2019 Tax Plan - Outline of corporate income tax and dividend withholding tax measures

Article

Outline of corporate income tax and dividend withholding tax measures

2019 Tax Plan - Budget Day (Prinsjesdag)

The following lists the measures proposed in the 2019 Tax Plan in respect of the corporate income tax and the dividend withholding tax.

20 September 2018

Outline of corporate income tax and dividend withholding tax measures

Dutch version

Back to outline 2019 Tax Plan

Abolition of dividend withholding tax

The government presents measures aimed at avoiding base shifting from or through the Netherlands to low tax jurisdictions. At the same time, action is taken to retain and consolidate an attractive business and investment climate for companies with real activities in the Netherlands. To retain and attract head offices of international businesses, the government proposes to abolish the dividend withholding tax as from 1 January 2020. This is compensated by the introduction on 1 January 2020 of a withholding tax on dividend that will be levied on dividend payments by a Dutch resident group entity to an entity established in a low tax country or in situations of abuse. A similar withholding tax on interest and royalties will be introduced in 2021, but the respective bill will not be published until next year.

Under the proposed measures, withholding tax will only be deducted from dividend distributions to affiliated entities. The government argues that the risk of tax avoidance primarily exists in affiliated relationships. Affiliation is deemed to exist if the receiving entity has a qualifying interest in the paying entity. A dividend receiving entity has a qualifying interest if it is able to - directly or indirectly – exercise such influence on the decision-making process that the activities of the affiliated entity can be determined. Affiliation will be deemed to exist in any case if the interest represents more than 50% of the statutory voting rights, and in situations where a third party has a qualifying interest in the dividend receiving entity and the dividend paying entity. If the dividend receiving entity is part of a cooperating group and that group jointly has a qualifying interest in the dividend paying entity, affiliation is also deemed to exist.

Withholding tax will be applicable on dividend payments to an entity established in a low tax jurisdiction. A low tax jurisdiction is defined as a state that does not subject entities to profit tax or at a rate of less than 7%. Also states that are on the EU list of non-cooperative countries come under the definition of the term low tax jurisdiction. The conditional withholding tax on dividends is primarily aimed at direct dividend distributions by Dutch entities to affiliated entities in a low tax jurisdiction. Withholding tax will also be payable in a number of comparable situations.

Moreover, the personal liability for tax of members established in a low tax jurisdiction with a qualifying interest in cooperative applies in all cases. So – contrary to the current dividend withholding tax - the personal liability for tax is not limited to members of a so-called holding cooperative.

In addition to direct payments to low tax jurisdictions, also artificial structures aimed at avoidance of Dutch withholding tax come within the scope of application of the withholding tax. The bill includes an anti-abuse provision for such situations. Abuse exists in case of an artificial arrangement or transaction (objective test) where the interest in the withholding agent is held for the main purpose, or with one of the main purposes, of avoiding taxation at the level of another entity (subjective test).

The tax base of the new conditional withholding tax on dividends largely corresponds with that of the dividend withholding tax. The tax is levied on the income from shares, profit-sharing certificates, and certain loans. On some points the concept of income is interpreted more strictly compared with the dividend withholding tax, for instance, the possibility of a tax-free repayment of capital has been limited.

Also the manner of levying will generally be similar to that of the dividend withholding tax. A difference is that the withholding tax will be payable over a calendar year, whereas the current dividend withholding tax is due when dividends are paid. The rate of the withholding tax will be based on the proposed corporate income tax rate as from 2020, i.e., 23.9%. As soon as the withholding tax also applies for interests and royalty payments in 2021, the rate will be adapted to 22.25% and made equal to the then applicable rate of corporate income tax.

To reduce certain arrangements, withholding tax is payable in certain situations on the amount received on direct or indirect alienation of shares in a Dutch based affiliated company. On top of that, the rules for determining the amount of paid-up capital in an exchange of shares, legal demerger and legal merger will change to avoid loss of withholding tax claims on yet undistributed retained earnings. If a demerger is predominantly aimed at avoiding or deferring taxation, it may be qualified as a profit distribution by the demerging legal entity.

