On Tuesday 21 September 2021 the Dutch state secretaries for Finance published the 2022 Tax Plan and related legislative tax proposals. This newsflash discusses the proposals we consider most relevant for (international) businesses.
Credit of Dutch dividend withholding tax (Sofina)
In principle the Dutch corporate income tax rules provide for a full credit of Dutch dividend withholding tax. Dutch taxpayers may credit in full Dutch dividend withholding tax withheld at their account against their Dutch corporate income tax liability. If the creditable withholding tax exceeds the Dutch corporate income tax liability, which is the case when the taxpayer finds itself in a loss-making situation, the Dutch dividend withholding tax will effectively be refunded.
Such refund procedures are not available for foreign shareholders with respect to Dutch dividend withholding tax withheld on dividends paid to such shareholders. This different treatment may not be compliant with EU law (ECJ case Sofina C-575/17).
At this moment a decree is in place that is issued by the Dutch state secretaries for Finance setting out the conditions for non-resident shareholders to also be eligible for a refund of Dutch dividend withholding tax in a similar situation to eliminate this different treatment. With the introduction of this decree last year an extension of the refund possibilities was offered while the proposed measures in the 2022 Tax Plan will limit the possibilities for a (full) refund.
Based on the main rule of the proposed measures, a credit or refund of Dutch dividend withholding tax will be maximised to the amount of the Dutch corporate income tax due in that financial year. If the Dutch corporate income tax liability for the relevant year is lower, or is nil in the case of a loss-position, than the amount of the withheld dividend tax, then the excess cannot be credited. Any non-creditable dividend withholding tax may be carried forward indefinitely to future years to credit against a future Dutch corporate income tax liability. This measure is proposed to take effect from 1 January 2022.
Increase of MIA percentages
In the 2022 Tax Bill, it is proposed to increase the Environmental Investment Allowance (MIA) percentages to 27%, 36% and 45% (2021 percentages are: 13.5%; 27%; and 36% respectively). The increased MIA percentages are proposed to take effect as from 1 January 2022.
Repairment holding and financing losses
In the accompanying letter to the Tax Bills, it is announced that the consequences of a recent decision of the Dutch Supreme Court (HR 11 June 2021, BNB 2021/116) will be repaired. This decision of the Dutch Supreme Court enables companies to set-off so-called holding and financing losses against profitable activities of a newly incorporated subsidiary company that is included in the same fiscal unity for Dutch corporate income tax purposes. This repairment will be included in a letter of amendment to the legislative proposal 'Overige fiscale maatregelen 2022'.
ATAD II – reverse hybrid mismatch rules
With effect from 1 January 2020, ATAD II is implemented in Dutch tax law containing measures combating tax benefits that result from hybrid mismatches. The Netherlands opted for postponing the application of the so-called 'reverse hybrid mismatch rules' until 1 January 2022. As expected, a legislative proposal containing the reverse hybrid mismatch rules has been issued simultaneously with the 2022 Tax Plan. Based on the reverse hybrid mismatch rules, Dutch entities that are considered tax transparent for Dutch tax purposes can become liable in the Netherlands for Dutch corporate income tax, Dutch dividend withholding tax and the 2021 conditional withholding tax.
The entities that will fall within the scope of the reverse hybrid mismatch rules will be generally partnerships that are considered tax transparent for tax purposes in the jurisdiction in which they are incorporated or established and are considered opaque for tax purposes in the jurisdiction in which an affiliated participant in that entity is established. A well-known example of such an entity is the Dutch limited partnership (CV) in a so-called CV/BV structure.
Based on the main rule of the proposed measures such (tax transparent) partnerships can become liable in the Netherlands for Dutch corporate income tax, Dutch dividend withholding tax and the 2021 conditional withholding tax. To the extent that the profits of the reverse hybrid entity are distributed directly to participants in a jurisdiction that considers this entity being tax transparent, a deduction option will be provided so that this part of the profits of the reverse hybrid entity is effectively not taxed in the Netherlands (subject to conditions). This measure is proposed to take effect from 1 January 2022.
Transfer pricing mismatches
Under the proposed new rules regarding transfer pricing mismatches, the arm's length principle will not be applied if it results in a downwards adjustment of the taxable profit in the Netherlands and there is no corresponding upward adjustment at the level of the affiliated entity.
