Introduction The Dutch government has released a consultation document ("the Document") containing a draft bill of law and explanatory memorandum on the EU Anti-Tax Avoidance Directive ("ATAD"; see also our Tax Alert of 23 June 2016 and our Tax Alert of 1 March 2017). The Document precedes the release of the formal bill anticipated in the first quarter of 2018, that should enter into force as per 1 January 2019. The Document is open for public comments up to 21 August and is used by the government to offer taxpayers and other interested parties the opportunity to voice any concerns they may have and identify any potential flaws in the drafting of the bill at an early stage. It contains rules with respect to earning stripping, exit taxation and the CFC-regime. In some cases alternative clauses are included in one regime for commentary. We will outline the key characteristics of these rules below. The consultation excludes rules for hybrid mismatches in relation to third states (These rules will be addressed separately as these rules should be implement only before 1 January 2020). We would like to draw your attention to the MyStibbe ATAD Tool, an online platform containing all information relevant to (the Dutch implementation of) ATAD and ATAD2. Please click here to register for the MyStibbe ATAD Tool and gain access to this exclusive information. Minimum standards Following the recent parliamentary elections and the still ongoing negotiations to form a coalition, as yet the Netherlands is governed by the outgoing government. Hence, the Document has purposely been drafted to just meet the minimum standards set in ATAD so to give room to the policy of the new government. Choices that are a matter of policy are thus for the time being undecided due to which the exact contours of the implementation of ATAD are not yet crystalized. Rules may be strengthened or expanded once the new government is in office. Earning stripping rules The earning stripping rule included in the Document essentially determines that interest expenses (after having been balanced with interest income) in excess of EUR 3 million are non-deductible to the extent they exceed 30% of the taxable profit adjusted for interest income, interest expenses and depreciation expenses (i.e. EBITDA), subject to certain further adjustments. Non-deductible interest expenses are carried forward indefinitely to the next financial years. The earning stripping rule does not apply if the taxpayer (a) is not part of a consolidated group for IFRS/GAAP purposes (b) has no affiliated company as defined for earning stripping rules or (c) has no permanent establishment. The Document contains two alternative group ratio rules that can be commented on (one of which eventually should be included in the final bill). Both group ratio rules basically determine that non-deductible excess interest under the aforementioned main rules would be deductible after all if the level of debt of the Dutch taxpayer compared to the debt at the level of the group is not excessive. Alternative 1 determines that interest expenses are deductible to the extent the taxpayer can demonstrate that, based on the consolidated commercial accounts, its average equity / average total assets ratio is at least equal to that of the group. Alternative 2 determines that interest expenses are deductible in excess of said 30% to the extent the taxpayer can demonstrate that the ratio consolidated interest expenses (less the consolidated interest income) / consolidated EBITDA, exceeds 30%. The new government should decide if any, and if so, which, of the existing interest limitation rules will be abolished once the earning stripping rule enters into force. No election, as allowed under ATAD, has been made by the Dutch government to postpone the entry into force of the earning stripping rules until 1 January 2024. CFC-regime ATAD includes two alternatives for implementing a CFC-regime. Model A essentially involves a CFC-regime revolving around on a number of (passive) types of income whilst model B essentially revolves around the at arm's length principle and considers income as CFC-income if the income is generated through artificial structures mainly created for tax planning purposes. In line with the preference of the Dutch Second Chamber of Parliament, model A is included in the Document. We also refer to our previous Tax Alert on ATAD for further information on both alternatives. Under the proposed CFC-regime, specified types of so-called tainted income of a controlled foreign company ("CFC") are included in the Dutch corporate income tax base of a corporate taxpayer in proportion to the interest held in the CFC to the extent the income has not been distributed to the corporate taxpayer at the end of the financial year. The following types of passive income are taken into account: (1) interest or other benefits from financial assets, (2) royalty's or other income from intellectual property, (3) dividend income and capital gains in relation to the alienation of shares, (4) financial lease income and (5) income less related expenses with respect to invoicing activities existing out of sales and services purchased from or rendered to affiliated companies or affiliated individuals that add no or limited value. If on balance the tainted income of CFC's results in a loss, the loss is not included in the Dutch corporate income tax base of the taxpayer but instead is carried forward for a period of up to 9 years to be offset against positive tainted income of subsequent years. A CFC is a subsidiary (a) in which the taxpayer – without or together with affiliated companies or an affiliated individual – has an interest of at least 50% of the (i) nominal paid-in capital, (ii) the voting rights, or (iii) profits, and (b) whose income is not subject to taxation that is reasonable according to Dutch standards. Taxation is considered reasonable according to Dutch standards if it results in taxation against a corporate tax base, in line with Dutch standards, and a tax rate which amounts to at least 50% of the applicable Dutch tax rate (whereby income of a permanent establishment is not taken into account if that income is not subject to a profit tax or is exempt from it). A company is not considered a CFC if (a) the income of the CFC at least predominantly exists of non-tainted income or (b) if the company is a financial undertaking as referred to in article 2(5) of ATAD and the tainted income is predominantly derived from others than the taxpayer or affiliated companies or affiliated individuals. The CFC-regime is not applicable to the extent that the CFC in relation to which tainted income is included in the Dutch corporate income tax base, carries out a fundamental economic activity, supported by personnel, equipment, assets and buildings. Local profit tax paid at the level of the CFC can in principle be credited against Dutch corporate income tax due. Various clauses are included in the Document to avoid unintended accumulation with the existing rules on (passive low taxed) shareholdings as part of the Dutch participation exemption regime. Exit charge The exit charge included in ATAD basically consists of two elements. Firstly corporate income tax is charged on a capital gain (i.e. difference between the fair market value and the book value for tax purposes) of an asset at the time the asset is transferred cross-border. Secondly, upon request of the tax payer, the corporate income tax in relation to the capital gain is deferred and becomes payable in 5 annual and equal instalments. With respect to the first element, the Dutch Corporate Income Tax Act 1969 already includes provisions that trigger taxation of a capital gain upon the transfer of an asset abroad. In this respect Dutch corporate income taxation already meets the requirements of ATAD. With respect to the second element, the Dutch Tax Collection Act already includes rules for deferred payment. However, given that these rules set a 10-year period during which the exit tax due should be paid (in annual and equal instalments), whilst ATAD only allows a 5-year period, the Dutch Tax Collection Act is proposed to be amended accordingly. As a starting point no security (e.g. bank guarantee) is required. However in case the tax collector can demonstrate a reasonable suspicion that the tax liability may not be fully paid, he is allowed to demand additional security to ensure proper payment. Deferred payment is ended and the remaining tax liability becomes payable instantly if (a) the taxpayer is no longer a resident of a EU or EEA Member State, (b) the payment requirements set are no longer met, (c) the security demanded in no longer met or (d) taxation on the capital gain would become payable if the taxpayer would have been a taxpayer in the Netherlands. The request for deferred payment should be filed together with the corporate income tax return that includes said capital gain. General Anti Abuse Rule The Document does not include a proposal for a general anti abuse rule ('GAAR') as Dutch tax law already includes the unwritten doctrine of abuse of law (fraus legis). The GAAR included in ATAD consists of three requirements that should be met to ignore an arrangement or a series of arrangements for the purposes of calculating the tax liability, being: (1) the main purpose or one of the main purposes is obtaining a tax advantage ('subjective criterion') (2) which defeats the object or purpose of the applicable tax law ('objective criterion'), (3) that is/are not genuine having regard to all relevant facts and circumstances. The Dutch doctrine of abuse of law also includes the first two requirements but as such does not include the third requirement. However, according to the legislator, the necessity of valid commercial reasons which reflect economic reality that is part of the GAAR included in ATAD, are also relevant for testing the subjective criterion that is part of the fraus legis doctrine. Furthermore, based on EU case law, a general legal framework that can be interpreted consistent with the respective provision in the directive, suffices for the implementation by a member state of a directive. Conclusion The Document merely includes the minimum standards required to implement ATAD in Dutch tax legislation. As a consequence of this approach, besides the fact that the comments on the consultation document may lead to amendments, currently it is unclear how ATAD will exactly be implemented in the Dutch legislation as this is left to decide for the new government. Therefore requirements may be further strengthened depending on the policy of the new government. This policy should also include a decision as to whether one or more of the existing interest limitation rules will be abolished and if and to what extent the extra budget realised through the implementation of ATAD will be used to increase the attractiveness of the Dutch fiscal climate (for example by reducing the Dutch corporate income tax rate). In conclusion, though the contours of the Dutch implementation have become clear, it is still too early to assess how the implementation will exactly affect Dutch corporate income taxpayers.