THE NETHERLANDS - Recent tax developments
Changes with effect from 1 January 2019
1. Corporate income tax rate reductions
From 1 January 2019, the applicable corporate income tax rates in the Netherlands will be annually reduced over a period of three years. The change to the rates may impact the calculation of deferred tax assets and/or liabilities. The applicable rates are:
|Amount of taxable profit
|Up to EUR 200,000
|Exceeding EUR 200,000
2. Earnings stripping rule – unallowable deductions
The earnings stripping rule is a general interest deduction limitation rule that limits the deductibility of the net amount of interest and other borrowing costs. The rule applies to loans which are obtained from related parties as well as to loans obtained from unrelated parties.
For the purposes of calculating the net amount of interest costs, not only the difference between the interest payable and interest receivable should be taken into account. Other factors, such as FX-results and hedging costs are also relevant. The net amount of interest costs will no longer be deductible in excess of the highest of the following amounts:
- 30% of the tax based EBITDA (earnings before interest, tax, depreciation and amortisation); or
- EUR 1 million threshold per year.
The earnings stripping rule is applicable per entity (taxpayer). If the taxpayer is part of a fiscal unity for corporate income tax purposes, the rule should be applied to the fiscal unity as a whole.
Since the amount of non-deductible interest is not based on the commercial EBITDA, but on the profit for corporate income tax (CIT) purposes, any tax exempt income does not increase the maximum amount of deductible interest. An example of the latter is income that is exempt under the participation exemption or the exemption for profit attributable to foreign permanent establishments. Furthermore, it is relevant that under the earnings stripping rule, any amount of depreciation and devaluation of assets to lower business value, even though in principle tax deductible, do not have an impact on the application of the rule.
3. Controlled Foreign Companies (CFC) legislation
On the basis of the effective CFC legislation, undistributed tainted passive income (such as interest, royalties and dividends) of subsidiaries and permanent establishments (PEs), which qualify as a low taxed CFC, may be included in the taxable income of a Dutch corporate taxpayer.
A foreign entity (subsidiary) or PE is considered a low taxed CFC if:
- In the case of a subsidiary: the Dutch taxpayer, alone or together with an affiliated company or individual, has a direct or indirect interest of more than 50% in the foreign entity;
- That company or the PE is located in a jurisdiction with a statutory tax rate on profits of less than a minimal statutory tax rate (9%) or is located in a jurisdiction that is included in the EU list of non-cooperative jurisdictions or the list of low taxed jurisdictions which was published by the Dutch government.
A company which owns an entity or PE in one of the countries in the following 2019 list could be subject to the CFC rules.
Jurisdictions on the EU black-list:
American Samoa, the US Virgin Islands, Guam, Samoa, and Trinidad and Tobago.
Jurisdictions on the Dutch low-taxed country list:
Anguilla, the Bahamas, Bahrain, Belize, Bermuda, the British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Cayman Islands, Kuwait, Qatar, Saudi Arabia, the Turks and Caicos Islands, Vanuatu and the United Arab Emirates.
CFC legislation is not applicable if the CFC does carry out real substantial economic activities. A CFC is considered to have substantial economic activities if the CFC satisfies the increased Dutch minimum substance requirements (reference is made to the following paragraph).
4. More stringent Dutch substance requirements
The Dutch minimum substance requirements became more stringent from 1 April 2018. The requirements have to be satisfied in order to qualify as a CFC with real substantial economic activities under the CFC legislation.
The requirements would also be applicable to certain anti-abuse legislation as laid down in the Dutch corporation income tax act and Dutch dividend withholding tax act. The following substance requirements have been added to the list of existing substance requirements:
- The Dutch company incurs annual salary costs of at least EUR 100,000;
- The relevant Dutch company has (for at least 24 months) office space at its disposal in the Netherlands.
Please note that these minimum substance requirements function as a ‘safe harbour’. This means that it would also be possible to evidence a real substantial economic activity in other ways.
5. Exit taxation legislation
The Dutch government considered that the existing exit tax legislation was already almost completely in line with the EU’s Anti Tax Avoidance Directive 1 (ATAD 1). Therefore, the only minor change which has become effective from 1 January 2019 to comply with ATAD 1 is that the previous 10-years deferral period for payment of Dutch corporate income tax – triggered by the exit tax legislation - is modified to a 5-year period.
