On 18 September 2018, the Dutch government released its Budget 2019 containing the Tax Plan for 2019, which includes some significant amendments to Dutch tax laws.
The basis of the Tax Plan was laid down in the newly elected government's coalition agreement of October 2017, whereby parties agreed to a comprehensive tax reform in the coming years.
The Tax Plan 2019 contains several important measures that significantly affect Dutch tax legislation. It aims to implement stricter rules, amongst others imposed by EU legislation, yet at the same time maintain a competitive business climate. As a next step, the measures announced yesterday will be discussed in Parliament in the coming weeks and, when approved, new laws will be implemented effective 1 January 2019 (unless otherwise indicated). In this Alert we summarize the most important measures.
Corporate Income Tax - EU Anti Tax Avoidance Directive
Earnings Stripping Rule
Based on ATAD, a new general interest deduction limitation for Dutch corporate income tax purposes is proposed with effect from 1 January 2019 (the “Earnings Stripping Rule”). Under the Earnings Stripping Rule, the starting point is to determine the taxpayer's so called “Interest Expense Excess”. This is the amount by which the taxpayer’s tax deductible interest expenses exceeds its taxable interest income. The deductibility of the Interest Expense Excess is limited to the higher of (i) 30% of the taxpayer’s EBITDA (carving out tax exempt income) and (ii) a safe harbor of EUR 1 million. The proposal seems stricter than the ATAD, which allowed for a safe harbor threshold of EUR 3 million. Interest disallowed under the Earnings Stripping Rule can be carried-forward to later years without limitation in time.
The Earnings Stripping Rule will equally apply to both existing and new loans (no grandfathering) and to both intra-group and third-party interest. In addition, no “group escape” (as allowed under the ATAD) will be implemented. Furthermore (and contrary to what was previously expected) the rule will apply to all entities including so called “stand alone taxpayers”, i.e. entities not part of a group of entities. Finally, no exception is made for taxpayers operating in specific sectors.
By implementing the Earnings Stripping Rule, some current interest deduction limitations are no longer deemed necessary. Therefore, abolishment is proposed of the following existing specific interest deduction limitation rules:
- article 13l which relates to “excessive participation debt”;
- article 15ad which applies to acquisition holdings; and
- article 20, paragraphs 4-6 which relate to the off-set of losses incurred by “holding and financing companies”.
Controlled Foreign Companies ("CFC")
Based on ATAD, EU Member States are obliged to implement a CFC rule according to which the non-distributed earnings of a foreign subsidiary or permanent establishment may be taxed in the Netherlands if certain criteria are fulfilled. The ATAD offered the following two options of implementing the CFC rule:
- Model A: on the basis of model A non-distributed passive income of the subsidiary or permanent establishment such as interest, royalties, dividend and financial leasing will be included in the tax base of the taxpayer.
- Model B: on the basis of model B income generated through assets and risks which are linked to significant people functions carried out by the taxpayer (i.e. the controlling company), to be calculated in accordance with the arm's length principle, will be included in the tax base of the taxpayer.
The legislative proposal states that the Netherlands already applies Model B, since the arm's-length principle is already an important part of Dutch tax legislation. This way the Netherlands government is of the view that Dutch tax law already meets the minimum standard of the ATAD CFC legislation.
However, for specific situations it is proposed to still apply Model A. This is the case where the following criteria are fulfilled with respect to a foreign subsidiary or permanent establishment:
- the Dutch taxpayer - with or without affiliated persons - has a direct or indirect interest of at least 50% of the nominal paid-up capital, voting rights and the profits in the foreign subsidiary or permanent establishment; and
- the foreign subsidiary or permanent establishment is:
- not subject to corporate income tax in its country of residence; or
- subject to corporate income tax in its country of residence at a statutory rate of less than 7%; or
- is located in a country that is included in the EU list of non-cooperative jurisdictions; and
- The foreign subsidiary or permanent establishment does not have a substantial economic activity. For purposes of this rule, a CFC is considered to have substantial economic activities if it meets certain substance requirements, which refer to existing minimum substance requirements and in addition the requirement to have an office space that is used for a period of at least 24 months and incur at least EUR 100,000 in salary expenses. Furthermore, the proposal states that the personnel of the CFC should not have a merely supportive role, i.e. should have the required professional knowledge.
