2018 Tax Plan - Outline of corporate income tax and dividend withholding tax measures


Outline of corporate income tax and dividend withholding tax measures

2018 Tax Plan - Budget Day (Prinsjesdag)

The following lists the measures proposed in the 2018 Tax Plan in respect of the corporate income tax and the dividend withholding tax.

4 December 2017

Outline of corporate income tax and dividend withholding tax measures

Dutch version

Back to outline 2018 Tax Plan

Adjustment scope of dividend withholding tax and corporate income tax liability for non-resident companies

A bill has been tabled holding that the dividend withholding tax should basically also apply to cooperatives. The dividend withholding tax exemption is to be expanded to include tax treaties with non-EU/EEA countries. And the proposal contains specific rules on interests held in Dutch BVs/NVs or holding cooperatives through hybrid entities. Finally, an anti-abuse provision will be added.

The bill also includes changes to the tax regime applicable to non-resident taxpayers in the Dutch corporate income tax act. Effectively, the proposals would hold that non resident taxpayers holding a substantial interest in a Dutch BV/NV or cooperative will generally only be subject to Dutch corporate income tax on their Dutch-source dividend income and on their capital gains if the interest is held with the main purpose (or one of the main purposes) being the avoidance of Dutch personal income tax at the level of the (indirect) shareholder. To some extent, this narrowing of the tax base would be counterbalanced by the inclusion of an anti-abuse provision in the Dividend Withholding Tax Act. The entry into force is scheduled for 1 January 2018.

Holding cooperatives and dividend withholding tax

Under current law, dividends distributed by a Dutch cooperative, in principle, are not subject to Dutch dividend withholding tax, except in certain abuse situations. By contrast, Dutch BVs/NVs are, in principle, required to withhold a 15% tax on dividends paid to shareholders.

Under the legislative proposal a Dutch holding cooperative will be required to withhold dividend withholding tax where a member of the cooperative holds a ‘qualifying interest’. A qualifying interest would exist where a member holds an interest in the cooperative and is thus entitled to at least 5% of its profits and/or liquidation proceeds. In determining whether this quantitative test is met, the interests of related parties, including those of related individuals, would likewise be taken into account.

A holding cooperative would be defined as a cooperative at least 70% of whose activities comprise the holding of participations or the direct or indirect financing of affiliated entities. Whether a cooperative meets the definition of a holding cooperative would in principle be determined based on the balance sheet of the year prior to the year of the distribution. However, in this respect also other factors should be taken into account such as the nature of the cooperative’s assets and liabilities, turnover and profit-generating activities and how its personnel spend their time. A Dutch cooperative that actively manages its investments and has sufficient related substance (e.g. personnel, offices) in the Netherlands potentially would not qualify as a Dutch holding cooperative and, therefore, would not fall within the scope of the Dividend Withholding Tax Act. It is acknowledged that, in certain circumstances, some cooperatives in private equity-owned structures could qualify as non-holding cooperatives.

The above activity and quantitative ownership criteria for cooperatives do not apply to BVs/NVs. The latter entities would continue to be within the scope of the Dividend Withholding Tax Act. It should be noted that, like a Dutch holding cooperative, a Dutch BV/NV may benefit from a full domestic Dutch dividend withholding tax exemption (see below). If a holding cooperative forms part of an existing structure, it can be advantageous to convert the holding cooperative into a Dutch permanent establishment, to which the shares in the companies held are allocated. Whether this is indeed advantageous should be assessed on a case-by-case basis.

Broadening of dividend withholding tax exemption

If a foreign parent company holds an interest in a BV/NV or a holding cooperative (‘Dutch entity’) through a Dutch permanent establishment to which the interest can be allocated, current law already provides for a domestic dividend withholding tax exemption, subject to the interest qualifying for the Dutch participation exemption or participation credit. In addition, in conjunction with the new withholding tax obligation applicable to Dutch holding cooperatives, the bill includes a provision to broaden the scope of the current domestic dividend withholding tax exemption. The exemption would apply to distributions made by BVs/NVs and holding cooperatives to parent companies that are tax resident in (i) the EU/EEA, or (ii) a third country that has concluded a tax treaty with the Netherlands that contains “qualifying provisions” relating to dividend withholding tax. In both instances, the interest in the Dutch entity would have to be an interest that would qualify for the Dutch participation exemption or participation credit if the recipient were resident in the Netherlands.

The full domestic Dutch dividend withholding tax exemption would be applicable even in the case of residents of treaty countries where the relevant treaty provides for a reduced rate of withholding tax rather than a full exemption (e.g. where a treaty with a non-EU/EEA member state provides for a 5% dividend withholding tax rate).

