On 19 September 2017, the Dutch Ministry of Finance published the 2018 Budget. The main tax proposals relevant for international investors relate to dividend withholding tax (“DWT”) and interest deduction limitation rules.
- Distributions by so-called Holding Cooperatives on qualifying membership rights will in principle become subject to DWT.
- A new attractive DWT exemption will be introduced for distributions to treaty resident companies, next to the existing intra EU/EEA DWT exemption.
- Both exemptions will be subject to a revised anti-abuse rule.
- The scope of the non-resident corporate income tax rules for substantial shareholdings (in general 5% or more) in Dutch entities will be changed.
- Under the anti-base erosion rules, the conditions to deduct interest on intercompany debt funded by linking loans attracted from third parties will be tightened.
Foreign shareholders or members of Dutch entities should assess the consequences of the proposals for DWT and non-resident corporate income tax rules as they may benefit or suffer from the changes. Taxpayers deducting interest on intercompany debt funded by linking loans from third parties should review their position under the anti-base erosion rules as they may face non-deductible interest under the tightened rules.
All changes are proposed to enter into force on 1 January 2018. The proposals may change in the course of the parliamentary process.
Consultation proposal changes DWT
The proposed changes to the DWT rules are based on a preliminary proposal published for consultation purposes on 16 May 2017. The current proposals are broadly in line with the preliminary proposals.
Proposed changes for cooperatives
Profit distributions on qualifying membership rights in cooperatives will in principle be subject to DWT if the cooperative is a “Holding Cooperative”.
- A cooperative qualifies as a Holding Cooperative if the actual activities of the cooperative usually consist for more than 70% of holding participations or of group financing activities. The 70% test should in first instance be determined on the basis of balance sheet totals, but other elements, such as types of assets and liabilities, turnover, activities and time spent by employees should also be taken into account. The relevant testing period for the 70% test is the year preceding the profit distribution. It will be possible to get certainty in advance from the tax authorities on whether a cooperative qualifies as a Holding Cooperative.
- A qualifying membership right concerns an entitlement to at least 5% of the annual profit or the liquidation proceeds of the cooperative (alone or together with related persons or a collaborating group).
Proposed changes to DWT exemptions
In addition to the existing DWT exemption in respect of EU/EEA shareholders, a new and attractive DWT exemption will be introduced for shareholdings or membership rights held by companies resident, for tax (treaty) purposes, in a state with which the Netherlands has concluded a tax treaty including a dividend article. For both exemptions, a revised anti-abuse rule will be introduced, according to which the exemptions will not be available – and distributions will therefore be subject to DWT under domestic law – if:
- the shares or membership rights are held with the main purpose, or one of the main purposes, to avoid taxation due by another individual or entity, and
- the holding of the shares or membership rights is part of an artificial arrangement or transaction (or a series of artificial arrangements or composite of transactions), which will be the case if there are no valid business reasons reflecting economic reality.
Valid business reasons are present if these are reflected in the substance of the direct shareholder or member. This can be the case if the shareholding or membership interest is functionally attributable to a business enterprise carried out by the direct shareholder or member. If the business enterprise is carried out by the indirect shareholder or member, and the direct shareholder or member is a foreign intermediate holding company that does not carry out a business enterprise, valid business reasons will be considered present if the foreign intermediate holding company has ‘relevant substance’. In addition to the current minimum substance requirements, this includes the requirement that the holding company incurs salary costs of at least € 100,000 in relation to its intermediary holding functions, and the requirement that the holding company has (for at least 24 months) own office space at its disposal which is in fact used to carry out its intermediary holding functions.
An important change to the preliminary proposals concerns the position of hybrid shareholders/members in a Dutch entity. The relevant criterion will be whether a distribution by a Dutch entity is regarded as income of a taxpayer of a treaty country. If that is the case, the withholding tax exemption can apply. An important example is a dividend received by an LLC that is transparent for US but opaque for Dutch tax purposes. Such dividend can benefit from the exemption under the amended proposals.
Another change applies to the application of the two new substance requirements. Taxpayers will get a 3 month period after 1 January 2018 to fulfil these new requirements.
Proposed changes for Dutch non-resident corporate income tax rules
The scope of the Dutch non-resident corporate income tax rules for substantial shareholdings will be changed. A non-resident entity will only be taxed on income from such shareholdings if personal income tax of an indirect shareholder of the Dutch entity is avoided. Avoidance of DWT does not trigger non-resident corporate income tax for a shareholder, because such avoidance is already dealt with in the amended DWT rules. This is a change compared to the preliminary proposal. Valid business reasons for a structure are and will continue to be an escape to taxation under these rules. The interpretation of valid business reasons will be equal to the interpretation under the revised anti-abuse rule for DWT purposes.
Another difference to the preliminary proposal is that non-resident taxation will not be limited to capital gains realized on such shareholdings, meaning that also dividends will remain taxable.
Interest limitation rules
The anti-base erosion rules of article 10a Corporate Income Tax Act (“CITA”) provide for a limitation of the deductibility of interest on intercompany debt, if such debt is connected with certain acquisitions, dividend distributions or capital contributions (a “tainted transaction”). Article 10a does not apply if business reasons predominantly underlie (i) the intercompany debt and (ii) the tainted transaction. On 21 April 2017, the Dutch Supreme Court ruled that this business reasons exception is met for both the intercompany debt and the tainted transaction if the intercompany debt is, on group level, funded by linking loans attracted from third parties (parallel funding).
The Dutch government seeks to nullify this decision of the Supreme Court. The Dutch government proposes to include in article 10a that, even if the intercompany debt is funded by linking loans attracted from third parties, the taxpayer still has to demonstrate that the tainted transaction is predominantly motivated by valid business reasons.
No grandfathering rules are proposed. Taxpayers that currently rely on ultimately external financing need to show valid business reasons for the tainted transaction as of 1 January 2018, even if the tainted transaction was entered into (long) before that date.
Other corporate income tax changes
Other changes proposed for corporate income tax include:
- changes to the rules for liquidation losses on participations;
- rules to avoid double use of losses in fiscal unity situations;
- rules limiting the amount of exempted permanent establishment income in certain deduction/no-inclusion situations; and
- provisions to rely on temporary voluntary filing of a country-by-country report (CbCR) by an ultimate parent entity in which case a Dutch subsidiary of this ultimate parent entity can be discharged from CbCR filing obligations in the Netherlands.