On 17 September 2019, the Dutch government presented its Tax Plan 2020. It includes several measures with an impact on businesses and financial institutions. In addition, it is proposed to impose an obligation on all taxpayers to document whether or not they use hybrid mismatches. Also, several Dutch tax treaties will include a principal purpose test as of 2020 which might result in the need to restructure. In this e-Alert and at our seminar of 19 September 2019 we will discuss these proposals.
1. Introduction | 2. Corporate income tax | 3. Increase of real estate transfer tax for non-residential real estate as of 2021 | 4. Introduction of a conditional withholding tax on interest and royalties as of 2021 | 5. Dividend withholding tax exemption may not apply and CFC-rules and non-resident corporate tax rules may apply even if substance requirements are met | 6. Changes in Dutch tax treaties as of 2020 because of the Multilateral Instrument | 7. Introduction of mandatory disclosure rules | 8. Personal income tax | 9. Wage tax | 10 Parliament can make changes to the Tax Plan | 11. Breakfast seminar 19 September 2019
On 17 September 2019, the Dutch Ministry of Finance published its Tax Plan 2020. In fact, the government sent 6 separate Bills to Parliament. Hereinafter we will refer to these Bills together as “the Tax Plan”. The Tax Plan includes many measures with an impact on businesses and financial institutions, such as the introduction of a conditional withholding tax on interest and royalties, an increase of the real estate transfer tax rate for non-residential real estate to 7% and the introduction of a thin capitalisation rule for banks and insurers. Furthermore, just before the summer the Ministry of Finance sent two Bills implementing changes in two European Union (EU) Directives to Parliament: the provisions on hybrid mismatches in the Anti-Tax Avoidance Directive (ATAD2) and the introduction of mandatory disclosure requirements in the Directive on Administrative Cooperation (DAC6). These Bills will follow the same timeline in Parliament since both must enter into force on 1 January 2020.
In this e-Alert we discuss the proposals that are most relevant to the business community, including financial institutions. Please note that the Tax Plan may change in the course of upcoming Parliamentary discussions.
2. Corporate income tax
2.1 Tax rates
The Dutch corporate income tax (CIT) includes two brackets: the first EUR 200,000 of taxable profits is currently taxed at 19% and the remainder of taxable profits is taxed at 25%. Last year, Parliament adopted the proposal to decrease the first bracket CIT rate to 16.5% and the second bracket CIT rate to 22.55% in 2020, further reducing these rates to 15% and 20.5% as of 2021. However, because of political and public pressure, the government decided to partly redress these rate reductions and to use the proceeds to support citizens with a low or middle income. The Tax Plan, therefore, proposes to keep the rate in the second bracket at 25% in 2020 and only to decrease it to 21.7% in 2021. However, if wages do not increase sufficiently in the perception of the government, this reduction might still be cancelled next year. The reduction of the rate in the first bracket remains unchanged in the Tax Plan, meaning that the first bracket CIT rate will be 16.5% in 2020 and 15% as of 2021.
2.2 Introduction of provisions against hybrid mismatches (implementation of ATAD2)
On 2 July 2019, a Bill was sent to Parliament containing the introduction of so-called anti-hybrid mismatch rules. This Bill is the implementation of an amendment of the EU Anti-Tax Avoidance Directive (ATAD2) in the Dutch CIT Act. The anti-hybrid mismatch rules are very complex and we will not discuss these in full detail (for example, we do not pay attention to the imported mismatch rules). We will give a general overview of the rules below and are of course prepared to discuss the implications for your company in more detail with you.
A hybrid mismatch can occur if jurisdictions qualify permanent establishments, entities or payments on financial instruments differently, as a result of which the same payment is qualified as interest by one jurisdiction and dividend by another or an entity as transparent in one jurisdiction and opaque in another. This can lead to a deduction without a taxable pick-up in the other country or to double deductions, for example in case of dual-resident entities or mismatches regarding permanent establishments. The Bill does not apply to mismatches that are not caused by a hybrid element, such as a different application of transfer pricing rules or because a country does not impose a profit tax. The new rules will apply in EU situations as well as in situations with third countries.