The bill is accompanied by a concession in relation to an interest held in a Dutch entity through a hybrid entity which qualifies as non-transparent for Dutch tax purposes. Even though from a Dutch tax perspective the recipient of the dividends does not qualify for the exemption, as the recipient is not a tax resident in the EU/EEA or a tax treaty jurisdiction, the exemption will be applicable. This is subject to the provision that all participants in the hybrid entity treat the hybrid entity as transparent and would qualify if they had held the Dutch entity directly. Particularly in situations where a US Inc. holds the interest in the Dutch entity through a transparent LLC, the exemption could also be available. On the other hand, if the hybrid entity qualifies as transparent for Dutch tax purposes, but as non-transparent from the perspective of the participants, it is stipulated that the participants do not qualify as the recipients from a Dutch tax perspective. Hence, for the exemption to apply, the hybrid entity itself should qualify as a tax resident in the EU/EEA or a tax treaty jurisdiction.

Anti-abuse provision

The bill also introduces a new anti-abuse rule in the context of the Dutch dividend withholding tax exemption. For the exemption to apply to recipients resident in the EU/EEA and/or in a tax treaty jurisdiction, it would essentially need to be established whether the (direct) interest in the Dutch entity is held with the main purpose (one of the main purposes) being the avoidance of Dutch dividend withholding (“subjective test”), and if so, whether the structure or transaction is considered artificial (“objective test”). A structure and transaction would not be (deemed) artificial to the extent it is based on valid business reasons that reflect economic reality. This could be the case, for example, if the direct member or shareholder of the Dutch entity itself carries on an active trade or business to which the interest can be allocated. When the interest in the Dutch entity is considered to be a passive investment, the exemption will only be applicable if the subjective test is not met.

Since the determination of the valid business reasons that reflect economic reality would be made by invoking the existing rules, a private equity investment fund could qualify as an active business and thus satisfy the valid business reason criterion. In addition, if the member or shareholder of a Dutch entity is a top tier holding company that carries out governance, management and/or financial activities with respect to the group, this could satisfy the valid business reason criterion. The criteria also could be satisfied by a foreign intermediary holding company with the requisite substance that performs a ‘linking function’ between the business or head office activities of the (ultimate) shareholder and the lower tier companies (whether Dutch or non-Dutch).

The factors that would be taken into account in determining whether the foreign intermediary holding company has the requisite substance will be adjusted. In addition to the substance needed to obtain an advance tax ruling (i.e. at least 50% of the board of directors should be Dutch resident, bookkeeping must be maintained in the Netherlands, etc.), the following conditions would have to be fulfilled: the foreign intermediary holding company would have to have wages of approximately EUR 100,000 relating to either its own or hired group personnel and it would need to have an office and premises of its own, both being used for its intermediary holding function. The legislative proposal provides for a three-month transitional period in relation to the additional substance requirements.

Should the exemption not be applicable, only (full or partial) setoff under an appropriate tax treaty will be possible. However, it has already been announced that the possibility to invoke the benefits of a tax treaty, is not intended to lead to a more favourable outcome than would be the case under domestic legislation.

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Fiscal investment institution excluded from withholding exemption

It is proposed to as yet exclude fiscal investment institutions (fiscale beleggingsinstellingen - FBIs) from the withholding exemption for dividend withholding tax purposes. This methodology does not seem to function properly for fiscal investment institutions. The amendment of the law means the former regulation continues to apply. Under this regulation fiscal investment institutions have the possibility to settle their dividend withholding tax and foreign withholding tax withheld up to certain amounts with the dividend withholding tax to be paid upon a distribution by the fiscal investment institution.

No extension of first income tax bracket in corporate income tax

The coalition agreement provides for a substantial reduction of corporate income tax rates. However, the gradual extension of the first income tax bracket up to EUR 350,000 ultimately, provided for in the 2017 Tax Plan, will be cancelled. For FY2018 this means that the first income tax bracket is capped at a taxable amount of EUR 200,000, instead of EUR 250,000 as previously proposed. The EUR 200,000 cap will be maintained in the coming years.

Innovation box

Profits realized using qualifying innovative activities are effectively taxed a rate of 5% in 2017, through application of the innovation box. The government proposes to raise this effective rate to 7% as of 1 January 2018. Transitional provisions will be introduced that provide for situations in which benefits received before that date have to be reversed at a later date. In the explanation to the memorandum of amendment, the legislature refers to the situation in which a claim for a patent or plant breeder’s right submitted in 2017 is rejected.

