On Budget Day, September 18, 2018, the Dutch government released the 2019 Budget, which includes the proposals for amendments to the Dutch tax laws (i.e. the 2019 Dutch tax plan). In the upcoming months the proposed amendments will be discussed in Dutch Parliament. Most proposals are aimed to enter into force as of January 1, 2019.
Below we have listed several key proposed amendments as included in the 2019 Dutch tax plan, as well as a brief description of the recently published internet consultation for the revision of the Dutch ruling practice. Please click on the links below for summarized information relevant to you.
Should you have any questions about any of the proposed amendments to Dutch tax laws and what the amendments could mean for your business, please contact one of the writers of this article or your regular Bird & Bird contact.
- Reduction of Dutch corporate income tax rate
- Restriction of loss carry forward term
- Introduction of a new interest deduction limitation: the earnings stripping rule
- Introduction of a Controlled Foreign Company-rule (CFC)
- Amendment of 'exit taxation'
- Restriction on depreciation of real estate
- Abolishment of Dutch dividend withholding tax and introduction of new Dutch source taxes
- Increase of 6% VAT rate to 9%
- Partial implementation of European E-Commerce Directive
- Amendment of Dutch personal income tax rates (Box 1, Box 2 and Box 3)
- Limitation of the 30%-allowance facility for expats
- Internet consultation on the ruling practice for advance certainty
Corporate income tax
Reduction Dutch corporate income tax (CIT) rate
As already announced in the Dutch coalition agreement, the Dutch CIT rate will be reduced step-by-step. Currently, Dutch CIT is levied at a rate of 20% for the first EUR 200,000 and 25% for taxable profits exceeding EUR 200,000 (2018 rates). It is, in order to remain attractive and to have a competitive business climate, proposed to reduce the Dutch CIT rates as follows:
|| CIT rate for the first EUR 200,000
|| CIT rate for profits exceeding EUR 200,000
Initially it was envisaged that the CIT rates would be reduced to 16% (first EUR 200,000) and 21% (profits exceeding EUR 200,000), however in order to fund the abolishment of the dividend withholding tax (see below) the reduction of the rate was limited (22,25% instead of 21%).
Restriction of loss carry forward term and abolishment of restriction on holding and financing losses
Restriction loss carry forward term
Currently, tax losses can be carried forward for nine (9) financial years, while the carry back of losses is restricted to one (1) financial year.
It is now proposed to, effective as of January 1, 2019, restrict the carry forward term to six (6) financial years, while leaving the carry back term at one (1) financial year. As such, the term to offset tax losses against taxable profits is limited.
For tax losses incurred prior to 2019, the loss carry forward term remains nine (9) years. In principle, losses are compensated in the order in which they were incurred. Consequently, the carry forward term for tax losses incurred in 2019 and 2020 would lapse in 2025 and 2026, so prior to the carry forward term of tax losses realized in 2017 and 2018, which would lapse in 2026 and 2027. Therefore, transitional law is proposed to address this, determining that tax losses realized in 2019 are available to offset against future profits before any outstanding carry forward losses of 2017 and 2018, while tax losses realized in 2020 are available to offset before any tax losses realized in 2018.
Abolishment of the restriction on holding and financing losses
As a result of the introduction of the earnings stripping rule (see below), the current restriction on so-called 'holding and financing losses' has become redundant and is thus abolished effectively as of January 1, 2019 (whereas it will remain applicable for holding and financing losses incurred prior to 2019).
Introduction new interest deduction limitation: the earnings stripping rule
Per January 1, 2019 a general earnings stripping rule will be introduced in line with the EU Anti Tax Avoidance Directive (ATAD). As of the same date, two specific interest deduction limitations will be abolished.
The general earnings stripping rule limits the deduction of net borrowing costs to the higher of (i) 30% of the EBITDA (i.e. Earnings Before Interest, Taxes, Depreciation and Amortization) and (ii) EUR 1 million. The net borrowing costs are the balance of a taxpayer's interest expenses (including economically equivalent costs and expenses incurred in connection with the financing) and interest income. Importantly, no distinction is made between related party debt and third party debt.
