On September 17, 2019, the Dutch government published its tax proposals for 2020 and onwards. The plan mainly aims to implement a number of measures of which implementation is required by the EU. It also introduces a conditional withholding tax on interest and royalties and minor changes to other taxes.
The most important proposal published on Budget Day is the conditional withholding tax on interest and royalties paid to entities in low tax jurisdictions or in certain abusive situations.
The measures that are relevant for multinational companies are:
1. Direct Tax:
a. implementation of ATAD II
b. amendment of the liquidation loss regime
c. change in corporate income tax rates
d. introduction of a conditional withholding tax on interest and royalties
e. amendment anti-abuse rules CIT / DWT
f. interest deduction rule for banks and insurance companies
g. amendment of the work-related expenses scheme
h. change in effective tax rate innovation box
2. Indirect Tax:
a. implementation of EU VAT quick fixes Directive
b. implementation reduced VAT rate for e-publications
c. change in standard Transfer Tax rate
Currently, the Tax Plan is subject to discussion in the Dutch House of Representatives, which may propose (and adopt) amendments to the legislative proposals published by the Dutch government. Upon approval by the Dutch House of Representatives, the Dutch Senate will vote on the proposal in December (likely the last session of 2019), after which the measures will take effect on January 1, 2020, except for the proposed conditional withholding tax on interest and royalty payments to low tax jurisdictions and in certain abusive situations, which will take effect on January 1, 2021.
Direct tax observations
Implementation of ATAD II
Pursuant to EU law, the Netherlands is (as are all other EU Member States) required to implement Council Directive (EU) 2017/952 of May 29, 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries (ATAD II) into their domestic law.
No amendments to the already published ATAD II proposal have been released on budget day. The expectation is that this law will be passed this year and will become effective as of January 1, 2020.
For more detailed information on ATAD II, see our Tax Alert of July 12, 2019.
Amendment of the liquidation loss regime (and the discontinuation loss regime)
The Dutch government has stated its intention to put forward a legislative proposal originally drafted by opposition parties which limits the so-called liquidation loss regime. The liquidation loss regime allows a Dutch resident taxpayer to take into account a liquidation loss if the sacrificed amount (opgeofferd bedrag) for a participation exceeds the liquidation proceeds (adjusted to include dividends distributed in the prior five or ten years, depending on facts and circumstances).
The liquidation loss regime will be limited to subsidiaries that are resident for tax purposes of EU/EEA Member States (geographical restriction), in which the Dutch resident taxpayer has a qualifying interest (more than 25%; substantive restriction), where the liquidation must be completed within three years (temporal restriction).
The discontinuation loss regime, which applies to a permanent establishment of a Dutch resident taxpayer, will be limited to EU/EEA Member States, except insofar the permanent establishment owns investment real estate or a limited partnership interest in a non-EU/EEA Member State.
The expected effective date of this expected proposal is January 1, 2021.
Change in corporate income tax rates
The Dutch corporate income tax will change as follows:
Introduction of conditional withholding tax on interest and royalties
The Dutch government has proposed a conditional withholding tax on interest and royalties paid to associated enterprises (controlling interest, which is deemed to be the case if 50% of the shares are held) that are residents for tax purposes in a so-called low tax jurisdiction or in certain abusive situations. The Netherlands currently considers the following jurisdictions to be low tax jurisdictions:
- American Samoa;
- American Virgin Islands;
- British Virgin Islands;
- Cayman Islands;
- Isle of Man;
- Saudi Arabia;
- Trinidad and Tobago;
- Turks and Caicos Islands;
- United Arab Emirates; and
The legislative proposal provides examples of structures that the Dutch government considers abusive.
In this respect, a structure where an interest or royalty payment is made to a company in a non-low tax jurisdiction such as Luxembourg may be targeted, if the Luxembourg company on-pays the interest or royalty to a low tax jurisdiction. This could be the case if only a small spread is reported in Luxembourg and the structure lacks substance.
The Dutch government also mentions that the use of hybrid entities may trigger the conditional withholding tax (under certain circumstances).
The effective date of the conditional withholding tax on interest and royalty is expected to be January 1, 2021.
Change in the definition of permanent establishment
Following the ratification of the Multilateral Instrument (MLI) by the Netherlands, the Dutch government has proposed an amendment to the definition of an inbound permanent establishment in order for it to be in line with the choices the Netherlands made in relation to the MLI. In the case of a jurisdiction with which the Netherlands has a tax treaty, reference is made to the definition of a permanent establishment in the relevant tax treaty. In the case of a jurisdiction with which the Netherlands does not have a tax treaty, the definition is in line with the recommendations of the OECD BEPS Action 7 Final Report.
