In today’s rapidly changing tax environment, it is important to be aware of all relevant tax developments. In the past months, several new tax rules have been implemented or announced. Please see below an overview of certain tax amendments that may be relevant when investing in the Netherlands.
1. Dutch corporate income tax
a) Tax rate and tax losses
As of 1 January 2022, the first EUR 395,000 of taxable profits (245,000 in 2021) is taxed at 15% and the remainder of taxable profits is taxed at 25.8% (25% in 2021). The Dutch innovation box regime provides for the possibility to be effectively taxed at a reduced rate of 9% (rate not changed compared to 2021).
As of 1 January 2022, under the new loss compensation rules, only EUR 1 million plus 50% of the taxpayer’s taxable income (minus the EUR 1 million threshold) can be set off against tax losses from previous years. Any excess profits will be taxable. Tax losses can be carried back one year and carried forward indefinitely.
b) Arm’s length principle
Based on the arm’s length principle, taxable profits or losses from domestic or cross-border transactions between related parties should be adjusted to reflect a situation with unrelated parties. To the extent transfer prices are not in accordance with the arm’s length principle, an upward or downward transfer pricing adjustment must be made. Based on longstanding Dutch case law, such adjustment subsequently resulted in the recognition of either a “deemed dividend” or a “capital contribution”, what is known as the “informal capital doctrine”. Whereas this doctrine has consistently been applied in the Netherlands, it has also resulted in international mismatches and situations of double non-taxation. To prevent such non-taxation, as of 1 January 2022, a deduction (the downward adjustment) is denied in the Netherlands if the taxpayer cannot prove that there is a corresponding upward adjustment at the level of the recipient. There is, however, no requirement that such inclusion in the other jurisdiction is effectively taxed. For example, there is no exception for jurisdictions with a statutory corporate income tax rate of 0% or if the income can be set off against losses.
The new rules also affect the transfer of depreciable assets from related parties. A Dutch taxpayer only receives a step-up for these assets if it can be demonstrated that there is a corresponding adjustment. Separate rules apply to assets acquired between 1 July 2019 and 1 January 2022. The amortizable base for such assets can be limited as from 1 January 2022 if the agreed value was not at arm’s length. The depreciable value will be set at the lesser of (i) the (lower) agreed value upon the transfer and (ii) the remaining depreciable base in the opening balance sheet for the fiscal year starting on or after 1 January 2022. For more background information, we refer to our Tax Notes International article of 29 March 2021.
c) Interest deduction limitation rules
At arm’s length interest expenses are in principle deductible for Dutch tax purposes, subject to certain interest deduction limitation rules. Below we list the recent developments with respect to these limitations.
i) Anti-base erosion rule
Interest expenses are non-deductible if the loans are taken up from related parties and the relevant debt is connected with a capital contribution or repayment, a dividend distribution, or an (external) acquisition. Entities are considered related if one entity holds a direct or indirect interest of at least one-third in the other entity (or vice versa) or if there is a cooperating group. This concept was introduced in 2017. Debt from a third party for which a group company acts as a guarantor may under certain circumstances also be considered as debt from a group company.
Over the past years, acquisition financing structures of several private equity funds have been targeted by the Dutch tax authorities, arguing that their financing structure resulted in base erosion. A trend is visible where the Dutch tax authorities also invoke the general abuse of law doctrine (fraus legis), developed in case law and not codified in tax law, as a weapon to counter the deduction of interest. After a lot of criticism, this approach has been accepted by the Dutch Supreme Court in certain cases. Fraus legis can be applied if the deduction of interest is against the objective and purpose of the law, e.g. if unnecessary legal acts are used with the predominant motive to realize a tax benefit. The respective case law covers previous tax years and the legislation has since then been amended several times, including in 2017 by introducing the cooperating group concept. The case law is nevertheless important as it shows a trend that the Supreme Court is no longer reluctant to restrict companies in their freedom of financing businesses activities and fraus legis is in certain cases being successfully used by the Dutch tax authorities. This is to be kept in mind when setting up the acquisition financing structure of a fund.
ii) Earnings stripping rule
As of 1 January 2022, the deduction of interest expenses is limited to 20% of a taxpayer’s EBITDA or EUR 1 million (the “earnings stripping rule”; this was 30% in 2021). For the application of the earnings stripping rule, a Dutch fiscal unity is considered as one taxpayer.
2. Dutch withholding taxes
a) Dividend stripping
The Dutch dividend withholding tax exemption is denied if it appears that the person receiving the dividend is not the ultimate beneficiary of the dividend (“dividend stripping”). The concept of ultimate beneficiary is also relevant in the case of a tax refund or reduction under a double tax treaty concluded by the Netherlands.