The well known Dutch CV/BV structure which was already less attractive following the GILTI regulations that were introduced with the 2017 US tax reforms, is specifically targeted by these new rules. In parallel with the introduction of the anti-hybrid mismatch rules, it was announced that the policy decree of 6 July 2005, ref. IFZ2005/546M (the CV/BV Decree), which deals with the application of the anti-hybrid entity provision in the tax treaty between the Netherlands and the U.S., will be revoked as of 1 January 2020. As of that date, this tax treaty will no longer reduce Dutch dividend withholding tax imposed on distributions to certain hybrid entities such as the ‘reverse hybrid CV’ used in the CV/BV structures described. The anti-hybrid mismatch rules may also have important implications for other structures that make use of the U.S. check the box rules.
The Bill includes two types of measures to redress the effect of hybrid mismatches. These are discussed below.
2.2.1 Neutralising measures
The first type of measure neutralises the effect of a hybrid mismatch regarding the qualification of payments on financial instruments or their recipients. ‘Financial instrument’ is defined broadly as any instrument that yields a return on equity or debt. The rules will only apply to hybrid mismatches between associated enterprises (interests of at least 25%), between entities and their branches, multiple branches of the same entity and to transactions between unrelated parties where the tax benefit of a hybrid mismatch is part of the scheme, referred to as structured arrangements. In principle, in these situations the primary rule will be applied: insofar as the income or reimbursement is not taxed at the level of the recipient because of a different qualification, the payer will be denied deduction of the payment and in case of a double deduction, deduction will be denied in the investor’s country of residence. If, for example, the Netherlands is country of residence of the payer, the Netherlands will deny the deduction insofar as the payment is not taxed in the country of the recipient. This could, for example, be the case if the Netherlands regards a payment as interest, but the receiving country qualifies it as a dividend that is exempt under a participation exemption scheme. However, if the Netherlands is the country of the recipient and the payer’s country – or in case of a double deduction: the investor’s country – does not deny the deduction, for example because it is not an EU Member State and it has not included the primary rule in its legislation, the Netherlands will apply the secondary rule. This means that the Netherlands will tax the payment or, in case of a double deduction, refuse deduction. This rule will apply to financial years starting on or after 1 January 2020.
2.2.2 Measures against reverse hybrid entities
For reverse hybrid entities, new rules will apply to financial years starting on or after 1 January 2022. Reverse hybrid entities are entities that are tax transparent for Dutch CIT purposes, ie not subject to CIT, in which an interest of at least 50% is held by one or more associated enterprises resident in a country that qualifies the entity as non-transparent for tax purposes. These reverse hybrid entities will be considered non-transparent for Dutch CIT purposes and will be taxed on payments they receive insofar as these are not taxed in the county of residence of the participants. Further rules might be implemented regarding reverse hybrids but the government has already announced that at the latest in the second half of 2021, a Bill will be sent to Parliament that will include an obligation for reverse hybrid entities to withhold dividend withholding tax on their profit distributions. If certain requirements are met, undertakings for collective investment in transferable securities (as defined in the EU UCITS Directive) and alternative investment funds (as defined in the EU AIFM Directive) will not be regarded a reverse hybrid entity.
2.2.3 Documentation obligation for all taxpayers
An additional aspect of this Bill is a new documentation obligation for all corporate taxpayers, including those that do fall under the hybrid mismatch rules. Taxpayers will be obliged to include information in their administration which shows whether the anti-hybrid mismatch provisions apply to a payment and if so, in which way. If an entity states in its tax return that the anti-hybrid mismatch provisions do not apply, it must include information in its administration which demonstrates this. If an entity applies the anti-hybrid mismatch provisions in its tax return, it must include information in its administration that demonstrates in which way the anti-hybrid mismatch provisions have been applied.
Which information must be included in the administration depends on the facts and circumstances. Examples of such information are a (global) structure chart of the group and an assessment of the financial instruments, hybrid entities or permanent establishments used under the applicable foreign and Dutch legislation. In case the anti-hybrid mismatch provisions apply, a substantiated calculation of the correction must be available. For a taxpayer or group that only operates in the Netherlands, it is sufficient if it follows from the administration that it does not make international payments. Further regulations regarding the documentation obligation may be imposed in a Ministerial Decree. Such Decree will be issued if it becomes clear that in practice there is a need for more guidance. Therefore, it is not a given that there will be a Decree.