Amendment of anti-abuse rules CIT / DWT
Following a set of Danish cases before the European Court of Justice, the Dutch government has reviewed the anti-abuse rules in the Corporate Income Tax Act of 1969 (CITA) and the Dividend Withholding Tax Act of 1965 (DWTA). This review has led to the conclusion that the anti-abuse rules are no longer in line with EU law and have to be amended.
The legislative proposal amends the so-called Objective Test. This test is met if the direct shareholder of a Dutch resident company conducts a material business enterprise (to which the shareholding in the Dutch resident company can be functionally attributed) or if the indirect shareholder(s) conduct a material business enterprise, where the direct shareholder of the Dutch resident company performs a linking function (between the rest of the group and the Dutch resident company) and meets the Dutch relevant substance requirements.
The current anti-abuse rules may function as a safe haven (i.e. the Dutch tax authorities cannot challenge it if the test is met). The legislative proposal changes the safe harbor rule. Even if the safe harbor test is met, the Dutch tax authorities may challenge the structure on the basis that it is artificial.
Interest deduction rule for banks and insurance companies
The Dutch government has also proposed a specific interest deduction rule for banks and insurance companies.
Under these rules, (8 -/- Leverage Ratio) / (100 -/- Leverage Ratio) of a bank’s interest expense is non-deductible for CIT purposes, where the Leverage Ratio can be no higher than 8. For insurance companies, the ratio is (8 -/- Equity Ratio) / (100 -/- Equity Ratio) where the Equity Ratio can be no higher than 8.
If a taxpayer functions as both a bank and an insurance company, the company's biggest activity determines whether the interest deduction rule for banks or the interest deduction rule for insurance companies applies.
Amendment of the work-related expenses scheme
The Dutch government has proposed to expand the work-related expenses scheme by increasing the percentage that falls within the work-related expenses on the first EUR400,000 of the wage sum to 1.7%. For the remaining wage sum, the percentage remains 1.2%.
Under the work-related expenses scheme, employers can, under certain circumstances, reimburse employees and grant allowances free of Dutch Wage Tax (WT) if the reimbursement or allowances have been designated as a final levy component (eindheffingsbestanddeel). A final levy component is an item of taxable salary where the employer takes the tax on its own account (any non-exempt final levy components that exceed the work-related expenses scheme threshold are taxed at 80%).
Change in effective tax rate innovation box
The Dutch government has announced it will change the effective tax rate on income attributable to the innovation box regime from 7% to 9% as of 2021.
Indirect tax observations
Implementation of EU VAT quick fixes Directive
The Dutch government proposed amendments to the Dutch VAT legislation in order to implement the four EU VAT quick fixes that simplify intra-EU trade as of January 1, 2020. The four quick VAT fixes concern the following areas:
(i) Call-off stock. The proposal provides for a simplified treatment for call-off stock arrangements where a seller transfers stock to a warehouse at the disposal of a known customer in another member state.
(ii) VAT identification number. To benefit from a zero VAT rate for the intra-EU supply of goods, the VAT identification number of the customer will become a material requirement.
(iii) Chain transactions. To enhance legal certainty in determining the VAT treatment of chain transactions, the proposal establishes uniform criteria for allocating cross-border transport to a supply within the chain.
(iv) Proof of intra-EU supply. A common framework is proposed for the documentary evidence required to claim a zero VAT rate for intra-EU supplies.
Reduced VAT rate for e-publications
Currently, a reduced VAT rate of 9% is applicable to paper publications such as books, newspapers and magazines. Following the 2018 VAT Directive allowing EU Member States to apply a reduced (or even 0%) VAT rate to e-publications, the Dutch government proposed extending the scope of the reduced VAT rate of 9% to also encompass their electronically supplied equivalents. As of January 1, 2020, the reduced VAT rate shall apply to electronic books, newspapers and magazines including access to news sites of newspapers and magazines. This is a welcome development as it creates a level playing field for publication businesses. The reduced VAT rate is not applicable to publications wholly or predominantly devoted to advertising and/or video content or audible music.
Change in standard Transfer Tax rate
In the Netherlands, a 6% Dutch Real Estate Transfer Tax (RETT) rate applies to the acquisition of the legal and/or beneficial ownership of real estate located in the Netherlands or certain rights concerning such Dutch real estate (e.g. right of usufruct, shares of real estate entities).
The Dutch government has proposed to increase the standard RETT rate from 6% to 7%. This increase will come into effect on January 1, 2020 which means all acquisitions (transfer of title) on or after this date would in principle be subject to 7% RETT.
This increased rate would solely apply to non-residential real estate. For residential real estate the reduced RETT rate of 2% will continue to apply. This reduced rate may however also apply to commercial properties which were originally constructed as residential properties (and vice versa). Following the increase of the standard RETT rate, it would be even more significant to assess whether the reduced RETT rate may be applicable.