On 20 September 2016, the Dutch government presented the 2017 Tax Bill together with several other legislative proposals. Simultaneously, the State Secretary of Finance sent a letter to Dutch Parliament about proposed changes to the Dutch dividend withholding tax position of cooperatives from 1 January 2018. Further clarification of the bill and the other proposals is expected during the parliamentary process.
Several important Dutch tax law provisions in will be amended, such as interest deduction limitations, the innovation box and the dividend withholding tax. Multinationals, international investors and investment funds should analyse the implications of these changes and reconsider current structures.
1 CORPORATE INCOME TAX
The 2017 Tax Bill amends two existing interest deduction limitations: (i) the anti-base erosion provision, and (ii) the interest deduction limitation for acquisition holdings. The anti-base erosion provision limits interest deduction where interest is paid to a related party in connection with certain tainted transactions. The definition of related parties will be amended: group companies acting in concert and holding a minimum total combined interest of one third in a Dutch company will each qualify as a related party. The expanded definition primarily aims to combat private equity structures where a general partner manages multiple funds. Each of those funds may qualify as a related entity of the Dutch company based on the proposed rules if the general partner has, amongst other things, certain control over the Dutch company. This is the case even when the fund individually holds an interest of less than one third. In these types of structures, the interest deductibility of shareholder loans should be re-evaluated.
The second interest deduction limitation to be amended is for acquisition holdings. Under this provision, interest expenses relating to excessively leveraged acquisitions may not be deducted if the target is subsequently included in a fiscal unity for corporate income tax purposes or merged with the acquiring company. Whether acquisition debt is excessive is determined based on a loan-to-purchase price ratio. In the year of the acquisition, a maximum loan-to-purchase price ratio of 60% is allowed; this maximum percentage is reduced by 5% annually over the course of seven years, down to 25% in year eight and subsequent years.
The 2017 Tax Bill closes certain loopholes in this provision. The first amendment aims to counter debt push-down transactions where the acquisition debt is assumed by the target company. Previously, these transactions prevented application of the interest deduction limitation. The second amendment aims to counter intragroup transactions that would result in resetting the annual allowed reduction to 60% of the acquisition price. Third, the proposed rules disallow the grandfathering rules introduced in 2012 for existing debt when the acquisition holding is included in a new Dutch fiscal unity headed by a different parent company. The effect of the proposed rules may be that interest paid by a Dutch company may not be deducted, whereas this interest would be deductible under the current rules. This may have an impact on the interest deductibility in existing structures.
The 2017 Tax Bill also contains two changes to the innovation box regime, including the introduction of the "modified nexus" approach. The modified nexus approach calculates the qualifying benefit under the innovation box regime as follows:
The difference between qualifying expenses in the numerator and the total expenses in the denominator are: (i) outsourcing expenses for contractual R&D activities performed by related entities, and (ii) IP acquisition costs. These costs therefore limit the benefits of the innovation box regime. Qualifying expenses include R&D activities performed by third parties, group companies in a fiscal unity, or a permanent establishment of the taxpayer. For a more detailed overview of the modified nexus approach, please see our previous In context article.
The second change to the innovation box regime is the introduction of new criteria for access to the regime. The revised criteria differ for small and large taxpayers. Large taxpayers are taxpayers with a five-year average turnover resulting from innovative assets of more than EUR 7.5 million and a total five-year average turnover of more than EUR 50 million. To qualify for the innovation box regime, both categories of taxpayers must have obtained an R&D certificate for the development of the relevant intangible asset. For large taxpayers, an additional condition applies. For these companies, only income from patents, utility models, software, plant breeders' rights, and pharmaceutical certifications qualifies for the innovation box regime. A small taxpayer may also include unprotected IP in the innovation box regime.
In light of these changes, the 2017 Tax Bill contains several grandfathering rules. The bill proposes that all intangible assets developed after 30 June 2016 be governed by the new regime for financial years beginning on or after 1 January 2017. The proposed grandfathering rule provides that qualifying intangible assets created before 30 June 2016 continue to benefit from the current regime until 1 July 2021. Further, patented intangible assets or breeders' rights developed by the taxpayer before 1 January 2017 will be considered qualifying intangibles under the new regime, even if no R&D certificate has been issued. These will continue to qualify for the innovation box without a time limit.
If the changes to the innovation box regime are adopted in their current form, certain profits will become ineligible for the lower tax rate resulting from the innovation box regime, and certain intangibles will no longer be covered by the innovation box regime. All existing tax rulings regarding the application of the Dutch innovation box regime will, with the exception of the grandfathering periods, be terminated.
Corporate income tax rate
Finally, the 2017 Tax Bill aims to change the corporate income tax rate. Corporate income is currently taxed at a rate of 20% up to a profit of EUR 200,000, with the excess being taxed at a rate of 25%. The first bracket will be extended to EUR 250,000 in 2018; EUR 300,000 in 2020; and EUR 350,000 in 2021.
