On 20 September 2016, as part of the 2017 budget, Dutch government released various tax bills and announced various other tax proposals. The government strongly confirms its continued commitment to maintain the attractive features of the Dutch investment climate, for instance by reducing the corporate tax rate to a competitive level in the future, while proactively addressing tax avoidance. The proposals include the following key changes:
- aligning the Dutch ‘innovation box’ regime, which grants a 5% effective corporate tax rate, with international standards while preserving benefits for the majority of taxpayers;
- amending specific interest deduction limitations to address certain artificial structures;
- suggesting broader dividend tax exemptions for all types of companies, but imposing a withholding liability on Dutch cooperatives.
Although the proposed changes concerning the innovation box and interest deduction limitations may be amended during the course of the legislative process, it is expected that they will take effect as of 1 January 2017. The dividend tax amendments have yet to be introduced and are expected to take effect as of 1 January 2018.
The legislative proposals include changes to the current Dutch innovation box regime. In line with the draft proposals of the public internet consultation of May 2016, the legislative proposal ensures that applicability of the regime will remain unchanged for the majority of taxpayers that currently apply the Dutch innovation box. The 5% effective rate remains unchanged and access to the revised innovation box regime is broadened compared to the draft proposals of the internet consultation.
The envisaged legislative changes are the Dutch implementation of Action 5 of the OECD’s BEPS project. Action 5 is aimed at combating harmful tax practices and focuses on improving transparency and exchange of information surrounding application of preferential regimes. Action 5 requires a certain level of activity (substance) for application of any preferential regime. This also affects the Dutch innovation box regime, for which Action 5 prescribes the so-called ‘Nexus Approach’.
The legislative proposals provide for a broad range of qualifying (partially new) intangible assets. At the same time, certain limitations compared to the current regime are to be newly introduced. The proposed innovation box regime will be founded on ‘qualifying intangible assets’ and ‘qualifying income’.
Qualifying intangible assets
In the current proposals, distinction is made between (a) small and medium-sized taxpayers (SMEs) and (b) other taxpayers.
SMEs are - in this context - defined as taxpayers (i) deriving benefits from qualifying intangible assets of less than € 37,500,000 in the respective financial year and the four preceding financial years combined, and (ii) also having a net turnover of less than € 250,000,000 in the respective financial year and the four preceding financial years combined. If the taxpayer is part of a group of companies the second test is applied to the turnover of the total group.
For SMEs, the intangibles that qualify for the revised innovation box regime are self-developed intangible assets from research & development (R&D) activities for which so-called ‘R&D wage tax certificates’ have been obtained from the competent Dutch governmental agency.
With respect to taxpayers that are not SMEs, a cumulative condition applies for qualifying intangible assets. In addition to having obtained R&D wage tax certificates in respect of these intangible assets, the intangible assets should also qualify as one of the following:
- patents or plan breeder's rights; or
- intangible assets in respect of which a patent or plant breeder’s right is applied for; or
- software program(s); or
- intangible assets for which a EU marketing authorizations for medicinal products were granted; or
- intangible assets in respect of which a supplementary protection certificate was granted by the competent Dutch government agency; or
- intangible assets in respect of which a registered utility model for the protection of innovation was granted; or
- intangible assets that are related to intangible assets qualifying under (i) through (vi); or
- exclusive licenses to use an intangible asset qualifying under (i), (ii), (iii), (iv) or (vi) in a certain way, in a certain area or for a certain period of time.
Qualifying income is determined per qualifying intangible asset or per coherent group of qualifying intangible assets ('tracking-and-tracing'). If it is not possible to apply the tracking-and-tracing method, the method for determining the qualifying income will be established by taking into account the nature of the business enterprise and the R&D activities of the taxpayer. The main methods used under the current innovation box regime to determine qualifying income will remain applicable: this particularly includes the commonly used profit split method.
Any qualifying income determined on the basis of the above can be limited if, and to the extent that, a taxpayer has outsourced part of its R&D-activities to a company within its group. If R&D is outsourced to group companies, the limitation to the qualifying income is based on the proportion of qualifying R&D expenses incurred by the taxpayer in relation to the overall R&D expenses incurred by the taxpayer in respect of the relevant intangible asset. In this respect qualifying R&D expenses are described as the total of R&D expenses minus the R&D expenses related to the outsourcing of R&D to group companies. These qualifying expenses may be multiplied with 1.3, allowing for limited outsourcing of R&D in the group.
