On 15 September 2015, the Dutch government presented the 2016 Budget. As part thereof a bill was submitted to Dutch Parliament on the implementation of the amendments to the EU Parent-Subsidiary Directive in the Netherlands. It contains two measures: a so-called anti-hybrid measure and the introduction of a general anti-abuse rule ("GAAR"). Below, we will summarise these two measures that will apply as from 1 January 2016. Please note that the summary is based on the current version of the bill which is still subject to parliamentary approval.

Anti-hybrid measure

The Dutch implementation of the anti-hybrid measure aims to ensure that the application of the Dutch participation exemption will no longer lead to situations of double non-taxation. This aim is in line with the OECD BEPS Action 2.

Under the current Dutch participation exemption, distributions of profits on shares in qualifying subsidiaries and payments of interest on hybrid instruments (qualifying as equity for Dutch tax purposes) issued by qualifying subsidiaries, are exempt from Dutch corporate income tax ("CIT") irrespective of whether or not such distribution/payment is deductible for profit tax purposes in the hands of the subsidiary.

The proposed anti-hybrid measure provides for a 'linking rule' pursuant to which income – that otherwise qualifies for the application of the participation exemption – is not exempt under the Dutch participation exemption if and to the extent it legally or in fact is deductible for profit tax purposes in the hands of the subsidiary or payor. In determining whether a payment is deductible, it appears not to be relevant whether the deduction effectively leads to a reduction of tax payable. In addition, general earnings stripping or thin capitalization rules are disregarded, even though these could potentially limit the deductibility of the payment for profit tax purposes in the hand of the subsidiary or payor. The explanatory memorandum is, however, silent on the effect of specific deduction limitations.

The anti-hybrid measure will in principle not apply to gains in respect of shares/hybrid instruments. However, the accrued profits/interest income (meegekocht dividend or meegekochte rente) in respect of shares/hybrid instruments present upon their acquisition, will be taxable in the hands of the recipient pursuant to the anti-hybrid measure. Similarly, payments in lieu of deductible profit distributions/interest payments on hybrid instruments  will also fall under the anti-hybrid measure. Examples include: the case of a (forward) sale of the dividend/interest coupon under, or (short term) right of usufruct (vruchtgebruik) over, the shares/hybrid instruments.

Furthermore, the recently codified compartmentalization doctrine will not apply with respect to the anti-hybrid measure. As a result, the anti-hybrid measure will have direct effect and consequently the participation exemption does not apply with respect to e.g. payments of interest received after 31 December 2015 on hybrid instruments issued before 1 January 2016, irrespective of whether the payment/interest has accrued before 1 January 2016.

Finally, the  scope of the anti-hybrid measure is not limited to distributions/payments made by EU tax resident subsidiaries; it will also apply with respect to distributions/payments by non-EU tax resident subsidiaries.

GAAR

The EU Parent-Subsidiary Directive GAAR is designed as a common (EU) minimum anti-abuse rule aimed at preventing misuses of such Directive through arrangements or series of arrangements that are not genuine and do not reflect economic reality. The GAAR does not prevent the application of domestic anti-abuse rules or doctrines. Therefore, the Dutch domestic anti-dividend stripping rules and general abuse of law doctrine (fraus legis) will continue to apply after the GAAR's implementation in the Netherlands.

In contrast to the implementation of the GAAR in other EU jurisdictions such as Luxembourg, in the Netherlands such implementation will not affect the Dutch domestic exemption from dividend withholding tax ("DWT") for qualifying EU tax resident shareholders. It will – unlike other EU jurisdictions – not affect the Dutch participation exemption either. Not implementing the GAAR with respect to the Dutch participation exemption is based on the statement of the European Commission pursuant to which it confirms that the GAAR is not intended to affect national participation exemption systems in so far as these are compatible with the provisions of the Treaty on the Functioning of the European Union.

Instead, in the Netherlands the implementation of the GAAR will be limited to modifications of two already existing anti-abuse rules: (i) the CIT anti-abuse rules for foreign shareholders with a shareholding of 5% or more (i.e., a substantial interest) in a Dutch resident company and (ii) the DWT anti-abuse rules for cooperatives.

Ad (i) CIT anti-abuse rules

Under the current CIT anti-abuse rules, a foreign shareholder with a substantial interest in a Dutch resident company, is subject to Dutch CIT as a non-resident taxpayer on the dividends and capital gains derived from such shareholding if (a) such shareholding is held with the main purpose or one of the main purposes of avoiding Dutch personal income tax or DWT in the hands of another person (anti-abuse test) and (b) such shareholding is not attributable to the foreign resident shareholder's business enterprise (business enterprise test).

