2022 Tax Plan - Outline of corporate income tax and dividend withholding tax measures

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Outline of corporate income tax and dividend withholding tax measures

2022 Tax Plan - Budget Day (Prinsjesdag)

The following lists the measures proposed in the 2022 Tax Plan in respect of corporate income tax and dividend withholding tax.

18 October 2021

Outline of corporate income tax and dividend withholding tax measures

Dutch version

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Corina van Lindonk, Aart Nolten and Eddo Hageman discussed the most noticeable measures of Tax Plan 2022.

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Corporate income tax rate structure

The top corporate income tax rate will be increased to 25.8% in 2022 (2021: 25%). However, up to a taxable amount of EUR 395,000 (2021: EUR 245,000), a rate of 15% will apply. See the table below for the rate structure. The figures for 2021 are for comparison purposes.

Year 2021 2022
Basic rate 15.0% (taxable amount up to EUR 245,000) 15.0% (taxable amountup to EUR 395,000)
Top rate 25.0% (taxable amount > EUR 245,000) 25.8% (taxable amount > EUR 395,000)


The earningstripping measure will be tightened, too, effective from 1 January 2022, by limiting the interest deduction to 20% of the EBITDA for tax purposes, down from the current 30%. For now, the EUR 1 million threshold will not be affected. In the coming period, it will be examined whether legal measures are necessary to prevent companies from being 'cut up', which is done to be able to use of the aforementioned threshold amount more often.

Transfer pricing mismatches

Background

The government has presented a bill that aims to combat avoidance of (Dutch) corporate income tax through international interpretation differences on the arm’s length principle; also called transfer pricing mismatches. The intention is to introduce new provisions in the Dutch corporate income tax act effective for financial years starting on or after 1 January 2022, that no longer allow a downward adjustments in situations where another state does not impose a corresponding upward adjustment. The proposal is to a large extent in line with the consultation document published in March but is more elaborate in its provisions and contains some welcome clarifications.


No corresponding upward adjustment

If a foreign entity grants an interest free loan to a Dutch BV, under current law, the Dutch BV would be entitled to deduct an arm’s length interest expense on the loan, irrespective of whether a corresponding interest revenue is taken into account at the level of the foreign entity. Under the proposal, BV is only allowed to deduct the interest to the extent that the foreign entity includes an arm’s length interest revenue in its tax base. The interest income must be subject to a tax on profits. This is the case if the other country levies profit tax and the amount of the corresponding upward adjustment would be included in the tax base for profit tax there. Similar rules apply if a loan would be provided to a foreign entity, agreeing on an interest rate that is higher than an arm’s length rate. The proposal includes details and explanatory examples on how to determine the relevant related party for the purpose of the new rules.


Double deduction

Situations of a transfer pricing mismatch under the proposal may also arise in situations of double deduction. Such situations could exist where costs are incurred and deducted at the level of an entity, where according to local transfer pricing rules the costs would belong at the level of another associated entity (as well). If the Dutch BV would be this other group entity, the deduction would be denied based on the proposed rules.


Basis for depreciation

In case an asset is transferred by a group entity to a Dutch BV, the Dutch BV would in principle be entitled to value the asset at fair market value for Dutch corporate income tax purposes. If, however, the transferring entity would only take into account a lower value than the fair market value of the asset in its tax base, the new provision would require the Dutch BV to take into account that lower value as the appropriate value for corporate income tax purposes. For the purpose of this rule, ‘assets’ may include both operational business assets as well as receivables. A similar rule is provided for debts.


Hybrid entities

The proposal includes specific rules to address structures with (reverse) hybrid entities. In short, two situations involving a hybrid entity can arise:

  • a transaction between a Dutch BV and a reverse hybrid entity (i.e., an entity that is transparent for Dutch tax purposes and non-transparent for local tax purposes): from a Dutch tax perspective, the participants in the reverse hybrid entity should in principle make a corresponding adjustment to allow a downward adjustment at the level of the Dutch BV. The reverse hybrid entity is the relevant related entity for the purpose of the proposed rules. Hence, only to the extent that a corresponding upward adjustment is made at that level, a downward adjustment may be made at the level of the Dutch BV; and
  • a transaction between a Dutch BV and a hybrid entity (i.e., an entity that is transparent for local tax purposes and non-transparent for Dutch tax purposes): under the proposal, a corresponding upward adjustment at the level of the participants in the hybrid entity may be taken into account provided the hybrid entity is treated as tax transparent locally. This also applies if the ownership chain consists of multiple hybrid entities.


Contributions and distributions

Compared to the consultation document, an additional rule was introduced to cover situations in which an asset is transferred to a Dutch taxpayer via a formal capital contribution or dividend distribution (including liquidation proceeds and repayments of share capital). Under the proposed rule, assets that are transferred to the Dutch taxpayer via such a transaction are treated similar to asset transfers that are subject to the new rules for depreciation basis (see above). This means that for assets that are transferred in a financial year starting on or after 1 January 2022, the carrying value for Dutch corporate income tax purposes is in principle limited to the value that is taken into account at the level of the transferor.


