The Netherlands’ 2020 Budget (2020 Budget) and five other legislative taxation proposals (together the 2020 Tax Plan) aim to implement a number of priorities from the Dutch government’s fiscal policy agenda, including measures to reduce taxation of employment income, combat tax evasion, improve the investment climate for real economic activities and support the green economy.
In addition, two other legislative taxation proposals have recently been sent to the Dutch Parliament in order to implement the Anti-Tax Avoidance Directive 2 (ATAD2) and the EU Mandatory Disclosure Directive (DAC6).
Generally, the 2020 Budget and ATAD2 are expected to become effective on January 1, 2020. DAC6 is expected to become effective on July 1, 2020 (with retroactive effect as from June 25, 2018). Certain other taxation proposals in the 2020 Tax Plan are expected to become effective on January 1, 2021.
The 2020 Tax Plan, ATAD2 and DAC6 will have a (financial) impact on multinational companies that do business in the Netherlands or have a holding, finance or royalty company in the Netherlands. Below we will discuss the most important taxation proposals.
Proposals—Adopted and Effective as of January 1, 2020
CIT Rate Reduction
The current statutory corporate income tax (CIT) rate applicable to profits exceeding 200,000 euros ($219,000) will remain at 25% in 2020 and will be reduced to 21.7% in 2021, as opposed to the original plan to reduce the CIT rate to 22.55% in 2020 and to 20.5% in 2021.
The budget that becomes available due to later and lower reduction of the CIT rate will be used to reduce the taxation of employment income (see below). The CIT rate applicable to profits up to 200,000 euros will be reduced to 16.5% in 2020 and to 15% in 2021 in line with the original plan.
Thin Capitalization Rules for Banks and Insurance Companies
The 2020 Budget proposes to introduce a restriction for banks and insurance companies to deduct interest payments if and to the extent debt exceeds more than 92% of the balance sheet total.
This means that banks and insurance companies need to have a minimum level of equity of 8%, otherwise they will be affected by the new thin capitalization rules for banks and insurance companies. The leverage and equity ratios are determined on December 31 of the preceding book year of the taxpayer.
For banks, the leverage ratio will be based on the EU Regulation 575/2013 on prudential requirements for credit institutions and investment firms. For insurance companies, the equity ratio will be based on the EU Solvency II Directive.
These thin capitalization rules apply to both banks and insurance companies which have their seat in the Netherlands and foreign banks and insurance companies which have a subsidiary or branch in the Netherlands.
Definition of Permanent Establishment Amended
Following the ratification of the multilateral instrument (MLI) as of 2020, the 2020 Tax Plan proposes to amend the definition of permanent establishment (PE) for Dutch CIT purposes (as well as for Dutch personal income tax and wage tax purposes) in order to bring it in line with the choices the Netherlands has made under the MLI.
This means that in case a double tax treaty does apply, the PE definition of the applicable double tax treaty will apply. In case no double tax treaty does apply, the PE definition of the 2017 OECD Model Tax Convention does apply. An exception may apply to taxpayers that artificially try to avoid having a PE.
Amendment of Anti-Abuse Rules CIT and Dividend Withholding Tax
In connection with the so-called “Danish cases” of the European Court of Justice (ECJ), the 2020 Budget proposes to amend the anti-abuse rules for dividend withholding tax purposes and CIT purposes due to the fact that the current anti-abuse rules are not considered fully in line with EU law.
This relates to the Dutch dividend withholding tax exemption for dividend payments made to a corporate shareholder resident within the EU, European Economic Area (EEA) or in a double tax treaty country.
This exemption does not apply if both the subjective test and object test are not met. Under current law, the objective test (which essentially means no artificial structure) is under circumstances met if the corporate shareholder meets the Dutch substance requirements.
Under the new anti-abuse rules, meeting the substance requirements will no longer be a safe harbor. On the one hand, this means that the Dutch tax authorities may challenge the structure and deny the dividend withholding tax exemption where the structure is artificial, even if the substance requirements are met. On the other hand, if the substance requirements are not met, the taxpayer may demonstrate that the structure is not artificial and that the dividend withholding tax exemption should apply.
Also, with respect to the controlled foreign corporation (CFC) rules for Dutch CIT purposes, it is no longer a safe harbor that a subsidiary does not qualify as a CFC if, and when, the substance requirements are met by the subsidiary.
Additionally, it is for foreign corporate shareholders which derive income (including capital gains) from a substantial (5% or more) shareholding in a Dutch company, no longer a safe harbor that the foreign taxpayer rules do not apply, if the foreign taxpayer meets the substance requirements under the objective test (similar to the objective test in respect of the dividend withholding tax exemption).
