On 10 July, the Netherlands government published a consultation document with draft legislation for the implementation of the first EU Anti-Tax Avoidance Directive (ATAD).

The ATAD contains rules on (i) limitation of interest deductions (earnings stripping), (ii) exit taxation, (iii) controlled foreign corporations (CFC) , (iv) hybrid mismatches, and (v) a general anti-abuse rule (GAAR).

The consultation document sets out draft legislation in respect of the earnings stripping rule, exit taxation, and CFCs (points (i), (ii) and (iii) above). The government has taken the position that the current Netherlands abuse of law doctrine (fraus legis) already meets the requirements set out in the ATAD for a GAAR (point (v) above). Draft legislation for rules on hybrid mismatches (point (iv) above) will be published separately.

The consultation document notes that a number of choices underlying the draft legislation remain subject to the views of the new government that is yet to be installed (a government is currently being formed, after the elections held in March 2017). Key choices will be whether existing interest deduction limitations may be amended or abolished as a result of the introduction of an earnings stripping rule, and whether the chosen model for CFC taxation will be changed (see further below).

Implementation is planned for 1 January 2019. In particular, we note that the consultation document does not apply the option as included in ATAD to defer implementation of the earnings stripping rule until 2024.

We have set out further background on the proposed rules below.

Earnings stripping rule

The proposed earnings stripping rule applies to taxpayers that form part of a group (or have a permanent establishment outside of the Netherlands).

Pursuant to this rule, deductions of interest expenses (to the extent exceeding interest income) are denied if and to the extent they exceed the higher of (i) 30% of the taxpayer’s ‘tax’ EBITDA, and (ii) EUR 3 million (in line with the minimum requirements of the ATAD).

Taxpayers may carry forward, without time limitation, interest costs which cannot be deducted in the current tax period. The proposal does not allow for carrying back nondeductible interest costs or carrying forward interest capacity (being options that ATAD also offers).

The proposal leaves open which (if any) of the following two group ratio escape rules provided by ATAD are included:

  • an equity escape rule (i.e., allowing full deductions if the taxpayer’s ratio of equity to total assets is not substantially lower than that of the group); or
  • an earnings-based ratio rule (i.e., allowing deductions if and to the extent the taxpayer’s ratio of net interest deductions to EBITDA does not exceed that of the group).

Although Member States are allowed under the ATAD to provide for exceptions for financial institutions, infrastructure loans or loans entered into before June 2016, the proposal does not include any of such exceptions. The impact for financial institutions is expected to be limited as the earnings stripping rule only applies to the balance of interest expenses and interest income.

Exit taxation

Under the current Netherlands legislation, exit tax is due upon migration of a company out of the Netherlands. The payment of exit tax may be paid over a period of 10 years in annual instalments, or (at the choice of the taxpayer) may be deferred indefinitely until the taxpayer actually realizes the underlying profits. The tax authorities may require the taxpayer to provide security for such deferred payments (at the discretion of the tax authorities).

Under the proposed legislation, taxpayers may pay the exit tax in annual instalments of 5 years (as opposed to 10), whereby the exit tax becomes payable sooner if and when the taxpayer realizes the underlying profits at an earlier moment. The tax authorities may only require the taxpayer to provide security for the deferred exit tax payments if there is a demonstrable and actual risk of non-recovery of the tax debt.


The proposal considers a company a CFC if:

(i) the taxpayer has a 50% (capital or voting) interest in the company (in line with ATAD); and

(ii) the company is taxed over its so-called ‘tainted income’ at a rate of less than 12.5% (i.e., half of the current Netherlands top rate of 25%).

The ATAD allows Member States to consider ‘tainted income’ to either be (i) specific income items (such as interest, royalties, dividends and income from financial leasing, insurance and banking activities), or (ii) any income derived by the CFC from ‘non-genuine arrangements’. The consultation document proposes to follow the first approach on the basis of parliamentary discussions in 2016, but the explanatory memorandum explicitly notes that this choice is still open for discussion.

The CFC legislation does not apply in respect of any subsidiary:

(i) that carries on substantive economic activity supported by staff, equipment, assets and premises; or

(ii) the income of which consists for less than 30% of ‘tainted income’; or

(iii) that is a financial institution that derives at least 70% of its ‘tainted income’ from non-related parties.

The CFC’s passive income is included in the taxpayer’s Netherlands tax base (at the standard rate of 25%), with a credit for tax levied by the CFC jurisdiction.

If, in the following year, the CFC distributes the income to the Netherlands parent or the Netherlands parent realises a corresponding capital gain, such distribution or gain should be exempt under the participation exemption (but the drafting of this provision is not yet fully clear).