If the tax administration requests to provide the documentation, the taxpayer will be granted a rea-sonable timeframe to comply with this request. What a reasonable timeframe is, depends on the complexity of the transaction, but in principle the term will be around six weeks. The documentation obligation applies to information that is of relevance for the assessment of financial years that start on or after 1 January 2020.
If the taxpayer does not (fully) meet the documentation obligation, the tax inspector can, if the tax inspector suspects that the provisions do apply, request the taxpayer to prove that the provisions do not apply. This means that if the taxpayer does not meet the documentation requirement, the taxpayer has a heavier burden of proof as application of the hybrid mismatch rules is assumed in such case. Examples of not meeting the documentation obligation are: documents are not provided to the tax ad-ministration, the application of the anti-hybrid mismatch provisions cannot be sufficiently derived from the documentation, or the documents do not sufficiently take away the suspicion of the tax inspector that the provisions apply.
2.3 Introduction of thin cap rule for banks and insurers
The Tax Plan proposes to introduce a thin capitalisation rule for banks and insurers restricting deductibility of interest as of 1 January 2020. The rules would apply to licensed banks and insurers with a registered office in the Netherlands and foreign banks and insurers with a permanent establishment in the Netherlands.
For banks, interest deduction will be restricted in case the consolidated leverage ratio (as defined in EU Regulation 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms), in short the Tier 1 capital divided by the sum of the exposure values of all assets and off-balance sheet items not deducted when determining the Tier 1 capital) is less than 8%. The leverage ratio is rounded off to one decimal. The proportion of the interest that is not deductible in such case is 8 minus the leverage ratio divided by 100 minus the leverage ratio. For example, if the interest is 100 million and the leverage ratio is 3, (8-3)/(100-3)=5/97 of the interest of 100 million is not deductible, eg 5.15 million.
For insurers, the thin capitalisation rule is linked to a so-called equity ratio. This is the equity of an insurer divided by the consolidated balance sheet total as calculated based on the EU Solvency II Directive. Using the same technique as for banks, interest deduction is restricted if this equity ratio is less than 8%.
If a CIT fiscal unity has both banking and insurance activities, the ratio of the largest activity is used.
2.4 Deductibility of liquidation and cessation loss restricted as of 2021
In the explanatory notes accompanying the Tax Plan it is stated that the government intends to embrace a proposal of three left-wing opposition parties to reduce the possibility for Dutch tax payers to deduct liquidation losses on foreign participations and cessation losses on foreign permanent establishments (PEs) as of 2021. No further details have been made public, but last spring the opposition parties published a detailed draft Bill.
The Netherlands applies a participation exemption, meaning that income related to qualifying participations, such as dividends and capital gains, is not taxable in the Netherlands. At the same time, capital losses on participations are not deductible either. Similarly, the Netherlands applies an object exemption for qualifying PEs, meaning that profits and losses incurred by PEs are not included in the Dutch CIT base.
However, in case a participation is liquidated or the activities of a PE are ceased, a so called liquidation or cessation loss can be deducted if certain requirements are met. The draft Bill of the opposition parties proposed to restrict the situations in which such losses can be taken into account in the Netherlands. These losses would only be deductible if the participation is resident in an EU or European Economic Area (EEA) Member State. Furthermore, the losses could only be deducted if the liquidation or cessation is completed within three years after the entity or PE discontinued its activities or decided on such discontinuance. If the taxpayer provides proof that completing the liquidation or cessation at a later moment happened because of business reasons, the three-year term would be prolonged. An additional requirement to take into account liquidation losses would be that the parent company has an interest of at least 25% in the participation (currently 5%) or otherwise has a decisive influence on the activities of the participation. The restrictions would not apply to liquidation and cessation losses up to an amount of EUR 1 million: these losses remain deductible under the current rules. This would mean, for example, that if the liquidation of a U.S. participation would lead to a liquidation loss for the Dutch parent of EUR 6 million, the parent could still take EUR 1 million into account. The remaining EUR 5 million would no longer be deductible under the new rules.