Dividend stripping is, in short, dividing the legal ownership and economic ownership of shares between a third party and the shareholder, respectively. If the third party is entitled to a more beneficial dividend treatment, a tax benefit (such as a refund or a credit) can be obtained. Dividend stripping can take various forms of which cum/ex-transactions or securities lending are well known.
Dutch legislation already contains an anti-abuse provision to counter dividend stripping. However, since the current anti-abuse legislation does not seem to be effective enough, the Dutch government is currently examining different forms of dividend stripping in order to be able to compile rules to more adequately counter dividend stripping. A consultation document was published on 15 December 2021 and we expect to hear more about it later this year.
b) Dividend withholding exit levy
Several bills have been submitted to the Dutch parliament proposing a dividend withholding exit levy in connection with certain cross-border activities, including reorganizations, relocations, mergers, demergers, and stock mergers. The most recent legislative proposal submitted would have retroactive effect as from 15 November 2021. In short, it is proposed that entities that leave the Netherlands by way of a transfer of seat, merger etc. would be subject to an exit levy in respect of any profits created in the Netherlands that would otherwise be subject to Dutch dividend withholding tax upon distribution. A franchise of EUR 50 million applies, which means that the first EUR 50 million of deemed distributions would not be subject to the exit levy. There is an exception proposed if the ‘new’ jurisdiction has a similar dividend withholding tax and does not provide for a step-up. There has been a lot of discussion about this proposal which is reflected in the fact that several bills of amendment have been filed and it is still unclear whether such proposed exit levy will be enacted into Dutch tax law. For a more detailed description, we refer to our Tax Notes International article of 3 January 2022.
c) Dutch conditional withholding tax
As of 1 January 2021, a conditional withholding tax is effective on (deemed) intragroup interest and/or royalty payments to low tax jurisdictions and in certain cases of abuse. The applicable tax rate is equal to the standard corporate income tax rate (currently 25.8%). As a short recap, in this context, companies are considered related if the recipient company has a qualifying interest in the paying company or vice versa or if a third company has a qualifying interest in both the paying and recipient company. An interest is considered “qualifying” if it represents enough influence in the decision-making process of an entity that the activities can be determined.
As of 1 January 2024, this withholding tax will be applicable to dividend distributions since the Dutch government wants to put an end to the Netherlands being used as gateway to low tax jurisdictions. This withholding tax will be levied in addition to the “regular” dividend withholding tax of 15%. There is an anti-cumulation rule so that where “regular” dividend withholding tax has been paid, this can be settled with the conditional withholding tax.
The conditional withholding tax has specific anti-abuse provisions with respect to hybrid entities that resulted in overkill. The Dutch legislature confirmed last year that hybrid entities will no longer be subject to Dutch conditional withholding tax if none of the beneficiaries has a qualifying interest in the hybrid entity. This clarification has retroactive effect to 1 January 2021 and is a welcome clarification. We refer to our Tax Notes International article of 25 October 2021 for more information.
3. Dutch tax classification rules
a) Dutch partnerships
As of 1 January 2022, the Dutch government has implemented measures to target “reverse hybrid” mismatches with as the most well-known example the “CV-BV structure” that was often set up to flow royalty payments without taxation. In the CV-BV structure, a closed CV is considered transparent for Dutch tax purposes whereas its related non-Dutch participants consider the CV as non-transparent (e.g. under the US check-the-box regime). As a result, royalty payments are not subject to corporate income tax in the Netherlands and not included in the participants’ income. The new rules tackle the discrepancy between qualifications between different jurisdictions (i.e. the cause of the mismatch) and is the final part of the implementation of the EU Anti-Tax Avoidance Directive (“ATAD 2”).
A reverse hybrid entity is an entity (generally a partnership) that for tax purposes is considered transparent in its jurisdiction of incorporation/establishment, whereas the jurisdiction of one or more related participants qualifies the entity as non-transparent. As a result, a reverse hybrid entity that is incorporated/established or residing in the Netherlands will, under certain circumstances, become subject to Dutch corporate income tax. Furthermore, distributions from such entity can, under certain circumstances, become subject to Dutch withholding taxes.
The reverse hybrid rules only apply if at least 50% of the voting rights, capital interests or profit rights are directly or indirectly held by entities/individuals in a jurisdiction that considers the partnership to be non-transparent for corporate income tax purposes. Consequently, the entity will become fully subject to tax with the opportunity of receiving a pro rata tax deduction. For a more detailed description, we refer to our Tax Notes International article of 17 May 2021.
b) Foreign partnerships
Based on current Dutch policy, the classification of foreign legal entities as transparent or non-transparent for Dutch tax purposes is based on a comparison of certain civil law characteristics of the entity and a Dutch entity. Based on this approach, the foreign entity is, in principle, treated in the same way as the Dutch entity that is comparable. During the summer of 2021, a draft legislative proposal was presented to change this comparison method for entities that do not have a Dutch equivalent as this could also lead to mismatches. This proposal has, however, now been postponed to late 2023. We refer to our Tax Notes International article of 25 October 2021 for more information.
