On 4 February 2019, the Dutch State Secretary of Finance announced that he would set out policy guidelines allowing for a unilateral concessionary treatment in certain areas of Dutch tax law in the event the United Kingdom would leave the EU on 29 March without any agreement on the withdrawal (‘no-deal Brexit’). Essentially, under the policy guidelines, the Netherlands will treat the United Kingdom as from 30 March 2019 as if it were still an EU Member State for a limited transitional period until the end of 2019 or, for businesses, until the end of the financial year for financial years commencing prior to 30 March 2019, so to prevent that citizens or businesses in the Netherlands are confronted with immediate tax consequences during the current taxable or financial year.1
On 8 March 2019, the State Secretary of Finance submitted the draft policy guidelines to the Second Chamber of Parliament to shed some more light on the areas of Dutch taxation that would be covered by the concessionary treatment.
The draft policy guidelines include a general concession that the United Kingdom will be treated as an EU Member State for the taxable year 2019 and financial years that have commenced prior to 30 March 2019 for purposes of the application of the Income Tax Act 2001, the Wages and Salaries Tax Act 1964, the Salaries Tax and National Insurance Contributions (Reduced Remittances) Act, the Corporate Income Tax Act 1969, and the General Taxes Act. The draft policy guidelines also include some further concessions for certain very specific situations (e.g. in respect of motor vehicle tax and the collection of taxes).
It speaks for itself that the status of being a resident or citizen of an EU Member State, being a business established in an EU Member State or having migrated from or to an EU Member State is relevant for Dutch tax purposes (as it will be in the other EU Member States) in many respects; the loss of EU Member State status by the United Kingdom therefore may have far reaching consequences in a wide array of situations.
The explanatory notes to the draft policy guidelines mention a few examples, which we have set out below.
Example: emigration of individuals and business / deferred tax assessment
Upon emigration by an individual or a business from the Netherlands, individual income tax or corporate income tax may be triggered in respect of certain Dutch source assets (e.g. an old age retirement scheme or pension, a substantial shareholding). The Dutch Tax Collection Act allows for the relevant tax liability to be deferred for a maximum of ten years subject to the taxpayer posting collateral. However, no collateral is required in case of an emigration to an EU Member State. Under the draft policy guidelines, the United Kingdom will be treated as an EU Member State in respect of (currently pending) deferred tax assessments that have been imposed in any of the taxable years up to and including 2019.
Example: corporate income tax – participation exemption
The Dutch participation exemption, on the basis of the EU Parent-Subsidiary Directive, applies to shareholdings representing at least 5% of the nominal-paid up share capital of the subsidiary company. Furthermore, in relation to shareholdings in EU resident companies, the participation exemption may also apply if the shareholding represents at least 5% of the voting rights, provided that the relevant EU Member State has concluded a tax treaty with the Netherlands that includes a voting rights requirement in the dividend article. The United Kingdom-Netherlands tax treaty indeed provides for a voting rights requirement. However, shareholdings that currently still qualify for the participation exemption on the basis that they represent at least 5% of the voting rights may no longer do so if the United Kingdom is no longer an EU Member State in a no-deal Brexit scenario. The draft policy guidelines address this for the taxable year 2019 and financial years that have commenced prior to 30 March 2019.
Example: corporate income tax – fiscal unity
Another example that stands out relates to the cross-border tax consolidation which has become possible under Dutch corporate income tax principles following the so-called ECJ ‘Papillon’ decision. Corporate groups which include Dutch subsidiaries of a mutual EU parent company or which includes Dutch subsidiaries with an EU intermediate holding company would under current rules be able to form a consolidation of the relevant Dutch companies for Dutch corporate income tax purposes (i.e. a fiscal unity). A fiscal unity can no longer be formed with a mutual UK parent company or a UK intermediate holding company in a no-deal Brexit scenario. The draft policy guidelines avoid a sudden termination of existing ‘Papillon’ fiscal unities mid-financial year and allow for time to repair until the end of 2019 or the end of a financial year that started before 30 March 2019.
Other examples: corporate income tax
The general concession that the United Kingdom will be treated as an EU Member State for the taxable year 2019 and financial years that have commenced prior to 30 March 2019 may under certain circumstances further be of relevance in other areas of Dutch corporate income tax, for example in respect of:
- application of cross-border (de)merger roll-over relief;
- application of the innovation box, for certain qualifying intangible assets;
- certain Country-by-Country report filing obligations.
Areas not (fully) covered
The general and specific concessions included in the draft policy guidelines are limited in scope to certain exhaustively listed Dutch tax laws. The draft policy guidelines – for example – do not include general or specific concessions in respect of the Dividend Withholding Tax Act 1965. Furthermore, for now, no general concession has been included in the draft policy guidelines in respect of the Turnover Tax Act 1968.
The draft policy guidelines neither address the consequences that Brexit may have for the application of the tax treaties concluded by the Netherlands. For example, the so-called ‘Limitation on Benefits’ test in the tax treaty between the Netherlands and the United States may be met based upon the fact that the shares in a relevant Dutch company are held by a limited group of EU so-called equivalent beneficiaries. Shareholders resident in the United Kingdom will no longer qualify as equivalent beneficiaries.
The European Social Security Regulation (883/2004) will no longer apply in case of a no-deal Brexit and this is not addressed in the draft policy guidelines. Whether the (existing) social security treaty between the United Kingdom and the Netherlands may be applied is subject to discussion.