Highlights from the Netherlands 2020 Tax Plan
INSIGHT ARTICLE |
Recent Dutch tax proposals may affect U.S. businesses with operations in The Netherlands
On Sept. 17, 2019 (Budget Day) the Dutch government submitted a Tax Plan (the Package) for 2020 to the House of Representatives. The Package contains corporate tax measures such as a conditional withholding tax on interest and royalties, but it would also tighten anti-abuse provisions and also has some provisions of general application. Following is an overview of the key corporate highlights:
Conditional withholding tax on interest and royalty payments
The Dutch government has proposed the Interest and Royalty Withholding Tax Act of 2021, which would implement a conditional withholding tax on interest and royalty payments that applies to transactions made to low-taxed and EU-blacklisted jurisdictions and in situations of abuse. The legislation is expected to be effective Jan. 1, 2021. Based on this legislation, interest and/or royalty payments made by a Dutch company will be subject to Dutch withholding tax if the following conditions are met:
- The recipient is tax resident in a low-tax jurisdiction.
Low-tax jurisdictions only qualify if they are included in either the Dutch list of noncooperative jurisdictions or the EU-blacklist of noncooperative jurisdictions.
However, a recipient that is established in a low-tax jurisdiction that is also considered tax resident of a (high-tax) jurisdiction, which (high-tax) jurisdiction considers the recipient as beneficiary of the interest or royalty income is deemed not to be established in a low-tax jurisdiction.
- The recipient has a qualifying interest.
As a second condition, the recipient should hold a qualifying interest in the Dutch payer. A qualifying interest will be deemed to exist if the decision making process can be influenced, directly or indirectly, to such extent that it can be used to determine the activities of the company paying the interest or royalty. This will in any event be the case if the interest represents more than 50% of the voting rights of the payor. Combined interests of collaborating groups can also constitute a qualifying interest.
There are special provisions for hybrid entities and collaborating groups included in the Interest and Royalty Withholding Tax Act 2021. Based on these provisions certain persons treated as “participants” can be deemed to be the recipient of the interest or royalty payment if certain conditions are met. As a result, Dutch withholding tax may be due.
The conditional withholding tax also applies to royalty and interest payments if the structure is considered to be wholly artificial. A structure qualifies as such if it has been set-up to avoid someone else’s tax and if the structure is not based on valid business reasons that reflect the economic reality.
Withholding tax returns
Under the proposals, the conditional withholding tax will be levied on the gross amount of the payments. The arm's length principle should be applied in determining these gross amounts. The conditional withholding tax is levied by the source state on the payor, and will be due within a month after the end of the calendar year. Withholding tax returns should be filed with the Dutch tax authorities by using a new standardized form.
Entry into force: Jan. 1, 2021
TIGHTENING OF THE ANTI-ABUSE PROVISIONS OF THE DUTCH DIVIDEND WITHHOLDING TAX
The anti-abuse provision of the Dutch Dividend Withholding Tax Act will be amended by the Package. Under the current tax regime valid business reasons are demonstrated by, and a safe harbour is provided for, Dutch companies that are held by intermediary companies that establish a connection between two levels of active operations and that meet the Dutch substance requirements. Under case law of the European Court the Dutch tax inspector has the authority to demonstrate that in such situations the structure/arrangement is (wholly) artificial. The Dutch tax inspector can rely on the indicators of abuse established in case law including:
- The level of substance of the intermediary company
- The amount of equity of the intermediary company
- The amount of the remuneration of the intermediary company (spread)
- The time between the receiving and the repayment of dividend
- Whether the intermediary company has the power to freely determine the use of its dividend income
- How the transactions are financed
- The underlying agreements of the transactions
- Actions taken in anticipation of upcoming/announced legislation
Under the amendments contained in the Package, substance will no longer be a safe harbour, but will only be relevant to the burden of proof. Group structures with foreign intermediary companies relying on the substance safe harbour to apply for the Dutch dividend withholding tax exemption, should reassess whether they could still apply the exemption.