4. Substance and economic nexus
The European Commission presented a legislative proposal for a directive targeting the misuse of EU shell entities (“ATAD 3”) on 22 December 2021. If adopted, ATAD 3 should be transposed into national law by 30 June 2023 and come into effect on 1 January 2024.
In a nutshell, ATAD 3 will introduce certain reporting obligations and may deny certain tax advantages to EU companies that are deemed to have no or minimal economic activity. Firstly, whether a company could fall within the scope of ATAD 3 needs to be determined based on three gateways, that also take the preceding two tax years into account, (i.e. >75% passive income, >60% cross border activity and outsourcing day-to-day management and decision-making functions), subject to certain carve-outs for e.g. regulated EU companies. If a company crosses all three gateways, it will be required to annually report this information in its tax return. Consequently, whether such company is deemed to have no or minimal economic activity needs to be determined based on three substance indicators (i.e. own premises, active EU bank account, qualified local directors/employees), subject to a rebuttal scheme. Whether the substance indicators are met needs to be declared in the company’s annual tax returns, accompanied by evidence. If an entity fails at least one of the substance indicators, it will be presumed to be a ‘shell’. The tax consequences are threefold:
- denial of benefits under tax treaties, the Parent-Subsidiary Directive and the Interest and Royalties Directive
- application of tax transparency (i.e. the shareholders of the shell will be deemed to hold the assets of the shell company directly and this could lead to withholding taxes being applicable)
- information must be exchanged among Member States.
It is being currently argued in the literature, and it cannot be excluded, that applicability of the Dutch participation exemption may be denied under ATAD 3 as this is implementation of the EU PSD. ATAD 3 provides for penalties which will be set by each EU Member State and are currently proposed to be at least 5% of the turnover of the non-compliant entity.
Although much is still uncertain, given the two-year look-back period in respect of the gateways, it is important to already consider the gateways and the substance indicators of EU companies. Some type of entities, notably regulated institutions and listed entities, will not be subject to these rules. In 2022, a separate EU proposal is expected for non-EU shell companies . For more information we refer to our Tax Alert of 24 December 2021.
5. Dutch personal income tax / employee benefits
a) Treatment of stock options
On the most recent Budget Day (21 September 2021), a legislative proposal was submitted to amend the tax treatment of stock option plans in the Netherlands. The proposal consists of amendments to make it more attractive for employers to grant stock options to their employees by shifting the moment stock options become taxable. Stock options are currently subject to Dutch wage tax on their exercise or sale. The legislative amendment provides that stock options would only become taxable once the shares obtained are tradable by the holder. Subject to certain conditions, an employee can decide to keep the taxation at exercise (this can be beneficial due to a lower valuation). The goal of this proposal is to solve liquidity problems, attract and retain more talented employees, and make the Netherlands more competitive compared with other countries for start-ups and scale-ups. It has been announced that the proposal will be further discussed in a few weeks. The proposed date of entry into force depends on the potential amendments, but will in any case not be prior to 1 January 2023. For more information we refer to our Tax Notes International article of 26 July 2021.
b) New regime for income on savings and investments (Box 3)
Under Dutch tax law, there are three categories of taxable income for Dutch personal income tax purposes, each type of taxable income having its own tax rate and rules (Box 1, Box 2 and Box 3). Assets, such as shares held by an employee, that do not qualify as a substantial interest (generally 5% or more, taxed in Box 2) or a lucrative interest (taxed in Box 1), are taxed on a deemed return, regardless of the actual income or capital gains derived from such assets. In December 2021, the Supreme Court ruled that the current Box 3 levy, notably the fact that it is based on a deemed return, constitutes a breach of the European Convention on Human Rights. The Box 3 levy is currently being reviewed in the Dutch parliament and a legislative amendment to drastically transform the system, potentially on an actual return basis, is expected in the course of 2022.
c) New decree on lucrative interest in international situations
In November 2021, the Dutch State Secretary of Finance published a decree on some international aspects of the lucrative interest regime. Most notably, the State Secretary takes the position that under domestic law, the Netherlands can levy personal income taxation over the entire remuneration (from such lucrative interest) that fully or partially relates to activities performed in the Netherlands, also if not all activities were actually performed in the Netherlands. This position/clarification can be considered broader than the literal reading of the relevant law provision and may be relevant for employees participating in an equity plan and who perform their activities in the Netherlands and abroad. An applicable tax treaty may still provide relief from such taxation.