The proposed rules for the Dutch innovation box regime are envisaged to enter into force as of 1 January 2017 and are to apply to financial years commencing on or after 1 January 2017. However, a number of grandfathering rules apply:
- A grandfathering rule will be applicable to qualifying intangible assets which have been developed before 30 June 2016. The current Dutch innovation box regime in principle continues to apply to these assets. This grandfathering is applicable up to and including the last financial year ending before 1 July 2021.
- A grandfathering rule will apply to intangible assets developed after 30 June 2016 but before 1 January 2017. If for these assets only a patent or plant breeder’s right is obtained (no R&D wage tax certificates), these assets still qualify for the revised innovation box regime.
Taxpayers currently applying the innovation box should assess whether they can continue to apply the innovation box to intangible assets developed after 30 June 2016.
Interest deduction limitations
Anti-base erosion rule
The anti-base erosion rule (art. 10a CITA) denies deduction of interest payments on loans from related parties that have a connection with certain ‘tainted’ transactions involving related parties. The proposed change broadens the concept of ‘related party’, which currently generally requires an equity stake of 1/3 or more of a single entity or individual. Under the proposed rules, entities that form part of a collaborating group that together owns 1/3 or more in the taxpayer will be deemed to be related. According to the explanatory notes, an example of a collaborating group is a group of unrelated funds with one common general partner acting on behalf of all funds and coordinating the joint investment.
The proposed rules would apply to all interest costs arising as from 1 January 2017 without any grandfathering rules for currently existing loans or past transactions. Structures in which the anti-base erosion rule currently does not apply because payments are made to, or transactions took place with, unrelated parties therefore need to be reviewed to assess the risk of a collaborating group.
Acquisition holding rule
The acquisition holding rule (art. 15ad CITA) denies deduction of interest payments made by acquisition holdings to related and unrelated parties on loans used for the acquisition of an entity that is included in a fiscal unity with the acquisition holding. The rule’s aim is to prevent offsetting interest costs of the acquisition holding against the profits of the acquired entity. This provision does not apply, among other exceptions, to non-excessive debt financed acquisitions (maximum of 60% of acquisition costs in the first year, declining with 5% per year after inclusion in fiscal unity to 25% in the eighth year). The first proposed change relates to this exception and combats structuring in which the goal is to start a new eight year period through a share transaction between related parties (under the broadened definition of the anti-base erosion rule; see above), followed by inclusion in a new fiscal unity.
The second change relates to structures in which interest expenses are pushed down to the acquired entity. Technically, under the current rules, deduction of such pushed down interest expenses would effectively not be limited. It is proposed to expand the scope of the acquisition holding rule to such pushed down interest expenses.
The third proposed change relates to the existing grandfathering rules, under which the acquisition holding rule does not apply to debt in relation to acquired companies that were included in a fiscal unity with the acquisition holding before 15 November 2011. The current grandfathering rules also apply to fiscal unities (with acquisition debt) entered into before 15 November 2011 that are broken up and included in a subsequent fiscal unity with a new parent company. It is proposed that this grandfathering is withdrawn in case a fiscal unity that was formed before 15 November 2011 is included in another fiscal unity with a different parent company on or after 1 January 2017. In most cases, this will be relevant for the structuring of acquisitions on or after 1 January 2017.
All changes to the acquisition holding rule would apply as from 1 January 2017 and – except for the third proposed change – also affect existing situations. A review of current structures is therefore advised to assess the possible impact of the proposed changes.
Dividend tax exemptions and cooperatives
In a letter addressed to Dutch parliament, the State Secretary of Finance outlines the envisaged alignment of the dividend tax treatment of cooperatives and NVs/BVs in international structures. The letter makes a distinction between ‘holding’ cooperatives and cooperatives that are engaged in broader activities. It appears that only the dividend tax treatment of ‘holding’ cooperatives will be changed. As a result of the proposed alignment, profit distributions by ‘holding’ cooperatives to ≥5% members would, in principle, become subject to dividend tax, similar to NVs/BVs. At the same time, to improve withholding tax free flows of funds, a broader dividend tax exemption would become available for distributions by cooperatives and NVs/BVs to parent companies resident in tax treaty countries in structures involving a business enterprise, unless the structure is considered to be abusive. The new rules are envisaged to enter into force ultimately 1 January 2018. As this is not yet a legislative proposal, but only an announcement, we will keep you posted on further developments.