Tax policy intentions in coalition agreement | Deloitte

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Tax policy intentions in coalition agreement

The government coalition parties VVD, D66, CDA and CU presented their coalition agreement on 10 October 2017. The document lays down the new government’s policy intentions. Quite some changes will be implemented, including numerous tax measures.

17 October 2017

Dutch version

Back to outline 2018 Tax Plan


The government coalition parties VVD, D66, CDA and CU presented their long-awaited coalition agreement “Faith in the future” on 10 October 2017. The document lays down the new government’s policy intentions. The key tax features include making work more profitable; increasing pollution taxes, tackling tax avoidance; and improving the business climate for companies with substantial economic activities in the Netherlands and which produce jobs. The following is a summary of the main tax changes for the coming years.

Corporate income tax and dividend withholding tax

Reduction corporate income tax rate

The new government wants the business climate to retain its competitiveness, so it intends to implement a significant reduction of the corporate income tax rates. Both the rate in the first and in the second bracket will be reduced, in stages, by a total of 4% percentage points (2019: 1% percentage point, 2020: -1.5%; 2021: -1.5%). The regular rate will thus be 21% in 2021. A 16% rate applies up to a EUR 200,000 taxable amount. The extension of the first bracket, as announced earlier on, will be reversed.


Abolition of dividend withholding tax/introduction withholding tax

The new government basically wants to abolish the dividend withholding tax, most likely as from 1 January 2020. This will be offset by the introduction of a withholding tax on interest and royalties on cash flows to countries with very low tax rates. In abuse situations and in the event of cash flows to countries with very low tax rates dividends will also be subject to a withholding tax. These provisions are expected to come into effect on 1 January 2020.


Equity/debt capital

The new government proposes to introduce a generic limitation of interest deduction in the form of an earnings stripping measureas from 1 January 2019. If the balance of (group and third party) interest payable and receivable exceeds a cap of 30% of the gross operating result (EBITDA: earnings before interest, taxes, depreciation and amortization), interest will no longer be deductible. In this respect the government opts for a fixed tax-free amount of EUR 1 million, which interest will in any case be deductible. A so-called group escape will not be applied.

The coalition agreement notes that, except for the specific limitation of interest deduction aimed at profit shifting, a few specific interest deduction limitations will be abolished. We assume this means the anti-profit shifting rules will now apply side-by-side with the new earnings stripping measure. The coalition agreement fails to mention the specific interest deduction limitations to be abolished. Still, this will most likely at least involve the limitation of interest deduction for loans related to participations and the limitation of interest deduction for so-called acquisition holding constructions. As yet it is unclear whether the limitation of loss set-off for so-called holding and financing losses will be scrapped. This equally applies to the limitation of deduction for long-term low interest bearing loans.


Innovation box

As regards the application of the innovation box, profits generated through innovative activities are taxed at an effective rate of 5%. It is proposed to raise this effective rate to 7%. This change is intended to come into effect on 1 January 2018.


Fiscal investment institution

In conjunction with the abolition of the dividend withholding tax, it is proposed to no longer permit direct investments in property by fiscal investment institutions. This change is expected to come into effect on 1 January 2020.


Depreciation on buildings for own use

As regards companies subject to corporate income tax, the depreciation on buildings for own use will be limited to 100% of the WOZ-value as from 1 January 2019. Currently a floor value of 50% of the WOZ-value still applies to buildings for own use.


Loss set-off

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. This legislative change is expected to come into effect on 1 January 2019.


Approach to tax avoidance

It is proposed to prepare a “black list” of non-cooperative tax jurisdictions combined with the obligation for multinationals to prepare a report on their activities for each EU Member State and each country on the black list.

Wage and income tax

Rates

The burden for citizens will be reduced in the years to come. The net tax burden reduction is set to be EUR 6 billion in 2021. The main contributing factor will be the introduction of a two-bracket income tax system, with a 36.93% basic rate up to an income from work and home of some EUR 68,600 and a 49.5% top rate over the excess. Due to the levy of social insurance contributions three brackets will be introduced for people entitled to an old-age pension. The new bracket system is expected to come into effect on 1 January 2019.