Entry into force and transitional law

As mentioned, it is intended to introduce the new legal provisions for financial years starting on or after 1 January 2022. Only in relation to the limitation of the depreciation/amortization base, the rules can have retroactive effect under the following conditions:

  1. the Dutch taxpayer received an asset from an associated entity in a financial year that started in the period from 1 July 2019 and 1 January 2022 (the consultation document included a ‘look-back’ period of 5 years);
  2. there is still a basis for depreciation at the beginning of that first financial year starting on or after 1 January 2022; and
  3. the asset would have been valued at a lower amount had the new rules been applied.


If those conditions are met, the depreciations on the asset will be calculated as of the first financial year starting on or after 1 January 2022, based on the lowest of the following amounts:

  1. the value the asset would have been accounted for at the time of the transfer if the proposed new article would have been applicable at that time; or
  2. the carrying value of the asset at the time immediately before the first financial year starting on or after 1 January 2022.


The transitional rule only relates to the amount that is allowed for depreciation. This applies to regular asset transfers as well as transfers via a contribution or distribution.

Reverse hybrid entities treated as tax residents and withholding agent

Background

The proposal details changes into the Dutch corporate income tax act (DCITA), the Dutch dividend withholding tax act 1965 (DDWTA) as well as the Dutch conditional interest and royalty withholding tax act 2021 (DCWHTA). The proposal is aimed to be effective for financial years starting on or after 1 January 2022.


Changes to corporate income tax

Already due to the Dutch implementation of ATAD2, specific rules relating to the tax liability of Dutch reverse hybrid entities as of 1 January 2022 were adopted. In the proposal these rules are reversed and replaced by similar new rules. According to the proposal, a Dutch reverse hybrid entity (either a partnership established under Dutch law or a Netherlands based foreign partnership) in scope of the rules is an entity that is – without the application of this rule – considered transparent for Dutch tax purposes (e.g., a Dutch CV), whereas at least 50% of the voting rights, capital or profit entitlement is directly or indirectly held by one or more related corporate investors that consider the entity to be non-transparent. Such a reverse hybrid entity will become fully subject to tax in the Netherlands. In this context, the origin requirement applicable to the regular hybrid mismatch measures is not relevant. In order to avoid double taxation, a deduction rule will apply for profits attributable to investors that treat the Dutch reverse hybrid entity as transparent provided the profits are included in a profit based tax in line with the definition used for the other ATAD2 provisions. As a result, the reverse hybrid entity will become subject to tax insofar the income of the entity is not taxed at the level of the investors. Under the proposal, the reverse hybrid rule will not apply to regulated collective investment funds (UCITs and qualifying AIFs) that are either a partnership established under Dutch law or a Netherlands based foreign partnership.

Due to the full tax liability, reverse hybrid entities are considered to be residents of the Netherlands, as a result of which these reverse hybrid entities will also qualify as treaty residents. Moreover, participants subject to Dutch corporate income tax holding an interest in a reverse hybrid entity can be eligible for the participation exemption provided they hold a 5 percent profit share. Because the reverse hybrid entity will become a Dutch tax resident as from 2022, payments made by a Dutch taxpayer to that entity would no longer fall within the scope of the ‘regular’ anti-hybrid rules.


Changes to dividend withholding tax

The Dutch reverse hybrid entity in scope of the corporate income tax rule explained above, will qualify as the beneficiary and as such become liable to Dutch dividend withholding tax. In addition, the Dutch reverse hybrid entity will also become the withholding agent towards its investors insofar as the interest held by the investor will be qualified as a ‘share’. This will only be the case if the investor qualifies the Dutch reverse hybrid entity as a taxable entity. In order to avoid that by interposing a Dutch reverse hybrid entity the dividend withholding tax exemption can be applied in full, whereas this would not be the case without the interposed reverse hybrid entity, an anti-abuse rule is proposed.


Changes to withholding tax

Similar to the changes in dividend withholding tax, the Dutch reverse hybrid entity in scope of the DCITA-rule explained above, will qualify as the beneficiary for purposes of the DCWHTA. However, the Dutch reverse hybrid entity will only be liable to tax insofar as the interest or royalties paid to that reverse hybrid entity are allocable to the investors that do not qualify the Dutch reverse hybrid entity as a taxable entity and a direct payment to these investors would have been subject to the interest and royalty withholding tax (i.e., related party established in a low-tax or non-cooperative jurisdiction). In addition, the Dutch reverse hybrid entity will become a withholding agent towards its beneficiaries (related parties established in a low-tax or non-cooperative jurisdiction) except if the beneficiary is an investor in the reverse hybrid entity that is established in a country that does not qualify the reverse hybrid entity as a taxable entity.

