The Dutch State Secretary of Finance has published his tax policy agenda, outlining the intention to strengthen the Dutch investment climate for real economic activities.
1. Strengthening the Dutch investment climate
The goal is to achieve a strengthened investment climate by lowering the Dutch corporate income tax (CIT) rate to 21 percent (16 percent for profits up to €200,000) and by abolishing the current Dutch dividend withholding tax act.
1.1 Corporate Income Tax rate will be reduced to 21 percent
The Dutch State Secretary of Finance confirms that the Netherlands will reduce the Dutch corporate income tax rate to 21 percent during the upcoming years. Next year (2019) the CIT rate will be reduced to 24 percent, followed by 22.5 percent (2020) and 21 percent (2021). The step-up rate for profits up to €200,000 will also be reduced: 19 percent (2019), 17.5 percent (2020) and 16 percent (2021).
By lowering the CIT rate to 21 percent, the Netherlands aims to have a CIT rate below the EU-average.
1.2 Abolishing the Dutch Dividend Withholding Tax Act
Currently, outbound dividend distributions by a Dutch entity are in principle subject to 15 percent Dutch dividend withholding tax (DWTA), absent dividend withholding tax exemptions or tax treaty protection. As of January 1, 2020, the current DWTA will be abolished. Instead, the Netherlands will introduce a conditional withholding tax regime on intra-group dividend, interest and royalty payments to low-tax jurisdictions. Please see section 2.4 below for more information.
2. Tackling tax avoidance and tax evasion
Another cornerstone of the tax policy agenda is to tackle tax avoidance and tax evasion. The State Secretary of Finance plans to achieve this goal -inter alia- by implementing the anti-tax avoidance directives (ATAD I and ATAD II), by introducing a conditional withholding tax regime on intra-group dividend, interest and royalty payments to low-tax jurisdictions and by increasing the Dutch substance requirements.
2.1 ATAD I – January 1, 2019
2.1.1 Interest deduction limitation rule
ATAD I requires EU member states to implement a general interest deduction limitation rule in the form of an earnings stripping rule. The earnings stripping rule that will be implemented by the Netherlands limits the deduction of net borrowing costs to the highest of (i) 30 percent of the EBITDA and (ii) an amount of €1 million. By choosing for a €1 million threshold, the Netherlands has chosen to implement the earnings stripping rule more strict than necessary (a threshold up to €3 million is allowed). The Netherlands will also not implement a group escape rule nor a grandfathering for existing loans. The earnings stripping rule will be implemented as of January 1, 2019.
For banks and insurance companies, an additional interest deduction limitation rule will be introduced in the form of a minimum capital rule.
2.1.2 CFC Rules – January 1, 2019
Pursuant to the CFC rules set out in the ATAD, the Netherlands will include undistributed "tainted income" from a controlled entity or permanent establishment.
Generally, the CFC rules will apply to CFCs that meet two specific requirements. First, the taxpayer, whether or not together with an affiliated entity or individual, should have an interest, directly or indirectly, of more than 50 percent of the nominal paid up capital, statutory voting rights or profit in the foreign entity. Second, the foreign entity is not subject to a profit tax that is reasonable according to Dutch standards. Broadly speaking, a tax rate of more than 12.5 percent on the taxable profit determined according to Dutch standards is considered reasonable under the proposed rules.
Notwithstanding meeting the requirements set out above, the CFC rules will not apply if the CFC conducts substantial economic activities.
2.2 Restriction carry-forward loss position – January 1, 2019
Currently, Dutch taxpayers can carry forward their losses for nine years and carry back their losses for one year. For budget reasons, the carry forward of losses will be limited from nine years to six years. This new rule will be implemented as of January 1, 2019.
2.3 ATAD II (Anti-hybrid mismatches) – January 1, 2020
The anti-hybrid mismatch rules set out in the ATAD II will be implemented as of January 1, 2020 given their complex nature and the variety of structures that may be impacted (eg, hybrid financial instruments, hybrid transfers, hybrid entities, hybrid permanent establishments, imported mismatches, double deduction mismatches and double residency mismatches). Implementation of ATAD II is also likely to adversely impact the commonly used Dutch CV/BV structure. A consultation will be launched during 2018; stakeholders may provide input during that period. The final proposal is planned for the beginning of 2019.
2.4 Conditional WHT (outbound dividends, interest and royalty payments to low-tax jurisdictions) – January 1, 2020 / January 1, 2021
As mentioned before, the Dutch State Secretary of Finance confirmed the intention to abolish Dutch dividend withholding tax as of January 1, 2020. Instead, a conditional withholding tax will be levied on outbound dividend, interest and royalty payments to low-taxed jurisdictions or jurisdictions named on the EU blacklist. Anti-abuse measures will be implemented to tackle artificial arrangements frustrating the conditional withholding tax regime (eg, re-routing payments to low-taxed or EU blacklisted jurisdictions). It is unclear what the withholding tax percentage would be, and no other details are available for now. It is indicated that the conditional dividend withholding tax should be applicable as of 2020 (in conjunction with the general abolishment of dividend withholding tax) and the conditional withholding tax on interest and royalty as of 2021.
2.5 Increased substance requirements – 2019 until 2021
To avoid the use of holding companies without any substance ("letterbox firms"), the Dutch State Secretary of Finance is looking to increase the Dutch substance requirements. The minimum Dutch substance requirements should also include a minimum of €100,000 relevant employment expenses and the requirement to have office space for a period of at least 24 months.
The increased substance requirements will be applicable to:
- Dutch companies that would like to obtain certainty in advance by means of a tax ruling
- Dutch resident holding companies
- Dutch financing/licensing companies.
The Dutch State Secretary of Finance announced that he aims to introduce the increased substance requirements as soon as possible. The exact timing is yet to be determined.
Furthermore, the Dutch State Secretary of Finance will review whether the participation exemption can be changed in such way that the participation exemption will no longer be applicable if the activities of the international group in the Netherlands are limited to holding activities without at least meeting the Dutch substance requirements. The review is envisaged to take place in 2020.
3. Key takeaways
On the one hand, the Netherlands improves its investment climate by reducing the maximum CIT rate to 21 percent and by abolishing the current Dutch DWTA as of 2020. Companies with real economic activities should in particular benefit from these amendments. In some cases, the Netherlands could also (still) be an interesting holding jurisdiction.
On the other hand, numerous anti-abuse rules are announced to tackle base erosion and profit shifting and to discourage the use of holding companies without any substance.
Dutch holding, financing and licensing companies which do not meet the increased substance requirements may face exchange of information with other countries and can no longer obtain a Dutch tax ruling going forward. The earnings stripping rule, CFC-rules and the anti-hybrid mismatch rules following from the implementation of the ATAD I and ATAD II, should be carefully considered going forward, as these provisions can have a significant adverse impact on Dutch taxpayers. Finally, the introduction of a conditional withholding tax scheme can result in withholding tax leakage if and insofar dividend, royalty and interest payments are made to low-taxed jurisdictions or jurisdictions named on the EU blacklist.