Any net borrowing costs that are non-deductible as a consequence of the application of this rule may be carried forward (not backward) to subsequent years. Unused interest capacity, however, cannot be carried forward or backward.
Two specific interest deduction limitations will be abolished. These specific interest deductions relate to costs in relation (i) to the financing of subsidiaries that qualify for the participation exemption and (ii) to the financing of a subsidiary within a fiscal unity.
Introduction Controlled Foreign Company-rule
Per January 1, 2019 the Netherlands will introduce a rule regarding Controlled Foreign Companies (CFC) in line with the EU Anti Tax Avoidance Directive (ATAD).
A CFC in this regard is a permanent establishment or entity (i) of which a Dutch resident corporate taxpayer directly or indirectly holds more than 50% of the share capital and/or profit rights and (ii) that is low-taxed. A permanent establishment or entity is regarded as low-taxed if it is resident in a jurisdiction with a statutory corporate income tax rate of less than 7% or in a jurisdiction that is included in the EU 'blacklist' of non-cooperative jurisdictions. This is the same definition of 'low-taxed' as is used with the newly proposed source tax on dividends. A company is not regarded as a CFC if its income usually does not mainly consist of tainted income as defined in the proposal (see below).
If the CFC does not perform a genuine economic activity, all tainted income should be included in the taxable base of the Dutch resident taxpayer. In to perform a genuine economic activity, the CFC must avail of relevant substance in its resident state (inter alia: office space and minimum wage costs of EUR 100,000). Tainted income is income from certain categories of passive income (e.g. interest, royalties, dividends, financial leasing income).
Amendment of the rule on 'exit tax'
If a natural person or corporate entity (or its Dutch branch) migrates from the Netherlands, any untaxed gains and goodwill will be subject to Dutch (corporate or personal) income tax. Currently, taxpayers that migrate to an EU/EEA member state have the choice of (i) paying such so-called exit tax in ten (10) equal, annual terms or (ii) paying when the tax would have been charged if the taxpayer had not migrated from the Netherlands (e.g. upon a sale).
For Dutch corporate taxpayers, this choice will no longer apply per January 1, 2019. Per that date, for corporate taxpayers that migrate to EU/EEA member states the deferred payment of the exit tax is available upon request but limited to payment of the exit tax in five (5) equal terms instead of ten (10). The deferral will expire if the tax would have been charged if the taxpayer had not migrated from the Netherlands. Deferral can be subject to interest and the obligation to provide security.
Restriction of depreciation on real estate
Depreciation on buildings is for tax purposes limited to the so-called "base value", whereas currently the base value of a building is defined as follows:
- In case of let out real estate: the base value is set at 100% of the WOZ-value;
- In case of real estate used in the own enterprise: the base value is set at 50% of the WOZ-value.
It is now proposed to, for Dutch corporate income tax purposes, the depreciation in relation to real estate in own use to 100% of the WOZ-value (i.e. in essence same base value as for let out real estate). This restriction is envisaged to be in effect as of January 1, 2019.
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Abolishment of Dutch dividend withholding tax and introduction of new Dutch source taxes in 2020 (dividends) and 2021 (interest and royalties)
It is proposed to abolish the Dutch dividend withholding tax as of January 1, 2020. Simultaneously with the abolishment, a new Dutch source tax on dividends would be introduced for dividends distributed by Dutch resident entities to related companies resident in low-taxed jurisdictions. Moreover, the source tax will apply in cases of certain situations of perceived abuse.
The rate of the proposed source tax is equal to the highest applicable Dutch corporate income tax rate (i.e. 23.9% in 2020 and 22.25% in 2021). To a large extent, the scope of the proposed source tax (i.e. the taxable basis) follows the scope of the current dividend withholding tax. However, it can also apply to the alienation of shares in a Dutch resident company (or the alienation of the shares of a non-resident intermediate holding company, which in turn holds the shares of the Dutch resident company) to the extent that the Dutch resident company has profit reserves.