This means on the one hand that the Dutch tax authorities may challenge the structure and may levy corporate income taxes from the foreign taxpayer holding such a substantial interest where the structure is artificial, even if the substance requirements are met. On the other hand, if the substance requirements are not met, the taxpayer may demonstrate that the structure is not artificial and that no corporate income tax should be levied from the foreign corporate taxpayer in respect of income from the substantial interest.
Tonnage Tax Amended
The 2020 Tax Plan proposes to amend the tonnage regime for time or travel charter, the flag requirement and activities other than the carrying of goods or persons in international traffic, in order to comply with EU state aid rules.
The legislative proposal as to the implementation of ATAD2 was submitted to Parliament in July 2019.
The proposal redresses the effects of hybrid mismatches through the use of hybrid financial instruments or hybrid entities, as a result of which certain payments are deductible in one jurisdiction and the corresponding income is not taxable in another jurisdiction (so-called Deduction/No Income or D/NI) or certain payments are tax deductible in more than one jurisdiction (so-called Double Deduction of DD).
For reverse hybrid entities, the new rules will apply as of January 1, 2022. The proposal introduces a documentation obligation for all corporate taxpayers whether the hybrid mismatch provisions do apply or do not apply and why the hybrid mismatch provisions do or do not apply. If a corporate taxpayer does not meet the documentation obligation, the taxpayer has the burden of proof that the hybrid mismatch provisions do not apply.
ECOFIN Council Directive amending Directive 2011/16/EU on administrative cooperation as regards mandatory automatic exchange of information in relation to reportable cross-border arrangements in order to disclose potentially aggressive tax planning arrangements (commonly referred to as “DAC6”) will impose an obligation to intermediaries, including lawyers and tax advisers, to report certain cross-border arrangements whose main benefit is obtaining a tax advantage in combination with satisfying certain hallmarks or when a cross-border arrangement meets other specific hallmarks (without having the main benefit of obtaining a tax advantage) of this Directive.
The deadline for implementing DAC6 is December 31, 2019. Cross-border arrangements of which the first step of implementation was made on or after June 25, 2018 and July 1, 2020 should be reported to the Dutch tax authorities by August 31, 2020, at the latest. If the first step of implementation of the cross-border arrangements commenced on or after July 1, 2020 it should be reported within 30 days.
Personal Income Tax Changes
The Dutch tax treatment of individuals in the Netherlands depends on which category or “box” applies to the type of income, i.e. generally, “box 1” applies to income from trading, employment activities and home ownership, “box 2” applies to income derived from a so-called substantial interest in a company and “box 3” applies to income derived from savings and investments.
The current statutory personal income tax rate of 51.75% for income from employment and house (box 1) will be reduced to 49.5% and will apply to income exceeding 68,507 euros.
For income up to 68,507 euros a base rate of 37.35% will apply (37.10% as of January 1, 2021). At the same time, the deduction of mortgage interest payment is further reduced to 46% in 2020, 43% in 2021, 40% in 2022 and the base rate of 37,05% in 2023. These changes were already introduced by the 2019 Budget.
The current statutory personal income tax rate of 25% for income from substantial (5% or more) interest in a company (box 2) will be increased to 26.25% in 2020 and to 26.9% in 2021. This rate increase is linked to the CIT rate decrease for profits of companies.
The government announced amendments to the taxation of income from savings and investment (box 3) as of 2022. It is expected that assets exceeding 30,000 euros will be taxed at a deemed yield of 0.09% for savings and 5.33% for other assets. In addition, a deemed interest rate of 3.03% for debt shall be deducted. The statutory personal income tax rate will be increased to 33%.
These amendments will have a positive affect for taxpayers with savings but will have a negative effect for taxpayers with other assets such as securities, vacation homes and real estate, in particular if finance with debt.
Wage Tax Reduction
The work-relaxed expenses provision (werkkostenregeling or WKR) will be amended in that the budget for tax free reimbursements and provision of work-relaxed costs to employees will be increased from 1.2% to 1.7% of the total wage costs of an employer up to 400,000 euros, and remains 1.2% of the total wage costs of an employer in excess of 400,000 euros. For this purpose, products or services from the company of the employer shall be valued at market value.
Proposals—Adopted and Effective as of January 1, 2021
CIT Rate Increase for Innovation Box Regime
The government announced the intention to increase the current effective statutory tax rate of 7% for innovation box income to an effective tax rate of 9% in 2021. A legislative proposal has not been released yet.
Abolition of Payment Discount for Provisional CIT Assessments
The government announced the intention to abolish the discount that is currently available to corporate taxpayers that pay corporate income tax due on a provisional CIT assessment at once in 2021. A legislative proposal has not been released yet.
Restrictions for Liquidation Loss and Cessation Loss Deduction
The government announced the intention to limit the deduction of liquidation and cessation losses as of January 1, 2021, following an earlier proposal by a number of left-wing parties to limit the deduction of liquidation losses on foreign participation and of cessation losses on foreign PEs.
