On September 20, the Dutch government released its Budget 2017 containing the Tax Plan 2017 which includes certain amendments to Dutch tax law. The government will discuss the plans in the coming weeks in parliament. Further to these discussions, some elements of the Tax Plan 2017 may change. Most proposals will become effective on January 1, 2017. The Tax Plan 2017 contains a number of legislative proposals (hereafter also referred to as the “Bill"), summarized in the below highlights covering: Corporate Income Tax (1-3), Dividend Withholding Tax (4-6), Personal Income Tax (7-8), Wage Tax (9-10), Gift and inheritance tax (11), VAT, Real Estate Transfer Tax and Excise duties (12-14).
1. Corporate Income Tax - 20% bracket extended
Profits up to EUR 200,000 are currently taxed at a rate of 20%, while profits in excess of EUR 200,000 are taxed at a rate of 25%. The Bill proposes to increase the first bracket to which the 20% rate applies over a period of four years. In 2018 the profit bracket will be increased from EUR 200,000 to EUR 250,000, in 2020 from EUR 250,000 to 300,000 and in 2021 from EUR 300,000 to EUR 350,000.
2. Corporate Income Tax - Changes to specific interest deduction limitation rules
Interest deduction limitation rule countering base erosion
Interest expenses are in principle non-deductible if the debt qualifies as ‘tainted debt’. A debt is tainted if it is granted by an affiliated person or entity and the proceeds of the debt are used by the Dutch taxpayer to, for example, acquire or capitalize a subsidiary. A person or entity is affiliated in case of a direct or indirect interest of 1/3rd or more. The Bill expands the definition of affiliated person or entity. Based on the new definition, parties that own less than 1/3rd but act in concert and provide debt to a Dutch taxpayer to, for example, acquire or capitalize a subsidiary will be treated as affiliated. The new definition primarily aims to combat private equity and joint venture structures.
Interest deduction limitation rule for acquisition holdings
It is common practice to use an acquisition holding company to acquire a Dutch target company. Such acquisition is often partially financed with debt. Subsequently the acquisition holding forms a fiscal unity with the target company, or (de)merges into/with the target so that interest expenses on the acquisition debt can be set-off against the operating profits of the target. The deduction of the interest is disallowed at the level of the Dutch target company if and to the extent the debt-to-equity ratio of the fiscal unity or (de)merged company exceeds 60% of the acquisition price of the target company. The percentage of 60% is reduced to 55% in the 2nd year, 50% in the 3rd year, etcetera, until it reaches 25% of the acquisition price. The Bill introduces certain refinements to the interest deduction limitation rule to (i) counter debt push downs where the acquisition debt is transferred to the target company, (ii) counter intragroup transactions that reset the annual reduction back to 60% of the acquisition price and (iii) disallow the grandfathering rules for existing debt when the acquisition holding is included in a new Dutch fiscal unity headed by a different parent company.
3. Corporate Income Tax - Amendments to the Innovation Box
Income from qualifying intangibles (patents and/or assets for which a specific R&D declaration was granted) can currently benefit from a 5% effective tax rate under the innovation box regime. In Action Plan 5 of the OECD BEPS-project the modified nexus approach and other amendments for special regimes for intangibles were introduced. In the Bill the Dutch innovation box regime is changed in line with Action Plan 5. Under the proposed regime a taxpayer can apply the innovation box only for intangibles that originate from activities for which a special R&D Declaration is granted. Additional requirements apply to companies with more than EUR 50 million global turnover and at least EUR 7.5 million per year in gross revenues from qualifying intangible assets.
Further, the proposed regime provides that:
- expenses relating to R&D activities outsourced to related parties are non-qualifying expenses and therefore limit the benefits of the innovation box regime;
- a Dutch tax payer is required to annually include information in its administration showing that the conditions to apply the innovation box are satisfied.
Three special grandfathering rules will be introduced:
- A grandfathering period until 1 July 2021 applies to qualifying intangible assets that have been developed with the use of a governmental R&D Declaration before 30 June 2016;
- A grandfathering period also applies to intangible assets that have been developed before 1 January 2017 without the use of a governmental R&D Declaration, but for which a patent was granted before 30 June 2016; and
- A grandfathering period also applies to intangible assets that have been developed before 1 January 2017 without the use of a governmental R&D Declaration and for which a patent is not yet granted before 30 June 2016. These intangible assets will qualify for the new regime if the patent is granted after 30 June 2016.
