Dividend withholding tax - Dutch holding cooperatives subject to Dutch dividend withholding tax
Profit distributions made by a Dutch cooperative to its members are currently not subject to Dutch dividend withholding tax, unless the structure is considered abusive. The Bill introduces an obligation for so called “holding cooperatives” to withhold Dutch dividend withholding tax at a rate of 15% on profit distributions to qualifying members.
Under the Bill, a cooperative qualifies as a holding cooperative in case the activities of the cooperative usually consist for 70% or more of (i) owning shareholdings that qualify for the Dutch participation exemption regime or (ii) financing related entities. A qualifying member is a member that is entitled to at least 5% of the annual profits, or 5% of the liquidation proceeds, of the holding cooperative.
Holding cooperatives and its qualifying members may, however, be eligible for the expanded exemption in tax treaty situations as described hereafter. As usual, application of bilateral tax treaties may also reduce this domestic withholding tax rate to a lower rate.
Dividend withholding tax - The EU/Netherlands withholding tax exemption expanded to corporate shareholders in tax treaty jurisdictions
Dividend distributions made by a Dutch company (such as a BV or NV) are currently typically exempt from Dutch dividend withholding tax if the recipient is a corporate tax resident in the Netherlands or a member state of the European Economic Area (including the European Union), and in some cases where a bilateral tax treaty results in an exemption. For many cases the Bill expands this exemption to corporate shareholders that are resident in a country with which the Netherlands has concluded a tax treaty that contains a dividend income clause. It is important to note that even if the dividend income clause does not provide for a 0% rate, the exemption will nevertheless apply in full based on the mere fact that a tax treaty is in place.
The proposed rules principally apply only to corporate shareholders that are resident in a tax treaty jurisdiction, although specific relief is available for hybrid entities that receive dividends from a Dutch company, provided certain conditions are satisfied.
The proposed exemption is however rejected in case (i) the foreign shareholder holds the interest in the Dutch company with a purpose to mitigate the levy of Dutch taxation and (ii) an artificial arrangement is in place. These two “anti abuse” tests already exist in Dutch tax law. Similar to the existing tests, the proposed rules should not result in the levy of Dutch dividend withholding tax in case of dividend distributions by a Dutch taxpayer to (i) any shareholders with an active business enterprise or (ii) intermediate holding companies that (indirectly) link two active business enterprises, provided the intermediate holding company has relevant substance in its country of establishment.
The relevant substance proposed in the Bill consists of the existing minimum Dutch substance requirements for foreign intermediate holding companies, but now expanded with the following requirements: (i) the intermediate holding company incurs at least €100,000 (or the equivalent thereof in a different currency) in wage costs that forms the remuneration for the linking role activities of the intermediate holding company and (ii) the intermediate holding company has an office space available with the customary facilities for the performance of the linking role activities. Foreign intermediate holding companies have until 1 April 2018 to satisfy the new substance conditions.
Corporate Income Tax - Relaxation of the Dutch foreign substantial shareholder regime
Under current law, non-resident entities that own a substantial interest in a Dutch company (i.e. 5% or more) are in principle subject to Dutch corporate income tax as a foreign substantial interest holder with respect to their substantial interest in case (i) the foreign shareholder holds the interest in the Dutch company to mitigate the levy of Dutch dividend withholding tax and/or Dutch personal income tax and (ii) an artificial arrangement is in place. The Bill limits the first test, on the basis of which the test now only focusses on whether Dutch personal income tax is avoided.
Corporate Income Tax - Interest deductibility on indirect 3rd party debt
Interest expenses on debts to related parties (at least 33% direct/indirect shareholding) that relate to certain "tainted transactions" (i.e. acquisitions of subsidiaries, capital contributions or dividend distributions) that can be indirectly linked to a third party debt (back-to-back loans), will no longer be automatically deductible. For such back-to-back third party debt, the interest will only be deductible if the taxpayer demonstrates that such transaction is predominantly entered into for business reasons. Although the proposal does not specifically address this topic, the proposed change could also adversely affect direct third party loans for which a group company provided a guarantee.
Corporate Income Tax - Losses on loans to group companies
To prevent double loss deduction schemes, the deductibility of losses on loans to related parties will be further restricted in specific cases. In general, if a taxpayer incurs a loss on a loan to a related party, such loss will no longer be deductible if it is indirectly related to a loss which arose at the level of a company that is (or was) included in a Dutch fiscal unity with the taxpayer.
Corporate Income Tax - Losses on the liquidation of subsidiaries
The Dutch legislature has taken the opportunity to repair a flaw in the wording of the so-called liquidation loss rule, which under circumstances allows Dutch corporate income taxpayers to deduct losses related to the liquidation of a subsidiary that qualifies for the participation exemption. Under the current rule and due to the wording of the law, a liquidation loss could be established too high in situations where a company would no longer take part in a fiscal unity for Dutch corporate income tax purposes. This has now been repaired.
Corporate Income Tax - Expansion of anti-abuse rule related to foreign permanent establishments
The Bill expands an existing anti-abuse rule relating to the calculation of profits of a fiscal unity that has a foreign permanent establishment. Due to the fiscal consolidation provided by the Dutch fiscal unity regime, intercompany transactions between fiscal unity companies are in principle eliminated. Payments of one fiscal unity company to another that are attributable to a foreign permanent establishment of a fiscal unity company can create a mismatch, as such transactions are visible in the permanent establishment jurisdiction. For interest payments an anti-abuse rule countering this possibility is already in force. Based on the Bill, this anti-abuse rule will effectively also apply to other intra -fiscal unity payments such as royalty payments, lease payments and rental payments.