According to the announcement such liquidation losses shall only be tax deductible if the Dutch corporate taxpayer holds an interest of at least 25% (as opposed to currently 5%) in the foreign participation, the foreign participation is a resident of the EU or the EEA and the liquidation of the foreign participation is completed within three years after discontinuation of the participation or the decision thereto.
The deduction of cessation losses will be limited in the same manner as liquidation losses. The limitations do not apply to liquidation and cessation losses up to 1 million euros, which remain tax deductible. It is not expected that there will be any transitional rules, except maybe a three-year transitional period for deferred losses incurred before January 1, 2021. A legislative proposal has not been released yet.
Conditional Withholding Tax on Interest and Royalty Payments
The 2021 Withholding Tax Law in the 2020 Tax Plan proposes to introduce as of January 1, 2021 a conditional withholding tax on interest and royalty payments made by a (deemed) Dutch tax resident entity or non-Dutch resident entity with a Dutch PE to “related parties” who are residents of a low-tax jurisdiction and in case of abuse. The applicable tax rate is expected to be 21.7% (2021). This conditional withholding tax is proposed in order to discourage the use of a Dutch resident entity as a conduit entity for interest and royalty payments made to low-tax jurisdictions.
For this purpose, a “low tax jurisdiction” means a jurisdiction:
- with a statutory profit tax rate below 9%; or
- that is included in the EU list of non-cooperative jurisdictions.
An entity is considered related for this purpose if:
- the recipient entity has a “qualifying interest” in the paying entity;
- the paying entity has a “qualifying interest” in the recipient entity; or
- a third party has a “qualifying interest” in both the recipient entity as well as the paying entity. A qualifying interest means a direct or indirect controlling interest (e.g. an interest representing at least 50% of the statutory voting rights). Further, entities can also be related, if they are acting as a cooperating group that jointly, directly or indirectly, holds a qualifying interest in an entity.
The conditional withholding tax will also apply in certain abusive situations (e.g. through indirect payments to a recipient in a low-tax jurisdiction via a conduit entity) and certain situations involving a hybrid entity or a PE.
Real Estate Transfer Tax Increase
The current statutory real estate transfer tax rate of 6% for the acquisition of non-residential property will be increased to 7% in 2021. The real estate transfer tax rate for residential property remains unchanged at 2%. The government announced that it is considering increasing the real estate transfer tax rate for residential property that is rented to third parties at some point in the near future.
The taxation proposals in the 2020 Budget, 2020 Tax Plan, ATAD2 and DAC6 have not yet been adopted by the Dutch Parliament and may be subject to amendments made during the parliamentary debate in the next couple of months.
Some of the elements of the taxation proposals, such as the amendment of anti-abuse rules for CIT and dividend withholding tax, ATAD2, thin capitalization rules for banks and insurance companies, restrictions for liquidation losses and cessation losses and conditional withholding tax on interest and royalty payments, might be heavily debated in the Dutch Parliament. Nonetheless, the following planning points should be closely monitored by taxpayers that run an international business:
- Foreign taxpayers investing in shareholdings in Dutch companies should monitor and assess whether income and capital gains from those shareholdings continue to be exempt from Dutch dividend withholding tax and capital gains tax under the amended anti-abuse rules for CIT and dividend withholding tax purposes, because meeting the substance requirements is no longer considered a safe harbor.
- Dutch banks and insurance companies and Dutch subsidiaries and branches of foreign banks and insurance companies need to assess whether they are affected by the thin capitalization rules for banks and insurance companies. If so, such banks and insurance companies may face a competitive disadvantage in comparison with the foreign banks and insurance companies that are not affected by similar thin capitalization rules in their home jurisdictions.
- International businesses that have set up structures with hybrid instruments or entities in order to cater for reduction of tax costs need to monitor and amend these structures in order to work around tax inefficiencies following the implementation of ATAD2.
- Multinational corporations (MNCs) that have provided funding to debt platforms (i.e. Dutch finance companies) or structured IP through Dutch IP companies need to monitor and assess whether interest and royalty payments made by those Dutch finance companies and IP companies, respectively, would become subject to the Dutch conditional withholding tax and if so, they need to restructure in order to mitigate tax inefficiencies following the introduction of this conditional withholding tax.
- Dutch holding companies or foreign MNCs with Dutch intermediary holding companies that rely on unlimited deduction of liquidation losses on foreign participation and/or cessation losses on foreign branches need to monitor the legislative proposal which aims to limit the tax deduction of such losses and they need to asses if and how this may adversely affect them.
- International businesses need to assess whether they will have any reporting obligation as of July 1, 2020 under DAC6 with respect to tax optimization schemes that are implemented or changed on or after June 25, 2018.
René van Eldonk is a Partner and Pim Duteweert is an Associate at Simmons & Simmons Tax Team in Amsterdam, the Netherlands.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.