Some other exceptions as included in ATAD will also be implemented, i.e. a specific exception for financial undertakings and an exception for cases whereby income mainly consists of other than passive income. Furthermore, several provisions to prevent double taxation will be implemented.
Abolishment of Dividend Withholding Tax, except in perceived abusive situations The current Dutch Dividend withholding Tax will generally be abolished as of 1 January 2020. Simultaneously, a new Withholding Tax Act will be introduced. This new Withholding Tax Act ("WTA") shows similarities to the Dividend Withholding Tax Act, although its scope is notably narrower.
Under the WTA, dividend payments made by a Dutch company will only be subject to withholding tax at a rate of 23.9% (to be reduced to 22.25% in 2021), if all of the following conditions are satisfied:
- the recipient is a corporate entity (as opposed to a natural person);
- the recipient (or permanent establishment of the recipient) is tax resident of (or located in) a low-tax jurisdiction, which is a jurisdiction designated by ministerial order (to be published at a later date) that:
- did not levy a profit tax, or levied profit tax at rate lower than 7% on 1 October of the preceding year; or
- was included on the EU list of non-cooperative jurisdictions in the preceding year.
- the Dutch distributing company and the recipient are 'related'. This is the case, if:
- the recipient directly or indirectly owns a 'qualifying interest' in the Dutch distributing company; or
- a third company directly or indirectly owns a 'qualifying interest' in both the Dutch distributing company and the recipient; or
- the recipient directly or indirectly owns an interest in the Dutch distributing company, and the recipient forms part of a cooperating group of one of more other companies, as a result of which the interest should be considered a 'qualifying interest'
A 'qualifying interest' in the Dutch distributing company is an interest through which such influence on the decisions can be exercised, that the activities of the Dutch distributing company can be determined. This will be determined on the basis of the facts and circumstances of the case. However, it is indicated that an interest representing more than 50% of the statutory voting rights will in any event constitute a qualifying interest. The Dutch tax authorities can be requested upfront to confirm whether a structure constitutes a qualifying interest.
Dividend payments made by a Dutch distributing company to a related recipient that is a hybrid entity and which owns a qualifying interest will be subject to withholding tax, unless it can be made plausible that this "hybrid recipient" is considered a tax resident of the (non low-taxed) jurisdiction in which it is established, and the dividend is included it its taxable income.
Anti abuse provision
Based on the above it can be concluded that in most structures Dutch dividend withholding tax will not or no longer apply. However, if (i) the recipient of a dividend is an intermediate holding company and (ii) owns the interest in the Dutch distributing company with the main purpose or one of the main purposes to avoid withholding taxes otherwise due by another person and (iii) the structure or transaction is artificial, then withholding tax will nevertheless be due (the "Anti-Abuse Provision").
The Anti-Abuse Provision will not apply if:
- the recipient of the dividend (the intermediate holding company) satisfies all 'relevant substance requirements', which are the existing minimum substance requirements including an office space that is used for a period of at least 24 months and at least EUR 100,000 of salary expenses ("Objective Test"). For intermediate holding companies that are tax resident of the EU/EEA, the option is provided to otherwise demonstrate that the Objective Test is satisfied; or
- the recipient of the dividend (the intermediate holding company) does not own the shares in the Dutch company with the main purpose or one of the main purposes to avoid withholding tax ("Subjective Test"). In order to determine whether this is the case, a comparison must be made between (i) the situation where the interest in the Dutch distributing company is held directly by the recipient and (ii) the situation where the interest in the Dutch distributing company would have been directly held by the beneficiaries of the recipient (the so-called 'look-through approach').
Generally speaking, the tax base of the WTA is the actual dividend paid to group companies. Similar to the current Dividend Withholding Tax act, certain distributions can qualify as deemed dividend distributions, e.g. liquidation proceeds, repayments of share premium and payments on hybrid loans.
One important additional withholding tax triggering event under the WTA is the indirect transfer of shares in a Dutch company, if a dividend distribution of such Dutch company to its direct shareholder would have been subject to withholding tax. The tax basis for the levying of withholding tax in such case is - in a nutshell- the fair market value of the Dutch company less its contributed equity for tax purposes.