Broadened scope of ATAD2 rules

The ATAD2 rules that are effective since 1 January 2020 in principle only apply to payments between the Dutch taxpayer and a related entity. It is envisaged to broaden the scope in conformity with the definition of associated enterprises within ATAD. In the future the rules will also apply if a hybrid mismatch arises between a Dutch taxpayer and a related individual.

Order of crediting under CFC measure

Following the EU Directive on combating tax evasion, the Netherlands introduced a rule under which the profits of controlled foreign companies (CFCs) in countries on the Dutch list of low-taxing and non-cooperative jurisdictions are taxed at the level of the Dutch parent company. A similar rule applies to foreign permanent establishments. Under the Dutch CFC rules, the profit tax levied by the jurisdiction of the CFC may, in certain circumstances, be credited against the Dutch corporate income tax payable by the parent company. The parent company has no right of refund. The amount not credited may be set aside to be carried forward to later years. The State Secretary for Finance proposes the order in which these foreign profit taxes can be credited if the parent company has more than one CFC. The State Secretary proposes a mandatory order to credit the foreign taxes by first crediting the lowest amount, and then the successively higher amounts. If the amounts to be credited are identical, both amounts must be taken into account for a proportional amount.

Restriction to dividend withholding tax credit for portfolio corporate shareholders

Under Dutch law, dividend withholding tax is considered to be a preliminary levy for corporate income tax purposes. As such, a Dutch resident company receiving a portfolio dividend is subject to dividend withholding tax, that it can credit against its corporate income tax due. If the company’s corporate income tax base would be insufficient, the company is entitled to a refund. This is also the case when the company is in a loss-making position.

As this possibility for obtaining a refund is only open to Dutch resident portfolio shareholders, the State Secretary for Finance indicated that the treatment potentially infringes EU law. He referred to the CJEU’s Sofina judgment, in which the CJEU took a comparable position towards the French legislation. Therefore, as a temporary solution, he allowed the refund of excessive withholding tax to non-resident portfolio corporate taxpayers as well. At the same time, he announced a more structural solution, following which domestic situations would not be eligible for a refund anymore. Upon the entry into force of that structural solution, the temporary solution would cease to exist.

In the 2022 Tax Plan, the legal basis for the structural solution is proposed to enter into force on 1 January 2022. It limits the possibilities to credit dividend withholding tax against the corporate income tax due by resident portfolio shareholders to the amount of corporate income tax due before the credit of dividend withholding tax. This limitation to credit dividend withholding tax is only applicable to taxpayers that:

  1. are not in a position in which corporate income tax is due, e.g. because they suffer losses or are entitled to avoidance of double taxation; or
  2. are in a position in which corporate income is due, but the amount concerned is lower than the withholding tax to be credited; and
  3. have a shareholding of less than 5% in a Netherlands resident entity which is a withholding agent for dividend withholding tax purposes.


If dividend withholding tax cannot (fully) be credited against corporate income tax due in a certain year, the uncredited excess withholding tax can be carried forward without time restrictions. If corporate income tax is due in a later year, the corporate taxpayer first needs to credit the dividend withholding tax of the year concerned before being entitled to credit the uncredited amounts of previous years.

The introduction of this rule concurs with other provisions in the DCITA. In this respect, various anti-abuse rules are proposed in relation to mergers and the fiscal unity regime. The rules limiting the crediting of dividend withholding tax equally apply for the possibilities to credit Dutch gambling tax.

Remedying the set-off of holding company losses

In its 11 June 2021 judgment, the Supreme Court further explained the concurrence between the rules governing loss set-off and the fiscal unity regime for corporate income tax. The legislator feels this has created a risk of taxpayers unintentionally setting off holding and financing losses against regular profits, resulting in a significant budgetary loss. This is why a new provision has been added through a memorandum of amendment, which stipulates that the profit allocation to the incorporators of a new subsidiary within a fiscal unity is maintained. But, under the application of the transitional regime of the holding company loss scheme, if the incorporators have holding company losses the assets and operations of the new subsidiary, too, will be attributed to the incorporators (also in proportion to the capital contribution).

Changes to the Dutch conditional interest and royalty withholding tax act

Two technical amendments to the DCWHTA have been added to the bill introducing the 2022 Miscellaneous Tax Measures through a memorandum of amendment:

  • The permanent establishment concept for withholding tax purposes will be amended effective from 1 January 2022. In line with the permanent establishment concept for corporate income tax purposes, the scope will be broadened. As a result, withholding taxes will also be levied on interest and royalty payments to entities in low-tax or non-cooperative jurisdictions, to the extent that these are attributable to specific Dutch sources, such as real estate located in the Netherlands.
  • In addition, a clarification will be included in one of the hybrid provisions of the Withholding Tax Act 2021. Under the current law it is not clear whether this provision is automatically met if there is not at least one underlying beneficial owner with a qualifying interest in the hybrid entity. It will be clarified that this is the case, which means that the hybrid entity is not subject to withholding tax. This amendment is intended to be introduced with retroactive effect up to and including 1 January 2021.
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