All existing tax rulings regarding the application of the Dutch innovation box regime will, with the exception of the aforementioned grandfathering periods, be terminated.
4. Dividend Withholding Tax - Refund of withholding tax
To align Dutch rules with recent case law of the European Court of Justice, a refund facility for dividend withholding tax will be introduced for non-Dutch resident individuals or entities. Under Dutch law, a portfolio shareholder (<5% shareholding) can credit the Dutch dividend withholding tax levied with his Dutch personal income tax or its Dutch corporate income tax due. Excess dividend tax is refunded. For non-Dutch resident shareholders, however, the dividend withholding tax will generally be a final Dutch tax. If that is the case, the Netherlands will under the new rules provide a refund to the extent the Dutch dividend withholding tax cannot be fully credited abroad and results in a heavier tax burden compared to a pure domestic situation. This rule will apply to both individuals and entities resident in countries with which the Netherlands has concluded a treaty that includes exchange of information possibilities (EU/EEA and many third countries).
5. Dividend Withholding Tax - Exemption instead of refund
Under domestic law profit distributions are subject to 15% withholding tax. However, certain tax exempt entities can claim a full refund of such tax. To reduce the administrative burden of a refund procedure for both the tax authorities and exempt entities, the Bill proposes an exemption at source.
6. Dutch investment climate - Proposals to extend dividend withholding tax exemptions to non EU shareholders in treaty countries and recommendation to reduce the headline Corporate Income Tax rate
The Dutch government added to the Bill separate letters with proposals to improve the Dutch investment climate. Currently, profit distributions to EU / EEA resident corporate shareholders with an interest of at least 5% in the Dutch entity are generally exempt. One of the proposals is to extend this exemption to such shareholders resident in tax treaty countries, provided that the shareholder carries out a business enterprise. Further, under current law, a Dutch cooperative is not subject to dividend withholding tax unless specific anti-abuse legislation applies. Under the proposals, profit distributions by cooperatives with a mere holding function (i.e. holding participations, investing funds and financing related parties) which are used in international structures would in principle become subject to dividend withholding tax, unless an exemption applies as referred to above. In addition, profit distributions by a cooperative that carries out a business enterprise itself will not be in scope of dividend withholding tax.
Finally, the government also recommends to reduce the headline corporate income tax rate in the coming years to stimulate the Dutch investment climate, while it continues to support multilateral measures proposed by the EU and OECD in the context of tackling aggressive tax structures.
These proposals are not part of the Bill. New elections will take place early 2017 and these proposals should be considered recommendations to the new government to transpose this into new legislation. It will be up to the new government to decide if and how these proposals will become law.
7. Personal Income Tax - Relief abolished for spin off to tax exempt investment company
In 2007, the Netherlands introduced a special tax regime that exempts investment vehicles from corporate income tax and dividend withholding tax. In order to facilitate the spin off of excess cash and securities from an existing taxable company to such newly established tax exempt company, the spin off could be effectuated with a roll over of the historical cost price of the shares from the taxable company to the exempt company. As a result, the immediate personal income taxation at a rate of 25% of the capital gain was deferred. As of 20 September 2016, substantial shareholders of which the taxable company separates financial assets to tax exempt company will be deemed to realize a taxable capital gain (market value of the new shares minus the lower historical cost price).
8. Personal Income Tax - Anti-abuse rule for income on savings and portfolio investments
As from 2017, income from savings and portfolio investment is calculated at a notional return between 2.9% to 5.5% of the value of the underlying net asset on the reference date (being the first of January of each year) and taxed at a rate of 30%. In practice, it was possible to avoid taxation on income from savings and portfolio investments by transferring the assets prior to the reference date for a limited period of time to a tax exempt company. As of 1 January 2017, the assets that are transferred to such tax exempt company for a period of more than six consecutive months, but no more than eighteen consecutive months, will be included in the taxable base to compute the aforementioned notional return, unless the taxpayer has sound business reasons for the transfer of the financial assets.
