The Netherlands 2012 budget was published in April 2011. We refer to the GT Alert of August 11, 2011 — Netherlands 2012 Budget - Impact on Dutch Inbound M&A — for a description of four corporate income tax measures that, if approved by Parliament, would enter info effect on January 1, 2012.
The 2012 tax bill is now in the legislative proceedings and parliamentary discussions are under way. Most recently, Dutch State Secretary of Finance Mr. Weekers provided answers to questions raised by Dutch parliament on the bill. On October 24, 2011, the third memorandum of amendment of the bill, as well as an explanatory memorandum, were published.
Even where the basic concepts are still the same, it is important to understand the current status of the major items in the tax bill. Note, since both the House of Representatives and the Senate must approve the bill, changes could still occur.
No Reduction of Corporate Income Tax Rate
The contemplated reduction of the corporate income tax rate to 24 percent is not pursued.
Interest Deduction Rule for Leveraged Acquisition in a Fiscal Unity
The bill expands the limitation for interest deductions in respect to loans taken to acquire a Dutch target company when said target company (i) is joined in a Dutch tax consolidation with the acquirer, or (ii) the assets of the target company are transferred to the acquirer under a legal (de)merger or liquidation. In these scenarios, the interest deduction on the acquisition loan can be effectively offset against the target’s operating income. This measure applies also if financing is obtained to increase an existing participation.
The aim is to only allow an interest deduction against the profits of the (fiscal unity of the) acquirer excluding profits of the target company. The bill contains a complex methodology on how to determine this exclusion (addressing for instance goodwill deductions, branch exemptions and profit shifts through intercompany transactions).
The annual interest limitation applies to “excess debt” (i.e., to the extent that the equity-to-debt ratio exceeds 1:2). The bill furthermore introduces a de minimus rule (annual interest expenses in excess of € 1,000,000 are not affected). The excess debt test holds overkill since all existing loans (at the level of acquisition and target company) need to be included in the debt component while subsidiaries and the amount of fiscal reserves are excluded from the equity component. Disallowed interest expense can be carried over to the following years.
Grandfathering is provided for leveraged acquisitions that resulted in the inclusion of the Dutch target company in a fiscal unity (or a legal (de)merger) with the acquirer prior to January 1, 2012. Debt refinancing and certain fiscal unity changes to pre-January 1, 2012, structures are also grandfathered.
Dividend Withholding Tax for Cooperatives
The bill introduces a dividend withholding tax on Cooperatives (COOP) for what are deemed “abusive” scenarios. The deemed abuse consists of:
- A COOP holding shares where the main purpose, or one of the main purposes, is to avoid Dutch dividend withholding tax or foreign tax and where the membership rights of the COOP are not part of the COOP member’s business assets (the latter condition is a tie in to the Dutch foreign tax payer regime).
- If an existing Dutch dividend withholding tax claim becomes illusory through the interposition of a COOP (existing retained earnings can then be distributed tax free to the COOP, who in turn can distribute to the members without Dutch dividend withholding tax). Once the existing claim is withheld by the COOP, the exemption of dividend withholding tax will be reinstated.
No change in existing policy (including ruling practice) is intended, and existing COOP structures that are in line with the current ruling policy are grandfathered.
Amendment Foreign Tax Payer Rules
Under the Dutch foreign tax payer regime, non-resident individuals and corporations that hold shares of at least five percent in a Dutch company may be subject to Dutch corporate income tax (CIT) on dividends, capital gains and interest from the Dutch company. If these shares can be allocated to the business assets of the foreign shareholder this regime does not apply. The European Commission considered parts of this regime irreconcilable with EU legislation. The bill attempts to repair this through limiting the current application of the foreign tax payer regime to situations where the shares in a Dutch company are held by the non-resident shareholder with the main intention of avoiding Dutch personal income tax or Dutch dividend withholding tax. In a scenario where only Dutch dividend withholding tax is avoided, the CIT rate is reduced to 15 percent. The amendment attempts to structure this legislation more akin to (EU acceptable) anti abuse legislation. The reach of the foreign tax payer regime will be reduced. Current structures that escape the regime under on the business asset allocation are not impacted.
Research and Development Costs
Innovation in the Netherlands is currently stimulated through a low tax Innovation Box and an R&D wage tax incentive. The bill introduces a new facility, a deduction for research and development costs other then wage costs. The allowable deduction for 2012 will likely be 40 percent. The interaction with existing facilities is unclear. During the legislative process we hope to achieve more clarity, for instance, the potential for cumulative application with existing facilities.
Exemption From Foreign Source PE Generated Income
A cornerstone of the Dutch corporate income tax system is the Dutch participation exemption. It provides a full exemption for qualifying dividends from and capital gains on foreign and domestic subsidiaries. Capital losses are not deductible, but as a special exception, liquidation losses are deductible. Similarly, foreign source income generated through permanent establishments (PE) are also exempt from Dutch tax. However, the PE exemption mechanic has an anomaly in that losses of PEs are deductible against Dutch source income (under application of a recapture provision). This anomaly now will be corrected where all PEs results (either profit or loss) are excluded from the Dutch head office taxable base. Similar to liquidation losses for subsidiaries, losses realized upon termination of a PE remain deductible. Currency exchange and translation results remain a part of the Dutch taxable base, but can easily be avoided by applying the foreign currency as functional currency for the Dutch tax payer/head office (most commonly applied when all activities are conducted through the PE). It is expected that the issue of currency translation results will be further discussed in the Parliamentary debate.
Under the Dutch participation exemption, the subject to tax test for subsidiaries has been eliminated in nontreaty situations. As a result, it is now possible to have shareholdings in qualifying companies that are not subject to tax (in absence of corporate income tax, such as a number of Middle Eastern countries, under a tax holiday or reversed hybrids) qualify for the participation exemption. In alignment with these rules, the subject to tax requirement for PEs will also be eliminated (but for passive financing PEs, the current credit system will remain in place).
During parliamentary proceedings, the above measures can be further amended or enhanced. It is expected, though, that any final legislation would become effective January 1, 2012. We will keep you posted on further developments. If items in this GT Alert are of specific interest to you, please let us know and we can contact you directly with respect to new developments on that matter.