Corporate income tax rate cuts

To maintain a competitive establishment climate, the government plans to substantially reduce corporate income tax rates in stages as from 2019. Rates will be cut in both the first bracket (up to EUR 200,000) and the second bracket (from EUR 200,000). In 2019, the rates will be reduced to 19% (first bracket) and 24.3% (second bracket), and in 2020 to 17.5% and 23.9%, respectively. For 2021, the proposal envisages a rate of 16% up to a taxable amount of EUR 200,000 and 22.25% for higher taxable amounts. The proposed rate cuts are lower than those presented in the coalition agreement, which mentioned a top rate of 21%. The table below summarises the proposed rate changes (2018 figures included for comparison).

Year

2018

2019

2020

2021

Taxable amount
up to EUR 200,000

20%

19%

17.5%

16%

Taxable amount
from EUR 200,000

25%

24.3%

23.9%

22.25%

 

Implementation ATAD 1

Implementation ATAD

To implement the European Anti Tax Avoidance Directive (ATAD1) a new rule on limitation of interest deduction (earnings stripping rule) will be introduced, alongside new rules for so-called controlled foreign companies (CFC rules). Changes will also be made to the current exit tax, which is levied when transferring assets or the tax residence to another state. The rules must take effect on 1 January 2019. The general anti-abuse provision prescribed in the Directive will not be implemented since the tenet of fraus legis already applies in the Netherlands in abuse situations. New hybrid mismatch rules implementing the ATAD2 Directive will be published for internet consultation in the course of this year.


Earnings stripping rule

The limitation of interest deduction relates to the difference between interest expenses and interest income from third party and group loans. This balance of interest is deductible up to a maximum of 30% of taxpayer’s EBITDA (earnings before interest, tax, depreciation and amortization), but at least up to an amount of EUR 1 million. Any surplus is non-deductible but can be carried forward indefinitely to a subsequent year. No group exception will be introduced, so the limitation of interest deduction should in principle be applied at entity level. The earnings stripping rule may, however, be applied at fiscal unity level. Furthermore, a specific exception applies to existing public private partnerships for public infrastructural projects. No non-retroactive effect applies for existing loans.

The government also proposes an anti-abuse rule to counter the trade in so-called interest entities. Interest entities are entities with entitlements to carry forward interest - to be included on determining the profit - from prior years under the earnings stripping rule. The rule avoids trade in such entities arising. The rule provides that if an interest in a taxpayer changes substantially (for more than 30%) the carry forward interest arising prior to this change of interest may no longer be included. Exceptions to this rule apply for non-abuse situations. Other than the other parts of the implementation of ATAD1 the regulation will be effective on 1 January 2020.

The bill includes several provisions for the concurrence between carry forward interest under the earnings stripping rule and the fiscal unity regime. These provisions regulate how carry forward interest is to be treated in situations of merger into and demerger from a fiscal unity. The system of the rules is based on the existing rules for loss set-off upon merger and demerger. Also the provisions for demergers, mergers, and administrative reorganisations or rearrangements will be expanded to include situations in which entitlements to carry forward interest exist under the earnings stripping rule.


Flanking measures

As part of the implementation of the new limitation of interest deduction the government proposes to abolish the interest deduction limitations on excessive participation interest (art. 13l CITA 1969) and acquisition holding companies (art. 15ad CITA 1969). By replacing these specific provisions with a single, general limitation of interest deduction, the government wants to strengthen the system of interest deduction limitations.

Another proposal involves abolishing the limitation of the setoff of losses for holding and finance companies. This regulation states that losses arisen in a period in which a taxpayer engaged in holding and financing activities can only be settled with profits from periods in which the said taxpayer performed similar activities.


