Yesterday, the four political parties that will form the new Dutch government following the election last March – VVD, CDA, D66 and ChristenUnie – reached a coalition agreement. The parties have a tight majority of 76 out of 150 seats in the House of Representatives. The coalition agreement, which is a political agreement rather than a legally binding agreement, sets out the policy plans of the new Dutch government, including an outline of the fiscal policy. Due to its high level nature, much is still unclear at this stage. We also note that the coalition agreement will be debated in the House of Representatives, which may lead to some adjustments before a policy plan is formally implemented through legislation. As the new government intends the policies to come into effect in 2019, the legislative proposals are expected to be sent to parliament during the course of 2018. A summary of the key measures for international groups and companies is set out below.
2. Policy plans for international groups and companies
The new government is looking to further enhance the investment climate in the Netherlands by proposing measures to benefit companies that add real value to the Dutch economy and, in line with the global developments, target the avoidance of taxation. Thus, on the one hand, the new government proposes to reduce corporate income tax rates and partially abolish dividend withholding tax ('DWT'). On the other hand, it has put forward several measures to broaden the corporate income tax base.
2.1. Dividend withholding tax abolished On Budget Day 2017, the previous government proposed measures to extend the application of the DWT exemption in relation to states that have concluded a double tax treaty with the Netherlands, provided the transaction is not considered abusive (see our Tax Alert on the 2017 Budget Day proposals for more details). To further strengthen the Dutch fiscal climate, the new government now intends to abolish DWT, except for dividend payments to 'low tax jurisdictions' (see below) or dividend payments in abusive situations. Abolishing DWT will benefit foreign shareholders to the extent they are currently not able to benefit from an exemption or reduced rates under tax treaties. It is not yet clear how the measures proposed by the previous government will be affected by the latest plans to abolish DWT and whether those measures will still be fully enacted.
2.2. Corporate income tax rate decreased from 25% to 21% Profits are currently taxed at a corporate income tax rate of 25%; any income up to EUR 200,000 is taxed at a reduced rate of 20%. The new government has agreed to gradually decrease these rates from 25% and 20% to 24% and 19% in 2019; 22.5% and 17.5% in 2020 and 21% and 16% in 2021. The reduced rate will continue to apply in respect of profits up to EUR 200,000. The pending proposal to increase the threshold (i.e. EUR 250,000) for the reduced rate will be revoked.
In order to maintain a fair balance between the effective taxation of business income from incorporated and non-incorporated businesses, the personal income tax rate for income in relation to a 'substantial interest' (generally applicable to individuals holding 5% or more in a company (aanmerkelijk belang)) will be gradually increased to 28.5% in 2021.
2.3. Deductibility of interest Introduction of earnings stripping rule In line with the adoption of the Anti-Tax Avoidance Directive ('ATAD') by the Council of the European Union, the new government envisages a new interest deduction limitation measure that limits the deductibility of interest to 30% of a taxpayer's EBITDA ('earnings stripping rule'). Whilst the proposed earnings stripping rule in the ATAD 1 consultation document released this summer left open the option to include a group ratio exemption (we refer to our Tax Alert for additional information), this is no longer being pursued by the new government. Furthermore, the now proposed threshold of EUR 1 million is less favourable than the EUR 3 million that was included in the ATAD 1 consultation document as well as in ATAD itself.
Introduction of thin capitalization rule for banks and insurance companies As banks and insurance companies are typically less affected by the interest limiting effect of earnings stripping rules, the new government aims to also introduce a thin capitalization rule to prevent banks and insurance companies from deducting interest if their debt exceeds 92% of the commercial balance sheet total.
Abolishing existing interest deduction limitations The new government plans to abolish some of the existing interest deduction limitations. It has not specified which particular rules will be abolished, although it has confirmed that the anti-base erosion rules (art. 10a Dutch corporate income tax act 1969) will remain in place.
2.4. Loss carry forwards limited to 6 years At present, a corporate income taxpayer can carry forward its losses for a period of 9 years. The new government has agreed to reduce this to a period of 6 years.
2.5. Effective tax rate innovation box increased from 5% to 7% The innovation box provides taxpayers with a special tax regime for income in relation to qualifying R&D activities. The effective tax rate currently stands at 5%. This effective tax rate will be increased to 7%.
2.6. Depreciation of real estate limited Taxpayers are currently allowed to depreciate real estate, which is used in the course of their own enterprise, to the extent that the book value exceeds 50% of the so-called WOZ value (the fair value as assessed annually by Dutch municipalities). The new government has agreed to increase the maximum to 100% as a result of which the depreciation base will be reduced. This 100%-maximum already applies to investment real estate that is leased to third parties.
2.7. Introduction of withholding tax on interest and royalty payments to 'low tax jurisdictions' The new government proposes a withholding tax on outbound interest and royalty payments to so-called 'low tax jurisdictions' in an effort to discourage the use of letterbox companies.
2.8. Support creation of a 'black list' with non-cooperative tax jurisdictions The new government will support the creation of a 'black list' of non-cooperative tax jurisdictions and the introduction of an obligation for multinational enterprises to report on their activities in these jurisdictions.
2.9. Direct real estate investments by fiscal investment institutions no longer allowed In view of the proposal to abolish DWT, fiscal investment institutions (fiscale beleggingsinstellingen) are no longer allowed to directly invest in real estate.
2.10. Application for 30% reimbursement expat regime reduced from 8 to 5 years Under the 30% reimbursement rule, expats that meet certain requirements will still be allowed to apply for a tax free reimbursement of 30% of their salary. However, it is proposed that the term of application of this regime is reduced from 8 to 5 years per employee.
2.11. Low vat rate increased to 9% The new government has also agreed to increase the low VAT rate from 6% to 9%.