In order to be considered a related company, the recipient (of the dividend) should hold a so-called "qualifying interest". A qualifying interest is recognized if the recipient has direct or indirect control over the distributing entity (e.g. if it holds more than 50% of the statutory voting rights).
In addition, a related company is recognized in cases where (a) another person or entity holds a qualifying interest in both the dividend paying entity and the dividend receiving entity or (b) the dividend receiving entity is part of a so-called "cooperating group" and such group holds together a qualifying interest in the dividend paying entity. Whereas "cooperating group" should be explained in line with the current definition in the Dutch corporate income tax act (i.e. article 10a).
A low taxed jurisdiction is defined as (i) a jurisdiction that does not levy a tax on profits or levies a tax on profits at a statutory rate lower than 7% or (ii) a jurisdiction that is listed on the EU-list of non-cooperative jurisdictions.
With respect to (i), annually an exhaustive list will be published providing an overview of the jurisdictions that are, for the upcoming tax period, designated as low-taxed jurisdictions. With respect to (ii) the Netherlands will follow the most recently published list prior to the start of the respective tax period.
There could be situations where the Netherlands cannot, as a result of a bilateral tax treaty with a listed jurisdiction, (fully) effectuate its source taxation. In those situations the Netherlands will approach such jurisdiction to amend the existing tax treaty. The proposal therefore includes a provision that dividends paid to related companies resident in treaty jurisdictions, will only become subject to the source taxation after three calendar years have lapsed since the moment such jurisdictions have been listed as low-taxed.
Abusive artificial situations
The source tax also applies in cases of artificial arrangements put in place to avoid Dutch source tax on dividends (e.g. through interposition of an intermediate company not resident in a low-taxed jurisdiction). In line with currently applicable anti-abuse measures in the Dutch dividend withholding tax act and Dutch corporate income tax act, the new source tax also includes a specific anti-abuse measure with an objective and subjective test:
Subjective test: the shareholder/member should not hold the shares/membership rights with the main purpose or one of the main purposes to avoid the Dutch source tax.
Objective test: the arrangement (or series of arrangements) cannot be considered wholly artificial, whereas an arrangement (or series of arrangements) is considered artificial to the extent that they are not put into place for valid commercial reasons that reflect economic reality. This test is deemed to be met in case the intermediate holding has 'relevant substance'. Such 'relevant substance' is recognized in case the intermediate holding company meets the substance requirements as currently applicable for intermediate holding companies that want to benefit from currently applicable dividend withholding tax exemption.
In principle the anti-abuse rule is applicable if both the subjective test and objective test are not met. However, if EU/EER resident intermediate holding companies are involved, the anti-abuse rule would not apply if there are other arguments based on which there are valid commercial reasons that reflect economic reality.
Envisaged source taxes on interest and royalties
In addition to the introduction of the new Dutch source tax on dividends, the Netherlands is also envisaged to, as of January 1, 2021, introduce a similar source tax in relation to interest payments and royalty payments to related companies resident in low-taxed jurisdictions and/or in cases of artificial arrangements. Currently, the Netherlands does not levy a withholding tax on interest and royalty payments.
Please note that developments, after the publication of these proposals, indicate that the Dutch dividend withholding tax may not be abolished.
Although draft legislation was published in September, one of the large multinationals that was planning to come to the Netherlands for this reason (Unilever) announced that it will not concentrate its corporate headquarters in the Netherlands. In response, the Dutch government announced that it will reconsider the current draft proposal. This means it is highly likely that the draft legislation to abolish the dividend withholding tax will be withdrawn. The extra budget that consequently becomes available is expected to lead to further amendments to the law proposals.
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Increase of 6% VAT rate to 9%
The Netherlands has three VAT rates: 0%, 6% and 21%. The 6% rate is levied on certain specific goods and services. These include, for instance, food, water, medicine, art and books. It is now proposed to increase the 6% VAT rate to 9% as per January 1, 2019. No transitional regime will apply; there will be no correction to the 9% rate for services that are already paid prior to January 1, 2019 but will be performed after that date.
