Earnings Stripping Rule
Based on ATAD, a new general interest deduction limitation for Dutch corporate income tax purposes is proposed with effect from 1 January 2019 (the “Earnings Stripping Rule”). Under the Earnings Stripping Rule, the starting point is to determine the taxpayer's so called “Interest Expense Excess”. This is the amount by which the taxpayer’s tax deductible interest expenses exceeds its taxable interest income. The deductibility of the Interest Expense Excess is limited to the higher of (i) 30% of the taxpayer’s EBITDA (carving out tax exempt income) and (ii) a safe harbor of EUR 1 million. The proposal seems stricter than the ATAD, which allowed for a safe harbor threshold of EUR 3 million. Interest disallowed under the Earnings Stripping Rule can be carried-forward to later years without limitation in time.
The Earnings Stripping Rule will equally apply to both existing and new loans (no grandfathering) and to both intra-group and third-party interest. In addition, no “group escape” (as allowed under the ATAD) will be implemented. Furthermore (and contrary to what was previously expected) the rule will apply to all entities including so called “stand alone taxpayers”, i.e. entities not part of a group of entities. Finally, no exception is made for taxpayers operating in specific sectors.
By implementing the Earnings Stripping Rule, some current interest deduction limitations are no longer deemed necessary. Therefore, abolishment is proposed of the following existing specific interest deduction limitation rules: - article 13l which relates to “excessive participation debt”; - article 15ad which applies to acquisition holdings; and - article 20, paragraphs 4-6 which relate to the off-set of losses incurred by “holding and financing companies”.
Controlled Foreign Companies ("CFC")
Based on ATAD, EU Member States are obliged to implement a CFC rule according to which the non-distributed earnings of a foreign subsidiary or permanent establishment may be taxed in the Netherlands if certain criteria are fulfilled. The ATAD offered the following two options of implementing the CFC rule:
- Model A: on the basis of model A non-distributed passive income of the subsidiary or permanent establishment such as interest, royalties, dividend and financial leasing will be included in the tax base of the taxpayer.
- Model B: on the basis of model B income generated through assets and risks which are linked to significant people functions carried out by the taxpayer (i.e. the controlling company), to be calculated in accordance with the arm's length principle, will be included in the tax base of the taxpayer.
The legislative proposal states that the Netherlands already applies Model B, since the arm's-length principle is already an important part of Dutch tax legislation. This way the Netherlands government is of the view that Dutch tax law already meets the minimum standard of the ATAD CFC legislation.
However, for specific situations it is proposed to still apply Model A. This is the case where the following criteria are fulfilled with respect to a foreign subsidiary or permanent establishment:
- the Dutch taxpayer - with or without affiliated persons - has a direct or indirect interest of at least 50% of the nominal paid-up capital, voting rights and the profits in the foreign subsidiary or permanent establishment; and
- the foreign subsidiary or permanent establishment is:
- not subject to corporate income tax in its country of residence; or
- subject to corporate income tax in its country of residence at a statutory rate of less than 7%; or
- is located in a country that is included in the EU list of non-cooperative jurisdictions; and
- The foreign subsidiary or permanent establishment does not have a substantial economic activity. For purposes of this rule, a CFC is considered to have substantial economic activities if it meets certain substance requirements, which refer to existing minimum substance requirements and in addition the requirement to have an office space that is used for a period of at least 24 months and incur at least EUR 100,000 in salary expenses. Furthermore, the proposal states that the personnel of the CFC should not have a merely supportive role, i.e. should have the required professional knowledge.
Some other exceptions as included in ATAD will also be implemented, i.e. a specific exception for financial undertakings and an exception for cases whereby income mainly consists of other than passive income. Furthermore, several provisions to prevent double taxation will be implemented.