Pursuant to the proposed amendments, the wording of these substantial interest rules will be modified in order to bring them in line with the wording of the EU Parent-Subsidiary Directive GAAR. Furthermore, the business enterprise test as such will in principle be abolished. As a result, under the proposed rules a foreign resident shareholder is only subject to Dutch CIT as a non-resident taxpayer if (a) its shareholding is held with the main purpose or one of the main purposes of avoiding Dutch personal income tax or DWT in the hands of another person (anti-abuse or subjective test) and (b) there is an arrangement or a series of arrangements that are not genuine. For purposes of condition (b) an arrangement may comprise more than one step or part and an arrangement or a series of arrangements is considered not genuine if and to the extent that they are not put into place for valid commercial reasons which reflect economic reality (objective test).

It is indicated in the explanatory memorandum to the bill that it is not intended to change the current (advance tax ruling) practice with respect to the application of the CIT anti-abuse rules in respect of passive investment structures. Whether an arrangement has been put into place for valid commercial reasons (objective test) will depend on the substance at the level of the shareholder. Valid commercial reasons may inter alia be present if the shareholder (a) conducts a material business enterprise and the shareholding is part of the business enterprise's assets, (b) is a top holding company that carries out material management, policy and financial functions for the group it heads or (c) functions as an intermediary holding company within the group structure in relation to the relevant subsidiary. In case of an intermediary holding company as meant in (c) above, an additional requirement applies pursuant to which such holding company would have to meet the Dutch minimum substance requirements for holding companies seeking an advance tax ruling, had it been tax resident in the Netherlands. These Dutch minimum substance requirements include that at least half of the statutory directors of the holding company are (in fact) resident in the relevant jurisdiction, the board decisions of the holding company are made in such jurisdiction and the acquisition price of the shareholding held by the holding company is for at least 15% financed with equity.

Ad (ii) DWT anti-abuse rules

Dutch cooperatives are in principle not subject to Dutch DWT as they are not a company with a capital divided into shares. However, pursuant to current Dutch DWT anti-abuse rules a cooperative is nevertheless subject to Dutch DWT if (a) the cooperative is used in a structure as a holding company with the main purpose or one of the main purposes of avoiding Dutch DWT or a foreign withholding tax (anti-abuse test) and (b) the membership interest in the cooperative cannot be allocated to a business enterprise conducted by the relevant member (business enterprise test). Furthermore, a special anti-abuse rule applies in the event that a cooperative is interposed with the effect of eliminating an existing Dutch DWT claim on retained earnings of a Dutch company. Under this rule, that applies irrespective of whether or not the business enterprise test is met, distributions by a cooperative (that fall under the anti-abuse test) are subject to Dutch DWT to the extent these relate to the retained earnings of the Dutch company that were present at the time the cooperative was interposed.

Pursuant to the proposed amendments, the wording of the DWT anti-abuse rules will also be modified in order to bring them in line with the wording of the EU Parent-Subsidiary Directive GAAR. Furthermore, the business enterprise test will in principle be abolished. As a result, under the proposed rules a cooperative is subject to Dutch DWT if (a) the cooperative is used in a structure as a holding company with the main purpose or one of the main purposes of avoiding Dutch DWT or a foreign withholding tax (anti-abuse or subjective test) and (b) there is an arrangement or a series of arrangements that are not genuine. For purposes of condition (b) an arrangement may comprise more than one step or part and an arrangement or a series of arrangements is considered not genuine if and to the extent that they are not put into place for valid commercial reasons which reflect economic reality (objective test).

Regarding the objective test, it is indicated in the explanatory memorandum to the bill that valid commercial reasons may be present if the cooperative has a real independent and genuine economic function. According to the explanatory memorandum to the bill this may be the case if the cooperative conducts a material business enterprise. In this respect, it is indicated that in practice this means that a cooperative which has its own employees on its own payroll and disposes of its own office space, conducts a material business enterprise. Furthermore, valid commercial reasons may be present if the relevant member in the cooperative (a) conducts a material business enterprise and the membership right is part of the business enterprise's assets, (b) is a top holding company that carries out material management, policy and financial functions for the group it heads or (c) functions as an intermediary holding company within the group structure in relation to the relevant subsidiary. In case of an intermediary holding company as meant in (c) above, an additional requirement applies pursuant to which such holding company would have to meet the Dutch minimum substance requirements for holding companies seeking an advance tax ruling (addressed under Ad (i) above), had it been tax resident in the Netherlands.

The revised special anti-abuse rule aimed at preventing elimination of existing Dutch DWT claims applies in case the cooperative has no real independent and genuine economic function (i.e., material business enterprise), irrespective of whether or not the membership interest in the cooperative can be allocated to a business enterprise conducted by the relevant member. Finally, like the scope of the anti-hybrid measure the scope of the GAAR is not limited to EU tax resident members; it will also apply with respect to non-EU tax resident members.

Conclusion

With this legislative proposal the Netherlands, unlike some other jurisdictions, seem to have chosen for a targeted approach of the implementation of the amendments to the EU Parent-Subsidiary Directive. In this regard, we feel that the Dutch business climate remains competitive.