2 DIVIDEND WITHHOLDING TAX
Cooperatives and the withholding exemption
The 2017 Tax Bill and the Minister of Finance's letter include several proposals to the Dutch dividend withholding tax. The first change regards the withholding tax exemption, which currently provides that profit distributions to EU and EEA resident corporate shareholders with a 5% interest in a Dutch entity are, usually, exempt from dividend withholding tax. The bill proposes to extend this exemption to all corporate shareholders resident in a country the Netherlands has concluded tax treaties with. An anti-abuse provision will prevent this exemption from applying in wholly artificial situations. According to the Minister of Finance's letter, this means that the withholding exemption will only apply to active business structures. The extent to which treaty conditions for reducing the dividend withholding tax rate must be met in order to claim the extended domestic exemption, is uncertain.
Secondly, the bill proposes changes to the dividend withholding tax position of cooperatives. Currently, distributions by cooperatives are not subject to dividend withholding tax, unless an anti-abuse rule that applies to a restricted scope of anti-avoidance structures applies. It is proposed that distributions by a cooperative become subject to dividend withholding tax if the cooperative has a mere holding function; that is, holding participations, investing funds and financing related parties to a member who holds a 5% interest or more. However, holding cooperatives used in active business structures may benefit from the withholding tax exemption. If a member of a holding cooperative has an interest below 5%, a distribution can be made without dividend withholding tax.
Thus, the withholding exemption will not be applicable to holding cooperatives if the members of the cooperative are located in non-tax treaty jurisdictions. As a result, distributions by international holding cooperatives to those members would always become subject to 15% dividend withholding tax. This deviates from the current situation where, in the case of an active business structure, distributions by international holding cooperatives are not subject to dividend withholding tax. The extension of the withholding exemption and the changes to the dividend withholding tax liability of cooperatives are not yet part of a legislative proposal, but it is envisaged that the new rules will enter into force on 1 January 2018.
The Minister of Finance's letter does not address how the proposed rules impact the rules on taxation of non-resident companies with a substantial interest in a company resident in the Netherlands.
Dividend refund and withholding exemption
Changes to the Dutch dividend refund rules are also proposed. Under Dutch law, a domestic portfolio shareholder (less than 5% shareholding) can credit the Dutch dividend withholding tax levied to his Dutch personal or corporate income tax. However, non-Dutch resident shareholders can generally not credit the Dutch dividend withholding tax. This could result in a heavier tax burden compared to a purely domestic situation. To align Dutch dividend refund rules with recent ECJ case law, a refund facility for dividend withholding tax will be introduced for non-Dutch resident individuals or entities where the Dutch dividend withholding tax cannot be fully credited and results in a heavier tax burden compared to a purely domestic situation. This rule will apply to both individuals and entities resident in countries that the Netherlands has concluded a treaty with, where the treaty includes exchange of information possibilities. As noted in another In context article of June 2016, some of these rules are still debatable from an EU law perspective.
Last, a new optional dividend withholding tax exemption is introduced which applies to dividend payments made to certain exempt non-resident entities (entities that are fully or partly not subject to corporate income taxation). This new regime will relieve the administrative burden of the current refund procedure.
The current definition of "building site" in the VAT Act is not aligned with the definition of "building site" as defined by the ECJ. The 2017 Tax Bill proposes aligning this definition with ECJ case law. The bill clarifies that the definition of building site also includes land intended to be built on, which is currently not always the case according to the Dutch definition. This intention must be apparent from an overall assessment of the facts and circumstances at the moment of the transfer, and must be supported by evidence. The alignment of the definition of "building site" with that of the ECJ ensures that the transfer of a building site is subject to VAT and exempt from real estate transfer tax.
Refund scheme for non-performing loans
The VAT Act contains a VAT refund scheme for bad debt. Under the current rules, it is often unclear when bad debt becomes uncollectible and when, because of that, a request for a VAT refund must be filed. The 2017 Tax Bill proposes amending these rules so that bad debts are deemed uncollectible after one year, although taxpayers may still demonstrate that non-payment occurred at an earlier date. This new regime will also apply when debt is transferred, for instance to a factoring company. In all cases, the amount of VAT to be refunded will be calculated in proportion to the uncollectible part of the debt. The proposed rules provide a safe haven by assuming that the debt is uncollectible after one year, but still allow flexibility to demonstrate that non-payment occurred at an earlier date.
4 WAGE TAX
Currently, supervisory directors are deemed employees for Dutch wage tax purposes. The bill proposed abolishing this assumption of employment.
This also has consequences for foreign supervisory directors. For instance, a previously applicable 30% ruling can no longer apply, since this ruling only covers (deemed) employees. The supervisory director and the company may decide to opt for withholding for payroll purposes via the "opting-in" regime to avoid the potentially unfavourable consequences of the proposed amendment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.