On September 15, the Dutch government released its Budget 2016, containing the Tax Plan 2016 which includes certain amendments to Dutch tax law. The government will discuss the plans the coming weeks in parliament. Further to these discussions, some elements of the Tax Plan 2016 may change. Most proposals will become effective on January 1, 2016. The Tax Plan 2016 contains a number of legislative proposals (hereafter also referred to as "The Bill"), summarized in highlights below. Most of these proposals will become effective on January 1, 2016.
1. Dutch corporate income tax
Recently, an anti-hybrid rule and the general anti avoidance rule (GAAR) were introduced in the EU Parent-Subsidiary Directive, to be implemented by EU member states before January 1, 2016. These will now be introduced in Dutch law.
Participation exemption: anti-hybrid
The Dutch participation exemption will no longer apply to payments and remunerations derived from cross-border hybrid mismatch arrangements that directly or indirectly produce a tax deduction in the other country (this includes a foreign branch of a Dutch subsidiary). The anti-hybrid rule will not be limited to payments originating from EU member states but applies to non-EU situations as well. The proposal does not only cover deductible interest, but also deductible cumulative preferred dividend. Upon the acquisition of a hybrid instrument, any purchased interest or dividend included in the purchase price that is paid after the acquisition is also excluded from the participation exemption. Capital gains realised upon the disposal of the instrument remain exempt.
Non-resident shareholder of Dutch entities: GAAR
Under current law, a non-resident shareholder owning 5% or more in a Dutch entity, can be subject to Dutch corporate income tax on income from this investment if the main purpose or one of the main purposes of the structure is to avoid Dutch dividend withholding tax or personal income tax and in addition thereto the investment is not attributable to a business enterprise. The business enterprise condition will be eliminated and replaced by an “artificial arrangement” test (the GAAR). Under this new test a shareholder that does not carry out a business enterprise will not be subject to non-resident taxation, provided that the structure can not be considered an artificial arrangement. An artificial arrangement is an arrangement or series of arrangements which are not based on sound business reasons reflecting economic reality.
According to the explanatory notes this means, for example, that the direct shareholder of the Dutch entity needs to meet minimum substance requirements if it concerns an intermediate holding company.
2. Dutch dividend withholding tax
Cooperative associations: GAAR
The GAAR will not be introduced in relation to dividends distributed by a Dutch BV, NV, open limited partnership and open mutual fund. Profit distributions by a Dutch cooperative association are not subject to Dutch withholding tax, except in certain situations covered by an anti-abuse rule. Under current law, dividend withholding tax may apply if the main purpose or one of the main purposes is to avoid (Dutch) dividend withholding tax and in addition thereto the investment is not attributable to a business enterprise of the member. The business enterprise condition will be eliminated and replaced by an “artificial arrangement” test. Under this new test a member that does not carry out a business enterprise will not be subject to dividend withholding tax provided that the structure can not be considered an artificial arrangement. An artificial arrangement is an arrangement or series of arrangements which are not based on sound business reasons reflecting economic reality. This means for example that if a cooperative carries out an enterprise in the Netherlands, the structure should not be considered artificial.
Basis Step-up in cross border (de)merger
The Bill introduces a step-up in basis for dividend tax purposes in
case of a cross border legal merger or legal demerger into a Dutch legal entity. For share-for-share mergers, this step-up already exists. This step-up will prevent a Dutch dividend withholding tax claim on retained earnings originating abroad. The step-up in basis will not be granted if the cross border legal merger or legal demerger is predominantly aimed at avoiding or deferring taxation.
3. Transfer Pricing Documentation and the Country-by- Country File
Dutch tax law will be supplemented with additional transfer pricing documentation requirements. The proposed requirements follow the recommendations of the OECD (BEPS project - Action Item 13). As a result, for fiscal years starting on or after January 1st, 2016, additional transfer pricing documentation requirements will apply to Multinational Enterprises ("MNEs").
- MNEs with consolidated revenues of €750 million or more should prepare transfer pricing documentation that generally follows the Masterfile, Local Country File, and Country-by-Country File structure as proposed by the OECD;
- MNEs with consolidated revenues of €50 million or more, but less than €750 million, should prepare transfer pricing documentation that follows the Masterfile and Local Country File structure. Hence, a Country-by-Country File is not required; and
- For MNEs with consolidated revenues of less than €50 million no additional transfer pricing documentation requirements apply. The current transfer pricing documentation requirements remain applicable.