Tax credits

The caps on the general tax credit and the employed person’s tax credit will be raised as from 1 January 2019. The same applies to the elderly person's tax credit. On top of that a gradual, income-related phase-out will be introduced for the latter tax credit, to replace the current income limit. The accrual of the income related combination credit will be changed too.

This is countered by a phase-out of the payment of the employed person’s tax credit and the income-related combination credit to the least-earning partner, a measure already implemented in respect of the general tax credit.


Notional rental value for owner-occupiers

A proposal is introduced to reduce the rate of the notional rental value for owner-occupiers to 0.60%, down from 0.75%, of the WOZ-value of owner occupied homes (the value under the Valuation of Immovable Property Act). This should come into effect on 1 January 2020. As a countermeasure the home owners who have repaid their home acquisition debt will once again need to pay income tax over the value of their house. To this end, the tax deductible item with the heading “No, or an insignificant home acquisition debt” (the so-called Hillen scheme) will be phased out over a period of 30 years. This phase-out will start in 2019.


Tax-deductible items

As from 2020, the cap against which tax-deductible items for income tax purposes can be taken into account will be phased out by 3% percentage points every year, until the 36.93% basic rate has been reached. This does not only apply to the mortgage interest relief. It affects other tax deductible items for income tax purposes, too, such as the self-employed person's allowance.


Increase of box 2 rate

In conjunction with the proposed reduction of the corporate income tax rates, the rate for income from a substantial interest (box 2) will be raised in stages by 3.5% percentage points. The rate will be 27.3% in 2020, to finally reach 28.5% in 2021. The new government wants to avoid the private limited liability company having too much of a magnet effect. It wants to maintain the overall balance of the tax burden between entrepreneurs for income tax purposes and entrepreneurs in a private limited liability company.


Taxation of actual yield in box 3

The new government will detail a proposal for an investment yield tax based on the yield actually realised. In anticipation of this, the tax-free capital is raised to EUR 30,000 (2017: EUR 25,000). In addition, more current figures are used for the yield over the savings component.


Limitation of 30% facility period

The period of the so-called 30% facility for extraterritorial employees will be reduced to five years, down from eight years, as from 1 January 2019.


Work as a self-employed person

The Assessment of Employment Relationships (Deregulation) Act will be replaced. By introducing a new law, the government intends to ensure (hirers of) true self-employed persons that no employment is involved. At the same time, the government wants to prevent sham self employment, particularly at the lower end of the labour market. The main features of what is being proposed are as follows:

  • If the rate to be charged is low, either in combination with a contract whose term is longer or in combination with the performance of regular work, self-employed persons will be deemed to have an employment contract. This low rate will be set at wage costs up to 125% of the statutory minimum wage, or the lowest wage scales in collective labour agreements. A longer term applies if the contract term covers at least three months.
  • If the rate is high, either in combination with a shorter contract term or in combination with the performance of regular work, an opt-out for self-employed persons will be introduced for purposes of wage tax and employee insurance schemes. A high rate applies if the rate exceeds EUR 75 per hour. In this respect a short-term contract is defined as shorter than a year.
  • Another measure, on top of the low rate, will be the introduction of a “client statement” for self-employed persons. This will basically provide clients with advance certainty of indemnity from wage tax and employee insurance contributions.

VAT and excise duty

Increase of low VAT rate

The low VAT rate is expected to be raised to 9%, up from 6%, as from 1 January 2019. The low VAT rate applies to goods like foodstuffs, medicines and books.


Tobacco duty

Tobacco duty is set to be raised.

Taxes on cars and environmental taxes

Heavier taxes on pollutive behaviour

The introduction of a minimum price for CO2 in the electricity sector, energy tax adjustments, higher taxes on dumping and burning waste, and abolishing the refund scheme relating to the private motor vehicle and motorcycle tax for taxis means that a “price” will be set for pollutive behaviour. These regulations are intended to come into effect on 1 January 2019. The government will likewise examine the option to introduce a tax on noisy and polluting aeroplanes. An air traffic tax could be introduced in 2021.