The legislative proposal also deals with transfer pricing mismatches associated with the transfer of an asset between affiliated entities. A taxpayer that acquires an asset from an affiliated entity may, under the proposed measure, no longer depreciate that asset for Dutch tax purposes on the basis of the fair market value, but the Dutch taxpayer is required to take into account the lower agreed consideration for depreciation purposes to the extent that such lower consideration, instead of the higher fair market value, is also taken into account at the level of the seller (i.e. no or smaller step-up in tax basis for Dutch corporate income tax purposes).
For situations in which a taxpayer has acquired a business asset from an affiliated entity between 1 July 2019 and before 1 January 2022 which can still be depreciated in a financial year commencing on or after 1 January 2022 a new depreciation limitation is proposed (subject to conditions).
The aim of the measures is to neutralise transfer pricing mismatches and to prevent situations of double non-taxation (i.e. deductions without pick-up or double deductions). The proposed measure is expected to take effect as from 1 January 2022.
Under current legislation, the granting or vesting of share option rights is not subject to Dutch wage tax. A taxable event for Dutch wage tax purposes first occurs when the share option rights are actually exercised or sold. The taxable value to be taken into account for Dutch wage tax purposes is equal to the difference (or “spread”) between the fair market value of the acquired shares on the date of exercise, or the consideration received for the sale of the options, and the exercise price to be paid in respect of the acquisition of said shares. However, this taxable moment has led to cash flow problems in case where such wage tax is to be borne by the option holder, because the exercise of the options does not result in the (former) option holder receiving any monies allowing it to compensate the employer for the wage tax due at the time of exercise of a share option right. This is particularly true if the (former) option holder also does not have the possibility to sell the shares obtained. These cash flow problems made it less attractive to use share option rights as salary.
With the measure included in the Tax Plan 2022, as a general principle the moment of taxation is shifted from the moment of exercise of the options to the moment at which the shares obtained upon the exercise of the share option rights become tradable. At that time, part of the shares can be sold if necessary to obtain monies to pay the tax due. However, since cash flow problems do not apply in all cases, the legislative proposal also provides for an election scheme for the employee. Under conditions and at the choice of the employee, the taxable moment remains the moment of exercise, as is currently the case. The main advance of such earlier levy moment is that any increase in value of the underlying shares between the moment of exercise and the moment these shares become tradeable are not included in the taxable value for Dutch wage tax purposes.
Other wage tax amendments
Work from home allowance
The Dutch Wage Tax Act includes specific exemptions. If an allowance falls within the scope of a specific exemption, the value of this allowance does not have to be deducted from the discretionary (fixed) amount that an employer can grant tax-free to its employees (subject to conditions). In response to the Covid-19 developments with regard to remote working, a proposal to introduce a specific exemption for working from home is included in the Tax Plan 2022. In accordance with this proposal, an amount of EUR 2 can be provided to the employee tax-free per day that the employee works from home.
The Tax Plan 2022 also includes a proposal to increase the discretionary amount (in Dutch: vrije ruimte) for the calendar year 2021. The discretionary amount applicable for the calendar year 2021 will, contrary to the current section 31a(3) of the Dutch Wage Tax Act be calculated as 3% of - in short - the wage bill up to and including EUR 400,000 plus 1.18% of the remainder of the wage. The proposed provision will retroactively apply with effect from 1 January 2021.
Energy tax amendments
The Tax Plan 2022 also includes a proposal pursuant to which the supply of electricity to an energy storage facility is not treated as a taxable supply for energy tax purposes (subject to conditions). This prevents energy tax from being levied twice in the chain. Under the current legislation energy tax can be levied twice: (i) once upon the supply to the energy storage facility and (ii) a second time when the electricity (after storage) is supplied from this energy storage facility to a user. If the proposal of the Tax Plan 2022 is implemented, the first supply should - under conditions - not be regarded a taxable event for energy tax purposes.
During the next couple of months the 2022 Tax Plan will be discussed in both chambers of Dutch parliament. This means that the proposed measures are subject to changes. We will keep you updated of any relevant changes.