We strongly recommend to timely analyze whether your structure would be adversely impacted by the WTA, especially if your Dutch company is held directly by a shareholder in a low-tax jurisdiction or if your Dutch company is held by an intermediate holding company that does not satisfy the 'relevant substance requirements' as explained. This is particularly important considering that indirect share transfers of a Dutch company could trigger withholding tax consequences as from 1 January 2020.
Other relevant aspects
Reduction of the corporate income tax rate
Currently, the Dutch corporate income tax rate is 25% (and 20% for profits less than EUR 200,000). However, the Dutch corporate income tax rate will be gradually decreased as of 1 January 2019 until 1 January 2021. The Dutch corporate income tax rate will be 24.3% (19% for profits of EUR 200,000 or less) in 2019 and will further decrease to 23.9% in 2020 (17.5% for profits of EUR 200,000 or less) and to 22.25% (16% for profits of EUR 200,000 or less) in 2021. The reduction of the Dutch corporate income tax rate is slightly lower than what was announced in last year’s budget plans.
Reduction of the period for carry forward losses
As of 1 January 2019, tax loss carry forward will be reduced from 9 years to 6 years. This means that losses that arise in fiscal year 2019 may be carried forward ultimately until 2025. This measure does not apply to losses incurred in years up to and including fiscal year 2018, as those can still be carried forward for a period of 9 years.
Abolishment of the restriction for holding and financing losses
Currently, losses that are incurred by taxpayers which activities consist entirely or almost entirely (i.e. for 90% or more) of holding and/or financing activities may, as a general rule, only be offset against taxable profits realized in years in which the taxpayer's activities consist entirely or almost entirely of holding and/or financing activities. However, since these so-called holding and/or financing companies will already be affected by the implementation of the earning stripping rule due to their relatively low EBITDA, the current restriction for the so-called holding and/or financing companies will be abolished as of 1 January 2019.
Fiscal investment institutions no longer allowed to directly invest in Dutch real estate
FBI's (fiscale beleggingsinstellingen, Fiscal investment institutions) will no longer be allowed to directly invest in Dutch real estate. Companies with an FBI status are subject to a 0% corporate income tax rate. Taxation is shifted from this collective investment vehicle to taxation at the level of the shareholders. The current proposal prohibits an FBI from directly investing in Dutch real estate, meaning that real estate investment vehicles will no longer be able to make use of this FBI-regime. These investment vehicles will be subject to the regular (soon to be reduced) corporate income tax rate. A distinction will be made between listed an non-listed real estate investment vehicles.
Restrictions to depreciation of buildings in own use
Under current law, buildings which are used within a company could be depreciated until 50% of the value for the purposes of the Valuation of Immovable Property Act ("WOZ-waarde"). Based on the proposal in the Tax Plan, tax depreciation of buildings which are used within the company will be limited to 100% of this value for corporate income tax purposes.
Environmental taxes & Incentives
The preferential depreciation regimes for investments in business assets that are beneficial for the environment (EIA, MIA and VAMIL) will remain in place for at least five more years (i.e. until 1 January 2024).
Additional Tier 1 capital instruments (AT1 / CoCo bonds)
Financial institutions need to consider that under the proposal Additional Tier 1 (“AT1”) capital instruments will be treated as equity for tax purposes, making the remuneration related to these instruments no longer deductible. With this measure, the government removes an widely used incentive for using AT1 capital instruments instead of Tier 1 core capital instruments, which were already treated as equity for tax purposes. Earlier this year, the European Commission designated the Dutch regime, which allows for the deductibility of the remuneration related to AT1 capital instruments, as a potential case of state aid. The Dutch government indicates that the change of treatment of the AT1 capital instruments is motivated by the state aid risk and that they expect the European Commission to eventually end tax deductibility of these instruments in all EU countries. The proposed measure would apply to financial years commencing on or after January 1, 2019 with no grandfathering for existing situations.