Introduction of kilometre levy on freight traffic

It is proposed to introduce a kilometre levy for freight traffic as soon as possible. The revenues to be collected will be repaid to the transport sector through a reduction of the tax on motor vehicles on trucks and making available funds for innovation and sustainability.

Various tax measures

Finally, a few other minor proposals with tax implications:

  • if corporations invest in the sustainability of their housing stock the landlord levy will be reduced;
  • a EUR 200 increase of the tax-free payments to volunteers, up to EUR 1,700 per year;
  • the option to use accrued pension for capital accumulation through the owner-occupied property, in other words, using pension money to finance the owner-occupied property;
  • a possible adjustment of the pension accrual tax facility in view of the revision of the pension system.

Comment

The new government had not been expected to announce a major tax revision. This simply has to do with the multitude of other projects in the pipeline. This includes the restructuring of the Tax Administration and the implementation of an array of international and European rules. Still, the government does take quite a few major measures. They are of great importance to and will have sweeping consequences for many taxpayers, both individuals and companies. On the whole, we feel these measures should be viewed positively. We highlight a number of issues.

When talking about individuals the accelerated phase-out of the mortgage interest relief clearly is a major issue. In principle this is a good thing. Although the mortgage interest relief was once a good instrument for the housing market, it’s a role it actually no longer fulfils. The current positive state of the economy and the low interest rate means limitation of the interest deductions will now be a relatively simple thing to realise. Since the owner-occupied property will not be transferred to box 3, the new government has been less than forceful in properly tackling this issue, though. While home owners are compensated somewhat through the lower notional rental value for owner-occupiers, everyone can clearly see that strong differences will apply to each separate case. People who pay no or very little mortgage interest right now will be at a bigger disadvantage: they are currently exempt from the notional rental value but they will soon have to deal with it. And in terms of box 3 itself: there had already been various proposals for a significant revision but this seems to be limited to a slightly different interpretation of the flat-rate system. Ambitions are rather low in this respect.

The VAT rate being raised will likely meet stiff opposition. However, its effects are often estimated to be more negative than they actually are. Bear in mind, the wage and income tax rates will be reduced at the same time, raising the net income. Economically this quid pro quo is appealing. Increasing the VAT rate, for that matter, fits in the European trend, as does the further reduction of the difference between the high and low rates. As regards the wage and income tax rates: this proposal seamlessly matches the 2013 report by the Van Dijkhuizen Committee, which proposed a near identical social flat tax.

The corporate income tax reduction is the stand-out point for the business community. It’s somewhat of a surprise. The rate itself obviously paints a beautiful picture. The Brexit is one of the areas where this will have an effect, with British companies shopping around in the EU. One thing should be noted, though, such a reduction of the rates is usually financed by broadening the taxable base. It means the tax burden itself is not reduced right away.

A direct consequence of reducing the lowest corporate income tax rate in particular, is the increase of the box 2 rate: otherwise the private limited liability company as a type of enterprise compared with entrepreneurs who are subject to box 1 of the income tax would become very attractive indeed. This effect is now prevented to a certain extent. The self-employed person's allowance another option - was something they apparently were reluctant to tinker with. More clarity about when one is considered to be an entrepreneur will definitely be important for self-employed persons, at least, for self employed persons with no employees. The direction in which the solution is going seems to be better than what is currently applied - the model contracts. Nevertheless, the new set-up will continue to create quite some debate.

Finally, some words on the so-called withholding taxes: the dividend withholding tax will largely be abolished. This intends to make the Netherlands more attractive to foreign investors that use equity. What’s more, it encourages equity financing over debt capital financing. This is reinforced by the (unexpected) introduction of an interest and royalty tax. The first naturally means debt capital financing will face heavier taxation. Both measures thus realise a better balance between the tax treatments of both types of equity. The latter is also achieved through a new system for the limitation of interest deduction, although this had already been prompted by European rules. The royalty tax, finally, particularly focuses on avoidance structures.

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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