The draft Bill proposed a three-year transitional period concerning deferred liquidation losses incurred before 1 January 2021.
It remains to be seen how closely the government will follow this draft Bill of the opposition: it is not yet clear when it will send its own Bill to parliament.
2.5 Intention to increase the tax rate of the innovation box regime as of 2021
Dutch taxpayers may claim a particular tax treatment providing for an effective rate of 7% on profits (including royalties) realised in respect of certain intangible assets, such as patents, developed by the taxpayer (innovation box). The regime applies insofar as the total income from the intangible assets to which the regime applies exceeds the total R&D costs for these assets. Furthermore, as of 2017, the Netherlands applies the so-called “nexus approach” that limits the benefits of the regime in case R&D activities are outsourced to related parties.
In the explanatory notes accompanying the Tax Plan it is stated that the government intends to increase the effective tax rate from 7% to 9% as of 2021, meaning that 9/25 of the relevant income will be taken into account. Similar to the changes in the CIT rate, the idea is to use the proceeds resulting from this rate increase to support citizens with a low or middle income.
2.6 Intention to abolish payment discount for preliminary CIT assessment as of 2021
In the explanatory notes accompanying the Tax Plan it is stated that the government intends to abolish the payment discount for preliminary CIT assessments. A taxpayer has the choice to pay a preliminary tax assessment at once or in instalments. Currently, the taxpayer gets a discount if the amount is paid at once. This discount will be abolished as of 2021 for preliminary CIT assessments. This is another measure to finance the alleviation of the tax burden for low and middle class incomes.
3. Increase of real estate transfer tax for non-residential real estate as of 2021
Currently, real estate transfer tax is levied at a rate of 6% in respect of the acquisition of real estate situated in the Netherlands, or certain rights concerning such property (including qualifying shareholdings in real estate rich companies). For residential real estate (including qualifying shareholdings) the rate is 2%. The person acquiring the real estate is liable to pay the tax, regardless of their place of residence and whether or not the acquirer is a private individual or a legal entity. The Tax Plan proposes to increase the rate for non-residential real estate from 6% to 7% as of 1 January 2021. This increase of the tax rate might make it attractive to transfer real estate before that date to benefit from the current rate of 6%.
4. Introduction of a conditional withholding tax on interest and royalties as of 2021
After quite some political and public turmoil, the Dutch government decided last year to withdraw the proposal to abolish the dividend withholding tax. Therefore, also in 2020 certain entities resident in the Netherlands have to withhold a 15% dividend withholding tax on profit distributions unless a withholding exemption applies or a lesser amount if a reduction is available under a tax treaty.
In addition to the existing dividend withholding tax, the government proposes to introduce a conditional withholding tax on interest and royalties that will apply from 2021. This is an important change, as currently the Netherlands does not impose a withholding tax on interest or royalties except with respect to interest payments if these are treated as dividends.
The conditional withholding tax is an anti-abuse measure and will apply to interest and royalty payments by a Dutch entity (broadly defined) directly or – if certain requirements are met – indirectly, to a related entity or permanent establishment of such entity (i) in a low-tax jurisdiction or (ii) in cases of abuse. Equally, the conditional withholding tax applies if such amounts are not paid but accrued. Interest and royalties are calculated on an arm’s length basis. Furthermore, it is not relevant whether or not the paying entity has substance in the Netherlands.
