Preliminary proposal published on the implementation of the EU Anti Tax Avoidance Directive into Dutch law
Essentially, the provisions covered are those in the area of earnings stripping and controlled foreign corporations (CFC). Some minor changes to current law are proposed in the area of exit taxes.
10 july 2017
On 10 July 2017, the Dutch government published a document which details potential changes into (primarily) the Dutch corporate income tax act. These changes aim to implement multiple provisions of the Anti Tax Avoidance Directive as agreed upon in June 2016 by the EU Member States (ATAD1) where needed. Essentially, the provisions covered are those in the area of earnings stripping and controlled foreign corporations (CFC). Some minor changes to current law are proposed in the area of exit taxes. Since the ultimate implementation date for rules targeting hybrid mismatches in EU and third country situations was mainly deferred to 1 January 2020 by EU Member States in May 2017 (ATAD2), the preliminary proposal does not detail any potential changes in that respect.
The document concerns a public consultation. As such, it is not a formal law proposal yet. Until 21 August 2017, comments can be sent to the Dutch Ministry of Finance. While it is our experience that normally no major changes are typically processed in the course of getting to a formal law proposal, this very well may proof to be different this time. Contrary to prior instances, the Dutch government already noted in advance that several matters should still be decided on once a final coalition between political parties has been reached which as such could have a major impact on the current proposals.
The preliminary proposal seems to aim at an effective date of 1 January 2019. Below you will find some highlights of the document for your reference.
Highlights of the preliminary proposal
The highlights of the preliminary proposal can be summarized as follows:
- Earnings stripping rules: a new interest limitation rule will be introduced. 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) provided the taxpayer is part of a group. Any amount in excess thereof would be deemed non-deductible and may be rolled-over to the subsequent year. A EUR 3M threshold is suggested. As an escape, either a “group EBITDA test” or a “group equity-over-total assets test” is suggested. As yet, no specific exceptions are made for financial undertakings and no grandfathering rules are provided.
- CFC rules: the CFC rules in ATAD1 attribute predefined categories of non-distributed (passive) income (“Option A”), or - alternatively - non-distributed income from non-genuine arrangements (“Option B”), of a more than 50% controlled, low-taxed, direct or indirect corporation (or permanent establishment) to the Dutch taxpayer/parent company. So far, the Dutch government has opted for the introduction of CFC rules under “Option A”, whereby an explicit request is made for input as to whether “Option B” should be preferred instead. A CFC qualifies as “low taxed” if the amount of profit based taxes levied at the level of such CFC is essentially less than 50% of the amount of Dutch corporate income tax that would have been levied should the CFC have been a tax resident of the Netherlands. As a result, for this test, the tax basis of the CFC should be recalculated in line with Dutch standards, whereby it is acknowledged that rules such as the Dutch participation exemption regime and the at arm’s length principle should be taken into account as well.
- Exceptions to the 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, sufficiently supported by staff, equipment, assets and premises.
- Lastly, provisions are suggested that deal with previously taxed income.
- Exit taxation: Dutch exit tax legislation is already largely in line with the exit tax provisions from ATAD1. The Netherlands should, however, for Dutch corporate income tax purposes reduce the option for deferral of the recovery of exit taxes from ten years to five years. A further amendment of current law is necessary, when a taxpayer fails to honor the obligations for the deferral of payment. Under current law, the open terms are still to be recovered in those years, but ATAD1 obliges the Netherlands to immediately recover the open terms. This is as such amended under the proposal.
In addition to the provisions reflected above, ATAD1 also included the introduction of a General Anti Abuse Rule (GAAR) as a minimum standard. In the preliminary proposal it is indicated that the GAAR is already sufficiently embedded in Dutch case law and that, as such, no specific provision is proposed.
It is acknowledged in the preliminary proposal that the introduction of an earnings stripping based rule could potentially come together with the cancellation of other rules that potentially limit the deductibility of interest expenses. This will, however, largely depend on the formal law proposal regarding e.g. the EBITDA percentage, the amount of the EUR 3M threshold and the introduction of a group escape, which all should, as per the indication in the preliminary proposal, be assessed by the newly formed coalition. Similarly, no views are yet provided as to how to recirculate any additional budgetary income connected to the implementation of the ATAD1 related measures into the Netherlands’ investment climate. It is our expectation that these views will still be provided in a later stage.
Albeit that the proposal is still in a preliminary stage, we do recommend monitoring the developments closely as we expect that some rules could have a significant impact should no further amendments be processed in the course of getting to the formal law proposal.