In September, the Dutch government published an initial round of tax proposals in connection with the 2019 Budget. One of these proposals, the Source Tax Act of 2020 (STA 2020), would, among other things, see the Dutch dividend withholding tax abolished and a source tax on dividends (as of 2020), interest and royalties (as of 2021) introduced. Furthermore, the STA 2020 would see Dutch corporate income tax rates lowered to 16 percent for taxable profits of up to €200,000 and 22.25 percent for taxable profits in excess of €200,000. These proposals were announced on September 18, 2018.

Then, on October 5, 2018, the Dutch government announced it was reconsidering its proposals for the improvement of the Dutch investment climate. On October 15, in a letter from the State Secretary of Finance to Parliament, the government announced the results of this reconsideration.

The proposed tax measures

The reconsideration of the abolishment of the dividend withholding tax resulted in the decision to include 10 changes to the pending tax proposals rather than abolishing the Dutch dividend withholding tax. These proposals would result in a further improvement of the Dutch investment climate.

The proposals presented by the Dutch government that are relevant for internationally operating companies with a Dutch company in their corporate structure are:

1. Lowering the corporate income tax rate on taxable profits in excess of €200,000 to 20.5 percent instead of 22.25 percent in 2021.

2. Lowering the corporate income tax rate on taxable profits of up to €200,000 to 15 percent instead of 16 percent in 2021.

Year

Corporate income tax rate lower bracket (taxable profits of up to €200,000)

Corporate income tax rate upper bracket (taxable profits in excess of €200,000)

2018

20%

25%

2019

19%

25%

2020

16.5%

22.55%

2021

15%

20.5%

Table 1 - Corporate income tax rates 2018 - 2021 (after amendment of the proposals)

3. Lowering employer's social charges by €200 million as of 2021. The letter does not specify how this would be realized; it is up to the Dutch parliament to decide how this €200 million is spent.

4. Introduction of a transitional measure for the restriction on the depreciation of non-investment real estate (ie, owner-occupied real estate) to 100 percent of the value for the purpose of the Valuation of Immovable Property Act in case such real estate has been occupied prior to January 1, 2019 and the building has not been depreciated for more than 3 years (ie, it is new real estate). In that case, the taxpayer still apply the old regime (depreciation to 50 percent of the value for the purpose of the Valuation of Immovable Property Act) for a period of 3 years.

5. Retroactive effect of the proposed emergency reparatory legislation for the Dutch fiscal unity regime would be limited to January 1, 2018 instead of October 25, 2017 as initially proposed. The main reason for this limitation is the fact if the proposal would have retroactive effect up to October 25, 2017 then the vast majority of taxpayers would have to base their 2017 corporate income tax returns on legislation that has not yet been passed by Parliament.

6. Introduction of a transitional measure for the so-called 30 percent facility, which allows employers to pay expats, inbound and outbound, 30 percent of their salary free of wage tax). The proposed reduction in the term from 8 years to 5 years will still remain as is; however, the transitional measure would exclude employees who, as a result of the change in legislation, would no longer be able to make use of the 30 percent facility in 2019 or 2020 (as they have already applied it for at least 5 years in those years.

7. Expansion of the R&D wage tax credit to 16 percent of the R&D (wage) expenses (from 14 percent) for R&D (wage) expenses in excess of €350,000.

8. As the Dutch dividend withholding tax will not be abolished, so-called fiscal investment institutions (companies that meet certain requirements and are subject to Dutch corporate income tax at a rate of 0 percent, ie, de facto exempt from corporate income tax) may keep investing in real estate directly.

The letter of the State Secretary of Finance also mentions that the proposed source tax on interest and royalties paid to low tax jurisdictions or in abusive situations (which would take effect in 2021) will remain unchanged. The proposed source tax on dividends paid to low tax jurisdictions or in abusive situations will be reconsidered due to the fact that the dividend withholding tax will no longer be abolished.

Key takeaways

The proposed changes to the Dutch tax proposals aimed at improving the Dutch investment climate are more advantageous to a larger group of companies than the abolishment of the Dutch dividend withholding tax would have been (due to the Dutch withholding exemption, under which no Dutch dividend withholding tax was due in the vast majority of cases). The further lowering of the corporate income tax rates benefits all companies operating in the Netherlands.

Retaining the possibility to invest directly in real estate with a fiscal investment institution (the Dutch REIT) means that structures with these types of companies can remain in place. As the future of the dividend withholding tax is not certain – it may well be abolished in the future – we will keep you updated on these developments.