A low-tax jurisdiction is a jurisdiction that does not levy a tax on profits or applies a statutory tax rate of less than 9% (this can be a federal, state or municipal tax) or that is included in the EU list of non-cooperative jurisdictions. Every year a list is published of jurisdictions that are deemed to be low-tax jurisdictions. A jurisdiction that was not included in the list before and with which the Netherlands has concluded a tax treaty, will only be considered a low-tax jurisdiction for this withholding tax three years after it was included in the list. The 2019 list includes next to five jurisdictions blacklisted by the EU (American Samoa, the US Virgin Islands, Guam, Samoa, and Trinidad and Tobago) 16 jurisdictions blacklisted by the Netherlands (Anguilla, the Bahamas, Bahrain, Belize, Bermuda, the British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Cayman Islands, Kuwait, Qatar, Saudi Arabia, the Turks and Caicos Islands, Vanuatu and the United Arab Emirates). This list is also used for the controlled foreign company (CFC) provision that was introduced on 1 January 2019 and for the new tax ruling practice. Based on this new ruling practice, as of 1 July 2019, the Dutch tax administration no longer concludes rulings in respect of transactions with entities in these blacklisted jurisdictions. For each year, a new list will be published. It is expected that this fall a draft 2020 list will be published for consultation. If it can be demonstrated that the receiving entity is also deemed to be resident in a jurisdiction that does not qualify as a low-tax jurisdiction and furthermore this jurisdiction, treats the receiving entity as the beneficial owner of the payments and does not exempt it under a tax treaty, then the receiving entity is not deemed to be resident in a low-tax jurisdiction.
In certain cases, the new withholding tax will also apply to payments to a related entity that is not resident in a blacklisted jurisdiction. First of all, this is the case if there is an artificial arrangement or series of arrangements (objective test) and the shares in the Dutch entity are held with the purpose, or one of the main purposes, to avoid Dutch withholding taxation of another party (subjective test). An example of the latter is interposing an intermediary entity in a jurisdiction that is not a low-tax jurisdiction. If more Dutch withholding tax would be due without interposing the intermediary, this is an indication that the subjective test is met. The objective test and subjective test are applied at the moment the Dutch entity makes a payment. If the intermediary entity meets the Dutch substance requirements, that, amongst others, relate to residency of the board members, qualifications of board members and staff, wage costs equivalent to – as a rule – at least EUR 100,000, having at its disposal suitable office space in the resident country for at least 24 months and some administrative requirements, the withholding tax will, in principle not apply. However, meeting the substance requirements is not a safe harbour, as the tax administration may nevertheless demonstrate that the objective and the subjective test are met. On the other hand, if the substance requirements are not met, the paying or receiving entity may demonstrate that either the subjective or the objective test (or both) is not met.
The withholding tax also applies to a receiving entity that is not resident in a blacklisted jurisdiction, but that receives the payment through a hybrid entity that is deemed to be transparent by the Netherlands but opaque by the jurisdiction of the receiving entity. However, if it is demonstrated that the hybrid entity is deemed to be the beneficial owner of the payments according to its jurisdiction of residence, the withholding tax test is applied to this entity. The withholding tax also applies if the receiving entity is a hybrid entity that is deemed to be opaque by the Netherlands, but transparent by its jurisdiction of residence if its participants are resident in a low-tax country. This is not the case if it is demonstrated that every participant is treated as beneficial owner of the payments in its country of residence and neither of them meet one of the requirements for the application of the Dutch withholding tax.
An entity is related if it can directly or indirectly control the decisions made by the other entity on its activities (a qualifying interest). This is for example the case if it has more than 50% of the voting rights. The controlling entity can either be the paying or the receiving entity. Furthermore, an entity is related, if a third party has a qualifying interest in both the paying and receiving entity. An entity is also related if it has an interest, but not a qualifying interest in the Dutch entity, but it is part of a cooperating group of entities which as a total has a qualifying interest in the Dutch entity that makes the payment.
The conditional withholding tax will be levied on a yearly basis. The tax rate is set at the same rate as the second bracket CIT rate for that year, e.g. 21.7% for 2021. Given the discussion on the CIT rate, it is possible that the withholding tax rate will increase. The paying entity must withhold the tax. If the tax is not paid, the tax administration has the option to either levy the tax from the taxpayer that received the payment or from the Dutch entity that should have withheld the tax when making the payment.