Announced further measures against tax avoidance
It was expected that the 2019 Budget would also introduce measures to further prevent tax avoidance and tax evasion. Part of these (earlier announced) measures are mentioned in the 2019 Budget but some are still to be introduced. The Dutch State Secretary for Finance informed the Dutch Parliament that he would send information in relation to these measures before the start of the legislative process. It is expected that the following measures will be introduced at a later stage:
- a withholding tax on interest and royalty payments to ‘low tax jurisdictions’;
- increased substance requirements for ‘financial service companies’ and imposing these same substance requirements on ‘Dutch holding companies’. The minimum substance requirements would now also require that the company incurs at least EUR 100,000 of salary costs and has an office at its disposal for a period of at least 24 months;
We will keep you informed as soon as there is more guidance in this respect.
Personal Income Tax
Box 1 - Income from work and dwelling
Income from work and dwelling in Box 1 will be subject to tax according to a two-brackets system with effect from 2021. The basic rate will be 37.05% while the top-rate will be 49.5%.
Box 2 - Income from substantial shareholdings
The tax rate for income from substantial shareholdings in Box 2 will gradually increase from 25% to 26,25% in 2020 and to 26,9% with effect from 2021. At the same time, the loss carry forward period will be reduced to 6 years from 9 years to align this with the corporate income tax rules.
30% ruling for expats
The application period of the 30% ruling for expats will be reduced from 8 years to 5 years for both existing and future rulings with effect from 1 January 2019. However, transitional rules will apply to the reimbursement or payment of the international school fees of the expat's children.
Increase lowest VAT rate
As of 2019, the lowest VAT rate will be increased from 6% to 9%. This rate applies to a variety of common products or services, such as food and drink, medicines, books, daily newspapers and magazines. Payments received in 2018 remain subject to the 6% rate. Suppliers under existing contracts are legally obliged to charge the extra VAT to their customers.
Extension of VAT sports exemption
The VAT sports exemption is currently restricted to sport services provided to members of sport associations. In order to comply with EU case law, the exemption will be extended to also include services to non-members.
Revision of small businesses scheme
The current VAT small businesses scheme will be replaced by an optional sales-related VAT exemption. This exemption will be available for businesses with a yearly turnover in the Netherlands up to Euro 20.000.
Implementation of VAT e-commerce directive
The VAT obligations for small businesses performing B2C digital services will be simplified as of 2019. This measure is introduced as part of the implementation of the VAT Directive on e-commerce. Other provisions of this directive will be implemented at a later stage.
Currently, tax interest can be charged on personal income tax and inheritance tax assessments, even when the taxpayer has fulfilled all obligations relating to the filing of the tax return and the return is filed timely. As per 1 January 2019, no tax interest will be charged if a personal income tax return is filed on time and the tax assessment is imposed in accordance with that tax return. This is in line with pre-existing policy of the Dutch Tax Authorities. A similar facility is introduced with regard to the inheritance tax.
Additional collection measures
In response to the Panama papers and the fight against tax evasion and tax avoidance the Dutch government introduces four additional tax collection measures:
- As per 18 September 2018, 15.15 hours, recipients of certain distributions or gifts can be held liable for tax claims of the tax debtor in “actio pauliana” situations.
- As per 18 September 2018, 15.15 hours, the liability of beneficiaries for inheritance tax claims of the testator is extended by the amount of gifts received from the testator in the 180 days prior to his or her passing;
- As per 1 January 2019 the tax assessment of a (foreign) legal entity that (presumably) has been liquidated and dissolved can be notified at the public prosecutors’ office. Prior to this change of legislation, a reopening of the liquidation was required to notify the tax assessment. Reopening of the liquidation in order to issue a tax assessment is therefore no longer required as per 1 January 2019.
- Currently, only persons that are formally held liable for a tax claim are obliged to provide information. As per 1 January 2019, this obligation is extended to persons that are 'potentially liable persons', i.e. persons that are not yet formally held liable for a tax claim, but can (presumably) be held liable.
Definition of the term offender for tax purposes
The definition of the term 'offender' is extended to the person that causes to be committed a crime, instigates a crime and/or is accessory to a crime for tax purposes. This extension would be cancelled as of 1 January 2019 unless a new legislative proposal thereon was introduced. The Dutch government deferred the cancellation date of this extension to 1 January 2024.