Budget Day 2018 the Netherlands
On 18 September 2018, the Dutch Ministry of Finance published the Dutch government’s tax plans for 2019 and beyond. The tax package includes legislative proposals implementing ATAD1, other Dutch CIT proposals and includes withholding tax developments.
18 September 2018
Today, on Dutch Budget Day, the Dutch Ministry of Finance published the following legislative proposals:
- Implementation of the Anti-Tax Avoidance Directive as agreed upon in June 2016 by the EU Member States (“ATAD1”), most importantly controlled foreign company (“CFC”) rules and the earnings stripping rule;
- Reduction of the corporate income tax (“CIT”) rate, and changes to the rules regarding tax losses and depreciation of buildings;
- Abolishing the current Dutch dividend withholding tax and introduction of a withholding tax on intercompany dividend distributions to low tax jurisdictions and in abusive situations.
Announced adjustments to 2019 tax plans
Read related article
Interest deduction limitation rules
ATAD1 requires EU member states to implement an earnings stripping rule. Exceeding (net) borrowing costs, such as interest expenses and currency exchange results, will only be deductible up to 30% of a taxpayer’s tax based earnings before interest, tax, depreciation and amortization (EBITDA). Any amount in excess thereof would be deemed non-deductible and may be rolled-over to the subsequent year. In line with earlier announcements, the Netherlands chooses to apply a EUR 1M threshold, following which EUR 1M would always be deductible, even if that would exceed the 30% threshold. Furthermore, the legislative proposal does not include a group escape, nor will grandfathering rules apply to existing loans and no specific exceptions are made for financial undertakings. In 2020, a specific minimum capital rule will be introduced for banks and insurance companies. The 30% EBITDA rule will be applied at fiscal unity level.
In connection with the introduction of the earnings stripping rule, the acquisition financing rule of article 15ad Dutch CIT Act as well as the excessive participation financing rule of article 13l Dutch CIT Act will be abolished as from financial years starting on or after January 1, 2019. These form welcome simplifications of the Dutch CIT system.
Controlled foreign company rules
ATAD 1 further requires EU member states to implement controlled foreign company (CFC) rules. There are two options for implementation: option A, which attributes predefined categories of non-distributed (passive) income, or alternatively option B, which attributes non-distributed income from non-genuine arrangements of a more than 50% controlled, low taxed, direct or indirect corporation (or permanent establishment) to the Dutch taxpayer/parent company. It is acknowledged that the Netherlands’ transfer pricing rules already form a sufficient implementation of ATAD’s option B. In addition, for specific situations, the Netherlands chooses to apply ATAD’s option A, which however would only apply to a CFC that is located in a jurisdiction on the EU list of non-cooperative jurisdictions or a “low tax jurisdiction”. Low tax jurisdictions are jurisdictions appointed by decree and consist of jurisdictions which does not levy CIT or CIT below a statutory rate of 7%.
Exceptions to the proposed CFC rules are provided for situations where: i) at least 70% of the CFC’s income does not fall within the predefined categories of non-distributed (passive) income, or ii) in case of specific financial undertakings at least 70% of the CFC’s income is not derived from the taxpayer nor related entities/individuals, or iii) where a taxpayer can establish that a CFC carries on substantive economic activity. There are minimum substance requirements for determining whether the CFC carries on substantive economic activity, which are similar to the criteria used for intermediary holding companies in the Dutch dividend withholding tax act. These substance requirements include:
- at least 50% of the board of directors live or effectively reside in the country of residence of the CFC;
- the CFC has qualified staff, the management decisions are taken in the country of residence of the CFC;
- the bookkeeping is maintained in the in the country of residence of the CFC;
- the CFC incurs relevant wages of approximately EUR 100,000 relating to either its own or hired personnel;
- the CFC has an office or premises of its own available, which is used for the CFC’s economic activities.
This means that if a CFC does not have undistributed income at year-end, or is not located in a low tax jurisdiction, or if the CFC meets the minimum level of substance, the Netherlands will not apply CFC rules (beyond its current transfer pricing rules). Hence, option A is only expected to apply in a limited number of cases. Lastly, provisions are included that deal with previously taxed income at the level of the CFC.
Dutch corporate income tax changes
Today’s proposals also contain:
- Reduction of the Dutch corporate income tax rate in steps to a 22.25% headline rate per 2021 (with a step-up rate of 16% for the first EUR 200.000 of taxable profits). The reduction will take place in steps: for book years starting on or after 1 January 2019 a 24.3% CIT rate would apply (with a step-up rate of 19%) and per 2020 a 23.9% CIT rate (with a step-up rate of 17.5%);
- The tax loss carry forward period is decreased from nine years to six. As a transitional rule, losses suffered in financial years starting prior to January 1, 2019 are carried forward under the current rules;
- The specific rules for ringfenced holding and financing losses will be abolished;
- Buildings in own use may only be depreciated up to the WOZ value (whereas currently depreciation up to 50% of the WOZ value is possible).
Dutch withholding tax changes
Today’s legislative proposal entails the abolishment of the Dutch dividend withholding tax per 2020.
At the same time, the legislative proposal introduces a new withholding tax on dividends (et al.) per 2020 with similar provisions, but generally with a more limited scope.
- The new withholding tax would only apply for dividends to liaised entities. Liaised entities are entities with definite influence (directly or indirectly, alone or together with cooperating investors). No withholding tax applies for payments to individuals.
- Further, the new withholding tax only applies for dividends to recipients “low tax jurisdictions”. Low tax jurisdictions are jurisdictions appointed by a decree and consist of jurisdictions with no CIT or a statutory CIT rate lower than 7%, as well as jurisdictions included in the EU list of non-cooperative jurisdictions (whereby for tax treaty jurisdictions a 3-year waiting period applies before they will qualify as low tax jurisdiction). Recipients include entities and permanent establishments in low tax jurisdictions, certain hybrid entities as well as certain interposed entities in case of abuse and without clearly defined minimum substance.
Key other changes compared to the existing Dutch dividend withholding tax include:
- The new rate will be equal to the Dutch CIT rate; initially set at 23.9% but to be reduced to 22.25% per 2021.
- Active cooperatives (“non-holding cooperatives”) which are currently not subject to withholding tax will be subject to withholding tax under the same conditions as other entities.
- In abusive situations, certain direct and indirect transfers of Dutch shares (et al.) with claimed reserves to related or unrelated entities are brought within the scope of the new withholding tax;
- The rules around tainted capital in case of share contributions, mergers and demergers change. Further, in abusive situations a demerger may be considered as a distribution.
It is still possible to rely on a tax treaty if Dutch withholding tax applies. The principal purpose test to be introduced in multiple tax treaties as from 2020 pursuant to the Multilateral Instrument should however be considered. The withholding tax proposal contains clear substance requirements, which form the Dutch interpretation of the principal purpose test.
The Netherlands have further announced to increase the scope of the dividend withholding tax to also include interest and royalty payments per 2021 (i.e. with the same limited scope).
Today’s package contains measures to improve the business climate, for instance by reducing the CIT rate and abolishing the dividend withholding tax. At the same time, tax avoidance is combatted, amongst others resulting from ATAD1. In this respect, clear definitions and delineations (e.g. minimum substance requirements) are provided.