5. Dividend withholding tax exemption may not apply and CFC-rules and non-resident corporate tax rules may apply even if substance requirements are met
A dividend distribution to a corporate entity resident in the EU, EEA or a country with which the Netherlands has concluded a tax treaty covering dividends and that, in short, owns 5% or more in a Dutch entity such as an NV, BV or cooperative, is exempt from dividend withholding tax if certain requirements are met. However, this exemption does not apply if both the subjective test and the objective test as described in section 4 above are not met. Currently, the objective test (no artificial arrangement) is met if a foreign intermediate holding company meets the Dutch substance requirements. However, following the Danish beneficial ownership cases of 28 February 2019 (C-115/16, C-118/16, C-119/16, C-299/16 and C-116/16, C-117/16), as of 2020 the Dutch tax administration may, even if the substance requirements are met, provide proof that a structure is abusive and refuse the exemption. This means that the substance requirements are no longer a safe harbour. However, if the substance requirements are not met, the tax payer may demonstrate either that the shares in the Dutch entity are not held with the purpose, or one of the main purposes, to avoid taxation of another party or that there are valid business reasons that reflect the economic reality.
Also for the Dutch controlled foreign company (CFC)-rules, meeting the substance requirements will no longer be a safe harbour, but the tax payer will be allowed to provide counter proof if the substance requirements are not met.
The same applies to the Dutch non-resident corporate tax rules. Non-resident corporate taxpayers are subject to Dutch CIT only if and to the extent they derive Dutch-sourced income mentioned in one of the categories defined in the CIT Act. One of those categories is dividends and capital gains derived from a ‘substantial interest’ (in short: an interest of at least 5%) in a company that is a resident of the Netherlands insofar as the subjective and objective test are met. Also for this provision meeting the substance requirements is no longer a safe harbour for the objective test as of 2020, as the tax administration may provide counterproof that the arrangement is artificial. On the other hand, if the substance requirements are not met, the tax payer may demonstrate that the shares in the Dutch entity are not held with the purpose, or one of the main purposes, to avoid taxation of another party or that there are valid business reasons that reflect the economic reality.
Because of the principal purpose test included in the Multilateral Instrument (see section 6 below), tax treaties may no longer be a fallback to restrict the taxation right of the Netherlands in case of artificial arrangements.
6. Changes in Dutch tax treaties as of 2020 because of the Multilateral Instrument
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), also known as the Multilateral Instrument or MLI, changes bilateral tax treaties of many jurisdictions. It implements minimum standards to combat treaty abuse and to improve dispute resolution mechanisms.
In 2019, the Netherlands ratified the MLI resulting in the entry into force of the MLI provisions as from 2020 for the Netherlands. This means that tax treaties that both the Netherlands and the other country have defined as being covered by the MLI (covered tax agreements) will be changed in 2020 if the other country has also ratified the MLI and to the extent there is a match regarding the applicable provisions of the MLI. The Netherlands listed 82 out of its 94 tax treaties to be brought within scope of the MLI. Based on the (provisional) choices of its treaty partners, the Netherlands expects 51 of its tax treaties to be affected by the MLI. Tax treaties that will be affected as of 2020 include the treaty with Luxembourg, the UK, France and Japan. The MLI will not have an impact on the treaty with the U.S.
The preambles of the covered tax agreements will be amended to clarify that these were concluded to eliminate double taxation without creating opportunities for non-taxation. A mutual agreement procedure will apply in tax disputes. The Netherlands opted for mandatory binding arbitration, but most jurisdictions opted out of this provision for which reason this will not be included in all tax treaties of the Netherlands. The Netherlands made a reservation on the measure to prevent the artificial avoidance of a permanent establishment status in relation to BEPS, including through the use of commissionaire arrangements. This reservation will be withdrawn when an effective dispute resolution between a sufficient number of signatories to the MLI and the Netherlands is in place.
The Netherlands has opted for a principal purpose test (PPT). This is an anti-abuse rule that in certain situations denies the application of treaty benefits, such as for dividends and capital gains. Because of the PPT it will be increasingly relevant to demonstrate business purposes of an arrangement or transaction. In our experience, some current structures, for example in relation to Luxembourg, will no longer be tax-efficient as of 2020 because of the PPT. In such cases we have been working with clients on restructurings to address the new 2020 tax treaty situation.