Adjustment anti-base erosion regulation

The Supreme Court pronounced judgment on a number of high-profile cases in April 2017, in which a bank group had conjured up a complicated tax structure. One of these cases discussed whether under the anti-base erosion regulation interest could be deducted from the profit or not. This regulation involves a limitation on interest in respect of debts related to certain contaminated legal acts. It involved a loan to an affiliated entity which, in its turn, had borrowed the funds required on the market. In this case it was certain that it involved “parallelism” between the internal and the external loan. In the ruling the Supreme Court decided that such a loan would basically fall within the scope of the anti-base erosion regulation. Nevertheless, no limitation on the deduction applies to interest if a loan effectively originates from a third party. Because in that case the so-called double business motive test will have been met. According to this test the anti-base erosion regulation does not apply if the taxpayer can provide reasonable arguments for both the (predominantly) arm’s length nature of the legal act and the (predominantly) arm’s length nature of the decision to finance the legal act with a debt.

The government now proposes to write into law that if a loan has effectively been obtained from a third party, the taxpayer should still provide reasonable arguments for the arm’s length of the legal act. Please note, the assessment as to whether the debt is effectively due to a third party does not change.

Deductibility of losses on debts and fiscal unity

If a private limited liability company holds a debt payable by another private limited liability company it can basically deduct a write-down loss on that debt from the profit. The government now proposes to cancel the deductibility of such write-down losses in certain specific situations. This involves situations in which the creditor of the loan forms part a fiscal unity for corporate income tax purposes and the write-down loss relates to a loss incurred by another company included in the fiscal unity. The prohibition on deduction applies in the event of a receivable from an affiliated entity, or an entity that has been affiliated. Without an amendment of the law and if, in its turn, that entity has a receivable from the other consolidated company, the loss could be charged to the profit of the fiscal unity twice.

Liquidation loss regulation

If a private limited liability company incurs losses upon the liquidation of a subsidiary in which it has a participation, these losses are basically deductible. If the related subsidiary has, or has had, a receivable from a debtor that has been consolidated into in a fiscal unity with the former private limited liability company, this could be regarded as a double loss recognition. This occurs if the debtor of that loan has incurred a loss that can be settled with the profit of the former private limited liability company due to how the fiscal unity functions. It is proposed to adapt the liquidation loss regulation such that this is not or no longer possible.

Another reason to adapt the liquidation loss regulation is the prevention of abuse in certain situations, which involve a coincidence with the fiscal unity. It regards a situation discussed in case law, one which is currently pending at the Supreme Court. The case involves a construed liquidation loss due to deconsolidation of a subsidiary (intermediate holding company) that was consolidated into the fiscal unity and which is subsequently (after a few months) liquidated. It is proposed to adapt the statutory regulation such that no liquidation loss can be claimed in such coincident situations.

Internal user fees fiscal unity for corporate income tax purposes

The government proposes to change the fiscal unity regulation on the calculation of profit for purposes of double tax relief. It involves the coincidence between the fiscal unity and the so-called full exemption for foreign business profits in case of internal user fees. Without the change an incorrect amount would be exempted in certain situations, based on the full exemption. A similar approach has already applied to internal borrowing costs for some time now. Last year, the Supreme Court ruled that royalty payments could have the same effect. The government now proposes to extend the regulation on financing costs to (other) internal user fees, such as royalty payments, rental and lease payments.

Country-by-Country Reporting

Under the banner of the OECD, the Netherlands implemented the standardised obligations to document, referred to as Country-by-Country Reporting, on 1 January 2016. It forces Dutch entities of large multinational companies to provide the tax authorities with insight into items such as their annual, worldwide tax profit appropriation. Likewise, they will have to state how much tax they pay in which country. Not all countries have adapted their legislation on time. To prevent group entities of a multinational group from falling back to the obligation to provide the country report to the tax authorities of the countries in which the group entities are established (“local filing”), the OECD states that countries can allow to the country report to still be filed by the ultimate parent company entity in the country in which it is established for tax purposes (what is referred to as “voluntary filing” or “parent surrogate filing”). In those situations the ultimate parent company entity will provide the country report to the tax authorities of its country of establishment. This country will subsequently exchange the country report with the Netherlands. It is now proposed that the Netherlands aligns its legislation with this, so Dutch group entities will not have the obligation to provide the country report to the inspector in such situations.

Budget Day 2017 - Webcast

After Budget Day, Deloitte Tax Lawyers discussed the new proposed bills during a webcast, on Wednesday September 20, 2017. You can see the recorded webcast (in Dutch) here.

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