9. Wage Tax - Customary salary scheme for start-ups
In order to strengthen the cash flow position of start-ups, under the customary salary (gebruikelijk loon) rules, the wages for the director-substantial shareholder can be limited to the minimum wage. This treatment can be applied for a period of three years, provided the start-up holds a special R&D declaration (see also above under 3).
10. Wage Tax - Abolition of privately managed pension
The legislator has proposed a law to abolish the privately managed pension and also solve issues regarding pension schemes entered into by substantial shareholders with their personal holding. Starting from 2017, it is no longer allowed to make contributions to a privately managed pension.
Furthermore, the proposal allows the person entitled to the pension to agree with the insurer of the pension (the personal holding) to pay out the pension in one lump-sum whereby the amount of the lump sum is equal to the net present value of the pension for corporate income tax purposes. Because that value is calculated using an obligatory discount rate of 4%, whereas commercial rates are substantially lower, the tax value can be substantially lower than the commercial value. Moreover, the lump-sum payment is exempt from wage withholding tax for 34.5% if the lump-sum is paid 2017, which exemption decreases to 25% in 2018 and 19.5% in 2019.
Additional measures are proposed for insurers which may face practical issues when paying out the lump-sum and for partners of persons which have insured their pension with the personal holding.
11. Gift and Inheritance Tax - Limitation of business succession facility
The business succession facility in Dutch personal income tax and gift and inheritance tax aims to facilitate the gratuitous transfer of business assets. The facility applies to persons that carry out the active business themselves, or to persons that own shares in companies that carry out such business. For the latter category, the facilities are limited to those assets that can be considered connected to the active business.
Recently the Dutch Supreme Court ruled that this tax facility could apply to interests in companies, regardless of the activity of those companies, if the shares themselves could be considered a business asset for the holder of the interest. This is in line with the idea that the choice to conduct the business in person or through a company should not make a difference for the qualification for the business succession facility, since an individual can also hold interests in companies as a business asset.
However, the legislator considered that, because the company in which an interest is held could also have non-qualifying assets, there is a risk that the scope of the business succession facility would be expanded beyond the intended application. Therefore, solely with respect to the business succession facility for substantial shareholders of companies carrying out the relevant business, interests held in companies no longer qualify as business assets by default.
12. VAT and real estate transfer tax – Expanded definition of “building land”
In the Netherlands, the supply of “building land” is subject to VAT and exempt from real estate transfer tax (RETT). The VAT Act defines building land as any land not built on: (a) on which work is being or has been carried out, (b) which is being or has been improved for the purposes of exclusive use of the land, (c) in the vicinity of which improvements are being or have been made, or (d) for which a building permit has been granted, for purposes of constructing buildings on the land. If land does not qualify as building land, then a VAT exemption applies and RETT is due.
In 2013 the ECJ ruled that building land is a EU law concept, defined as land being intended to be built on. This must be apparent from an overall assessment of the factual circumstances at the moment of transfer, including the intention of the parties as supported by evidence. This is a broader definition of building land than the current definition of the Dutch VAT Act. To align Dutch rules with ECJ case law, the current definition of building land as laid down in the VAT Act, will be replaced by the aforementioned definition of the ECJ.
13. VAT - Simpler VAT refund for bad debts
The refund scheme for bad debts will be simplified. Under the current rules, it is often unclear at which moment a bad debt becomes uncollectible and a refund of VAT must be filed. Under the proposed rules, bad debts are deemed to be uncollectible after one year, although tax payers may still demonstrate that non-payment occurs at an earlier date. This new regime will also apply by law when a debt is transferred. It is then the acquirer (for instance a factoring company) which can claim back the refund of VAT. In all cases the amount of VAT to be refunded will be calculated in proportion to the unreceived part of the invoice.
A comparable regime will be introduced for reclaiming environmental taxes included in bad debts.
If VAT has been claimed back on invoices which have not been paid yet, this VAT becomes due after two years. This period will be set at one year, similar to the period for the refund of VAT on bad debts.
14. Excise duties
The exemption of excise duties for certain biofuels for heating purposes will be abolished. The same applies for the refund provision. The refund of excise duties for liquid petroleum gas (LPG) used for the propulsion of busses for public transportation and certain other vehicles used for public services, will also be abolished.