Partial implementation of European E-Commerce Directive
The VAT treatment of companies active in e-commerce will change as a result of the so-called EU E-Commerce Directive. Most changes will take effect per January 1, 2021. Other changes will enter into effect per January 1, 2019.
Per January 1, 2019, certain simplification measures will be introduced. These inter alia relate to the VAT treatment of low volumes (i.e. less than EUR 10,000 in revenue) of cross-border digital services, the availability of the Mini One Stop Shop (MOSS) system for entrepreneurs outside the EU and the harmonization of invoicing rules under the MOSS system.
Per January 1, 2021, the rules will change with respect to distance sales, the MOSS system and sales via online platforms. It is recommended to contact your tax advisor if any of those topics relate to your business.
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Personal income tax
Amendment of personal income tax rates
Box 1 – income from work and home
The government intends to amend the taxation of income from work and home (box 1). Such income is currently taxed progressively in four brackets. It is now proposed to reduce this to two brackets per January 1, 2021. After the amendment, income from work and home up to an amount of € 68,507 will be taxed at a rate of 37.05% and the excess at a rate of 49.5%. The tax rates in the second and third brackets will – in stages – be amended in the coming years, such that they will be aligned with the 37.05% tax rate in 2021. Separate rules apply to taxpayers that do not pay social insurance premiums.
The proposed amendments are intended as a decrease in the tax and premium burden of € 5.6 billion in total.
Box 2 – income from substantial interest
It is proposed to increase the tax rate for income from substantial interest (box 2). Such income is currently taxed at a rate of 25%. The government proposes to increase the tax rate in stages. Per January 1, 2020 the rate would increase with 1.25 percentage points to 26.25%. Per January 1, 2021 the rate would further increase to 26.9%.
The proposed increasing of the substantial interest tax rate should be seen in conjunction with the lowering of the Dutch CIT rates. By increasing the substantial interest tax rate, the government intends to preserve the balance between taxation of businesses operating through a legal entity (taxed with CIT and in box 2) and taxation of businesses operating without a legal entity (tax in box 1).
Box 3 – income savings and investments
The government intends to amend taxation on income from savings and investments (box 3), which is currently levied on a deemed return on investment. The government is working on a proposal to levy tax on actual return on investment instead of a deemed return on investment.
Because the low interest rate on savings, the deemed return on investment often exceeded the actual return on investment. Consequently, the tax sometimes exceeded the amount of the return on investment. This was widely litigated.
No legislative proposal was published yet. The government intends to come with a proposal this term of office.
Limitation of the 30%-allowance facility for expats
The 30%-allowance facility is a tax facility for employees coming from outside the Netherlands who are employed in the Netherlands on a temporary basis and who meet certain specific conditions. These employees are deemed to incur extra expenses related to their stay outside their country of origin. As compensation for these extra expenses - extraterritorial expenses - the employer may grant a fixed tax-free allowance of up to 30% of the wage if the employer and the employee jointly submit an application with the Dutch Tax Authorities, who will then issue a ruling.
Currently, the maximum applicable period for the 30%-allowance facility is eight years. It is proposed to limit this period to five years as per January 1, 2019. If adopted by the Dutch Parliament, the five-year period will apply to both new and existing cases. Transitional law will only apply with respect to costs for international schools and only for the schoolyear 2018/2019.
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Revision of the Dutch ruling practice
It has been a long standing practice that the Dutch tax authorities, upon request, provide advance certainty in the form of a so-called tax ruling. The set-up of the Dutch ruling practice has recently become topic of public debate. Therefore, the government announced it will revise the current set-up.
The revision may relate to the circle of taxpayers eligible for a tax ruling, the scope of topics for which a tax ruling can be obtained, the process of determining whether a ruling should be granted, the period during which the ruling is valid and increased transparency with respect to issued rulings.
An internet consultation for the revision of the ruling practice was held between August 30, 2018 and September 20, 2018. The government announced it will publish its plans for the Dutch ruling practice late 2018.
This publication has been prepared with great care, nevertheless Bird & Bird LLP cannot accept any liability for making use of this information without involvement of a Bird & Bird LLP's advisor. The information should be considered as general information and cannot be regarded as advice.