CFC rule

As it wants to prevent profits from being transferred to subsidiaries established in countries with a low tax rate, the Netherlands will implement a so-called CFC rule. Profits reported at a subsidiary that should actually be included in the tax base of a Dutch taxpayer, will already be allocated to a taxpayer based on the arm's length principle. In addition to this, a regulation will apply for entities in which a shareholding of more than 50% is held and that are established in states without a profit tax or where the statutory rate is less than 7%, or in so-called non cooperative jurisdictions. Certain categories of non-distributed (passive) income of such a CFC will be allocated to the taxpayer/parent company. An exception applies to CFCs performing a “substantial economic activity”. The interpretation of this concept is subject to specific substance requirements.


Exit taxes

The Dutch exit tax for the levy of corporate income tax already largely corresponds with the ATAD1 exit tax provisions. Only a few changes relating to the collection of taxes are proposed. One of the changes regards the period for which an extension of the collection of the exit tax can be obtained. This will be cut to five years, down from ten years. It will only be possible to request for security for the payment of tax debts in case of a reasonable fear that the debt may be irrecoverable. Finally, if the tax debtor realises benefits in respect of the assets to which the exit tax relates, tax debts must be paid immediately from now on.

Abolition of tax deduction regarding additional tier-1 capital instruments

A base-broadening measure proposed by the government regards the abolition of the statutory provision that permits tax deductibility in respect of the coupon on additional tier-1 capital instruments (the so-called contingent convertibles). Through this measure the government wants to limit the tax incentive for financing with debt capital for all taxpayers and achieve a more balanced tax treatment of equity and debt capital.

Depreciation on buildings for own use

The depreciation on buildings for own use for businesses that are subject to corporate income tax will be limited to 100% of the WOZ value as from 1 January 2019 (minimum value). The current minimum value for buildings for own use is still 50% of the WOZ value. Depreciation for tax purposes on these buildings will thus be limited sooner than is now the case.

Energy investment, environmental investment and arbitrary depreciation

Following a positive evaluation, the energy investment allowance, the environmental investment allowance and the arbitrary depreciation of environmental business assets will be prolonged for a period of five years.

Investment property fiscal investment institutions

Entities that are subject to corporate income tax and that engage in investments can opt for the regime of the fiscal investment institution, provided certain conditions are met. The taxable results of a fiscal investment institution are subject to a zero rate. The government intends to put a stop, as from 2020, to fiscal investment institutions engaging in direct investments in Dutch property. This proposed amendment of the law is linked to the abolition of the dividend withholding tax. Taxation on the results from property of foreign investors in fiscal investment institutions that invest in Dutch property is currently dealt with through the dividend withholding tax. Without the measure, the Netherlands would not be able to tax income received by foreign investors in fiscal investment institutions from property located in the Netherlands.

The amendment solely regards directly held domestic property. So, a fiscal investment institution still has the possibility to directly invest in foreign property. It also continues to be possible to indirectly invest in Dutch property, by holding shares in regularly taxed property investment subsidiaries.

Carry forward of losses

The possibility to set off losses from prior (financial) years with positive taxable profits from later years will be limited to six years. Right now, losses can still be carried forward during nine years. The more austere loss carry forward rules for corporate income tax purposes will first apply to losses incurred in 2019. So, losses incurred in 2019 can be set off through 2025.

The nine-year period continues to apply for losses incurred through 2018, which means that a loss incurred in 2018 can be set off against profits up to 2027 at the latest - so for a longer period than losses incurred in 2019 and 2020. To solve this issue, a transitional arrangement is in place that breaches the obligation to first settle the oldest losses. In practice, this means that - where appropriate - losses from 2019 and 2020 may be carried forward and set off prior to the 2018 loss to avoid losing the possibility to set off losses.

In conjunction with this measure, for income tax purposes the forward loss set-off period for income from substantial interest (box 2) will also be limited to six years.

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