Entry into force: Jan. 1, 2020
TIGHTENING OF THE ANTI-ABUSE PROVISIONS OF THE DUTCH TECHNICAL INTEREST REGIME
The anti-abuse provision of the foreign taxpayer rules laid down in the Dutch Corporate Income Tax Act will be amended the same way the anti-abuse provision of the Dutch Dividend Withholding Tax Act is to be amended (addressed above). Group structures with foreign intermediary companies now using the aforementioned safe harbour to apply for the exemption of the foreign taxpayer rules, should therefore reassess whether they can still apply the exemption. Intermediary companies holding a qualifying interest in a Dutch company that can no longer apply the exemption, may qualify as a foreign taxpayer in the Netherlands for income (capital gains) arising from the substantial interest they are holding in the Dutch company. Such income will be taxed under the application of the Dutch Corporate Income Tax Act, and may be subject to a Dutch corporate income tax rate of 25% at maximum 25%.
Entry into force: Jan. 1, 2020
ADJUSTMENTS TO THE CONTROLLED FOREIGN COMPANY (CFC)-RULE
The Dutch CFC measures entered into force on Jan. 1, 2019. The CFC measures apply to so-called controlled foreign companies or controlled permanent establishments (PE). A foreign company or PE is considered to be a CFC if:
- The Dutch taxpayer, directly or indirectly, has a qualifying interest of at least 50% in that foreign company (control test); and
- The foreign company is established in a country that is EU-blacklisted or included in the list of countries with a low statutory tax rate (less than 9%) that is published by the Dutch government.
If the foreign company is considered a CFC, the income that was not (timely) distributed by the CFC is included in the taxable income of the Dutch corporate taxpayer (substance approach). Timely for this purpose in general means within the course of the respective book year. The CFC rules apply to a variety of income types including interest, dividend, royalties, capital gains and income from financial leasing,
The CFC measures should not be applicable if the CFC carries on genuine economic activities. Genuine economic activities are deemed to be carried on if the foreign entity meets the substance requirements that also apply in relation to the Dutch domestic dividend withholding tax exemption and foreign taxpayer rules exemption.
Under the amendments to the CFC measures the Dutch tax inspector may demonstrate that the main purpose or one of the main purposes of meeting the relevant substance requirements is to apply the exemption. If the Dutch tax inspector succeeds in doing so, the taxpayer may still prove that the CFC is carrying out genuine economic activities, although it may be more challenging to do so.
Entry into force: Jan. 1, 2020 (applicable to book years starting on or after Jan. 1, 2020)
REDUCTION OF THE DUTCH CIT RATE
The Package introduces a step-by-step reduction of the Dutch corporate income tax rate. The rate structure will be as follows:
|Taxable amount up to €200,000||19.0%||16.5%||15.0%|
|Taxable amount above €200,000||25.0%||25.0%||21.7%|
Increase of the Dutch innovation box rateThe Dutch government hopes to better position the Netherlands to compete in the current investment climate through the introduction of lower rates, including the gradual reduction of the high corporate tax rate to 21.7% in 2021 and the gradual reduction of the low corporate tax rate to 15% in 2021.
With release of the Package, the government expressed its intention to increase the tax rate of income taxed under the innovation box regime from 7% to 9%.
Entry into force: Jan. 1, 2021
LIMITATION ON THE DEDUCTIBILITY OF FOREIGN LIQUIDATION LOSSES
By 2021, it is anticipated the deductibility of foreign liquidation losses will be limited in accordance with the consultation document released in early 2019. Based on the new regime, a deduction of foreign liquidation losses by a Dutch company will, in principle, be allowed only if the company holds an interest of more than 25% in a company that is established in an EU/European Economic Area (EEA) country. For non-EU/EEA situations in which an interest of 5% up to 25% is held, a foreign liquidation loss is deductible up to a maximum of €1 million. In addition to this restriction, a liquidation loss is only deductible if the settlement phase of the liquidation is completed within three years after the decision to liquidate the company is made.
Entry into force: anticipated by 2021
ADJUSTMENT TO DEFINITION OF PERMANENT ESTABLISHMENT AND PERMANENT REPRESENTATIVE
New definitions of “permanent establishment” and “permanent representative” will be introduced into the Dutch Corporate Income Tax Act. These definitions will also apply to the Dutch Personal Income Tax Act and the Dutch Wage Tax Act. The definition that will be included in these laws is in line with the OECD Model Tax Convention 2017. The new definition will apply to non-treaty situations. In treaty situations, the definition that is included in the treaty will apply.
Entry into force: Jan. 1, 2020
In preparation, businesses operating in the Netherlands should evaluate the nature of intragroup interest and royalty payments to determine whether they could be subject to new withholding taxes. If you have questions, please contact your local RSM contact for further assistance.