Furthermore, because of the MLI the Tax Plan proposes to change the definition of permanent establishment (PE) in the Dutch CIT, personal income tax and wage tax acts. As of 2020, the PE-definition of the applicable tax treaty will apply. In case no tax treaty applies, a PE is defined in line with the OECD Model Tax Convention: a fixed place of business through which the business of an enterprise is wholly or partially carried on, bearing in mind that a building site or construction or installation project constitutes a PE only if it lasts more than twelve months. The exceptions to the PE definition in article 5(4) and the other provisions in article 5 of the OECD Model Tax Convention are included in this new Dutch definition as well. There are some deviations from the OECD Model Tax Convention provision to combat tax payers that artificially try to avoid the PE-definition.
7. Introduction of mandatory disclosure rules
On 12 July 2019, the Dutch government sent a Bill to Parliament to comply with the obligation to implement the EU Directive on the mandatory disclosure and exchange of cross-border tax arrangements (DAC6). This Directive requires EU intermediaries (including banks, accounting firms, corporate service providers and certain others) involved in cross-border arrangements under certain circumstances to make a disclosure to their tax authority. If no intermediary is required to make a filing, the taxpayer may need to disclose instead. Failure to comply can result in penalties. In the Netherlands these penalties can amount up to a maximum of EUR 830,000. The Dutch implementation proposal follows the Directive and does not have a broader scope. We refer to our client alert on the Directive for a general overview. The first reports are not due until August 2020. However, all reportable transactions from 25 June 2018 must be disclosed. It is therefore crucial to consider the effects of this new regime and the information, if any, you should already be collecting.
8. Personal income tax
Earlier, Parliament adopted the proposal to further reduce the personal income tax rates in 2020 and 2021. The Tax Plan now implements the full reduction in 2020. Where the 2019 top rate is 51.75%, it will be reduced to 49.5% as of 2020 for income over EUR 68,507. For income of EUR 68,507 or below, a basic rate of 37.35% will apply.
The possibility of deducting mortgage interest payments is further reduced. In 2020 these will be deductible at a rate of 46%. In addition, personal allowances, including alimony paid, are as of 2020 no longer deductible at the highest rate, but at a lower rate which is gradually reduced to the basic rate. In 2020, those deductions are possible at a rate of 46%, in 2021 at a rate of 43%, in 2022 at a rate of 40% and as of 2023 at the basic rate of 37.05%. These changes were already adopted by Parliament last year.
The tax rate for individuals with a substantial interest in a company (in short: an interest of at least 5%) will be increased from 25% to 26.25% in 2020 and to 26.9% from 2021.
Furthermore, on 6 September 2019, the Ministry of Finance announced a reform of the taxation of income from savings and investments (‘box 3’) as of 2022. The details of this reform have not yet been published, but it is suggested that if the assets of a tax payer amount to more than approximately EUR 30,000, the tax payer will be taxed on the following deemed returns: 0.09% on savings and 5.33% on other assets. Furthermore, a deemed interest rate of 3.03% on debts can be deducted. A tax free income of EUR 400 will be deducted from the resulting income. The remainder is taxed at a rate of approximately 33%. This change would be positive for tax payers with savings, but negative for tax payers with other assets, such as holiday houses and real estate that is rented out, especially if financed by debt. A Bill containing the box 3 reform will be sent to Parliament before the summer of 2020.
9. Wage tax
For Dutch wage tax purposes, in principle, all allowances paid and benefits provided to employees, qualify as taxable wages (a few exceptions apply). However, the work-related expenses provision (werkkostenregeling; WKR) allows for a general fixed budget of 1.2% of the total taxable wages from which employers may pay or grant allowances and benefits to their employees tax free. If the total amount of allowances and benefits provided under this scheme exceeds the general fixed budget of 1.2%, the employer must pay non-recoverable wage tax against a rate of 80%. As of 2020, the budget is 1.7% for the total wage costs of an employer up to EUR 400,000 and 1.2% for the remainder.
10 Parliament can make changes to the Tax Plan
It is possible that the Tax Plan as it is currently drafted will be amended in the course of Parliamentary discussions. New elements may be added to the Tax Plan to compensate for any amendments. It is envisaged that the Second Chamber of Parliament will vote on the amendments and the final contents of the Tax Plan on 14 November 2019. The First Chamber of Parliament, that has no right of amendment and can only adopt or reject a Bill, is expected to vote on the Tax Plan on 17 December 2019.