1. Revised ruling practice (1 July 2019)
The Dutch Minister of Finance intends to revise the Dutch ruling practice. In a letter sent to the Parliament on 22 November 2018, he outlined the main features of the revision of the ruling practice. The revision is aimed at further safeguarding the quality of the ruling practice for businesses with activities of substance as well as enhancing its robustness. There will be more stringent requirements for issuing rulings with an international character and the rules on issuing rulings will also be more transparent. The Deputy Minister hopes the new measures will take effect on 1 July 2019.
The main features of the revised ruling practice are as follows:
- The Dutch tax authorities will publish anonymised summaries of rulings with an international character;
- The Dutch tax authorities will publish an annual report on the Dutch ruling practice;
- Each year independent experts will continue to investigate rulings with an international character.
A centralised team at the Dutch tax authorities will handle all rulings with an international character.
Content of the rulings
- There will be a stricter standard to meet for rulings with an international character. Instead of the current list of substance requirements, there will be a requirement of ‘economic nexus’ with the following conditions for the Dutch entity:
- There should be operational activities for its own account and risk;
- The activities should be in line with its function within the group;
- In relation to its operational activities, there should be an appropriate amount of operational costs.
- The motive will be considered more closely; no rulings will be issued if the sole purpose is to reduce Dutch or foreign taxes;
- International rulings will have a maximum term of 5 years, which can only be extended to 10 years in exceptional cases;
- There will be a fixed format for all rulings with an international character.
2. ATAD 2 update
On 29 October 2018, the Dutch Government published draft legislation for the further implementation of ATAD. Following ATAD 1, ATAD 2 aims to prevent hybrid mismatches between EU countries and between EU countries and third country situations. The final proposed legislation is expected to be published early in 2019.
In short, ATAD 2 aims to address hybrid mismatches which result in double deductions or in a deduction without inclusion of income in another State. The provisions of ATAD 2 will be included in the Dutch Corporate Income Tax Act (DCITA) which will enter into force from 1 January 2020 and 2022 (reversed hybrid rules). ATAD 2 applies to the following types of hybrid mismatches:
- Hybrid entities;
- Hybrid financial instruments;
- Hybrid permanent establishments;
- Hybrid transfers;
- Imported hybrid mismatches, and
- Dual residency situations.
3. Mandatory disclosure update
On 25 June 2018, the Mandatory Disclosure Directive (‘the Directive’) took effect. This Directive provides for the mandatory automatic exchange of information on reportable cross-border arrangements. On 19 December 2018, the Dutch government launched a consultation offering interested parties the opportunity to respond to the bill to implement this Directive into Dutch law.
The Netherlands must implement the Directive into national law by 1 July 2020, with a retroactive effect from 25 June 2018. During the parliamentary debates that will follow, more clarity will have to be given on how the Netherlands interprets the obligations and terms in the Directive. On the basis of the draft legislation and explanatory notes that have now been published, the Dutch implementation appears to remain close to the text of the Directive in terms of its wording.
The consultation closed on 1 February 2019. If approval is granted, the responses will be published during the course of the consultation. The final bill is expected to be presented to the Lower House in the summer of 2019.
4. Dutch fiscal unity regime recovery legislation update
On 22 February 2018, the European Court of Justice (CJEU) decided that a non-resident EU subsidiary of a Dutch company should be granted certain benefits of the Dutch fiscal unity regime, despite the fact that the subsidiary is unable to enter into a fiscal unity, which a resident subsidiary would have been granted when being part of a Dutch fiscal unity (‘per-element-approach’).
On 6 June 2018, the Dutch Secretary of Finance published a legislative proposal to modify the Dutch fiscal unity regime. This proposal contains recovery legislation to repair the (possible) consequences of the CJEU decision. On the basis of the proposed recovery measures, several regulations (and related rules) in the Dutch Corporate Income Tax Act (DCITA) and the Dutch dividend withholding tax act (DDWTA) need to be applied as if no fiscal unity exists. The plenary hearing for the ‘Bill Recovery legislation fiscal unity’ is scheduled for February 2019.
Companies should assess the potential impact of the above-mentioned legislative measures. Your BDO tax adviser can review the impact of the legislative changes for your company, and help to ensure that your company is ready.
Niek de Haan