The deadline for filing the Country-by-Country File is within 12 months after the end of the fiscal year. The Masterfile and the Local Country File should be added to the taxpayer's administration within the term for filing the corporate income tax return. Further guidance on the content of the required documentation will be issued by the Ministry of Finance.
With regard to the automatic exchange of information, the Netherlands will implement the system proposed by the OECD. As such, the Netherlands will automatically exchange the Country-by-Country File with countries with whom it has concluded a tax treaty allowing for such automatic exchange and where the MNE has presence.
4. Value added tax and real estate transfer tax
It is proposed that for the application of the reduced VAT rate on medicines, it will be required to have a marketing authorization for such medicines under the Dutch Medicines Act. The purpose is to clarify which medicines do qualify for the reduced VAT rate. Specific pharmaceuticals for which already an exemption for such authorization exists, will remain subject to the reduced VAT rate.
Real estate transfer tax
The use of ground lease (erfpacht) or right of superficies (recht van opstal) is often used to reduce the taxable basis for real estate transfer tax purposes in case of a financing structure or sale of real estate to investors. From January 1, 2016 the value of the ground lease or the value of the right of superficies can no longer be deducted from the value of the real estate, if the real estate is supplied simultaneously with a ground lease (erfpacht) or right of superficies (recht van opstal). As a result, this arrangement will be treated similar to sale and lease back arrangement for real estate transfer tax purposes.
5. Wage withholding tax
Integration of Research & Development benefits
The special Research & Development (R&D) Deduction for corporate income tax purposes (“RDA”) will be integrated into the R&D wage withholding tax deduction (“WBSO”). The background is that the RDA only results in an immediate benefit if the R&D product or service becomes profitable.
The RDA as such will be abolished and, in addition to the R&D wage costs, also R&D costs and expenditure will qualify for the WBSO regime, resulting in lower wage withholding taxes. The brackets of the WBSO will be amended as of January 1, 2016. The first bracket will be increased from EUR 250,000 to EUR 350,000 and the tax benefit of this bracket will be decreased from 35% (2015) to 32%. Costs exceeding EUR 350,000 will result in a tax benefit of 16% (2015: 14%).
Furthermore, two specific activities will be excluded from the WBSO qualification as of January 1, 2016 (i.e. technical feasibility analysis of own R&D work, and technical research on substantial amendments of production methods or modelling of processes).
6. Personal income tax
Emigration of substantial shareholders
A substantial shareholder is a person who owns an interest of 5% or more in a company. Until now, substantial shareholders that emigrated were confronted with a tax assessment on the difference between the fair market value of their substantial shareholdings at emigration and the historic cost of that shareholding. This assessment was preserved and only collected if the shares were alienated or the reserves of the company were distributed for more than 90% within ten years of the start of the year of emigration. After this term, the uncollected part of the assessment was waived.
In practice, it was thus possible to avoid collection of the preserved tax assessment. It is now proposed to make collection of the assessment possible indefinitely. Moreover, any distributions made after emigration will immediately lead to collection of the assessment for the amount distributed (rather than only if 90% or more was distributed). This could lead to effective double taxation of a dividend distribution after emigration.
Notional return on savings and portfolio investments
Until now, all income from savings and investments was calculated at a notional return of 4% of the value of the underlying net assets and taxed at a rate of 30% (resulting in an effective tax rate 1.2% of the net asset value). This system was scrutinized in recent years because the yield on bank deposits has dropped substantially below 4% in many cases.
As from 2017, the rate of 4% will be reduced for savings and increased for investments. The new rule will not apply to the actual amount of savings and investments, but instead to a notional division between these categories. The change will result in a lower than 1.2% effective tax rate for net assets with a value up to EUR 100,000, and a higher effective tax rate for net assets with a value in excess of EUR 100,000. If the net asset value exceeds EUR 1 million, the effective tax rate will be 1.65%.
7. Gift tax
Increased exemption for gifts to finance own house
An exemption from gift tax currently exists only in case of a gift from a parent to his child, and the exemption is limited to EUR 52,752 (2015). As of 1 January 2017, this exemption will be increased to EUR 100,000 and will no longer be limited to parent-child relations. The recipient of the gift needs to be between 18 and 40 years of age.
8. Other measures
Preliminary ruling by Supreme Court in tax cases
As of 1 January 2016, it will be possible for the District Court and the Court of Appeal to ask the Supreme Court for a preliminary ruling on general questions of tax law. If the Supreme Court issues a preliminary ruling, the lower courts must base their own ruling on this outcome. The procedure is largely comparable to the existing procedure in Dutch civil law and the procedure before the European Court of Justice.