On the one hand, measures are proposed which benefit companies that add real value to the Dutch economy e.g. by abolishing the Dutch dividend withholding tax and reducing the corporate income tax rate to 21%. On the other hand, in line with global developments, measures are proposed targeting the avoidance of taxation by letterbox companies and broadening the corporate income tax base e.g. through a strict Dutch implementation of the EU Anti-Tax Avoidance Directives ("ATAD"; see also our Tax Alert of October 12, 2017).
A summary of the key items of the Letter is set out below.
Earnings stripping rule (ATAD)
The Letter emphasises that the Dutch government wants to introduce an earnings stripping rule more stringent than the ATAD standard. Interest expenses (after having been balanced with interest income) in excess of EUR 1 million (instead of ATAD's EUR 3 million) will be non-deductible to the extent they exceed 30% of the earnings before interest, taxes, depreciation and amortization (i.e. EBITDA), subject to certain further adjustments. It is reiterated in the Letter that the Dutch government is not willing to include a group escape rule or a grandfathering rule for existing loans. The Dutch EBITDA rules are envisaged to enter into force as per January 1, 2019.
Furthermore, to equalize the tax treatment of equity and debt for all sectors of the Dutch economy a 'minimal capital rule' will be implemented for banks and insurance companies by 2020. The contours of this 'minimal capital rule' are not set out in the Letter.
CFC Rule (ATAD)
The Dutch government confirms in the Letter that it wants to introduce a CFC regime revolving around a number of (passive) types of income (e.g. dividends, interest, financial lease income, royalties) for CFCs in Low Tax Jurisdictions (1) or in jurisdictions that are on the EU Black List (2). Such income would have to be taken into account when computing the taxable income at the level of the Dutch holding company, unless the relevant CFC is involved in 'real economic activities' (Model A).
From the Letter it follows that the CFC would in any case be involved in 'real economic activities', if it meets the so-called Relevant Substance Requirements as defined below. The Relevant Substance Requirements were introduced as part of the changes to the Dutch dividend withholding tax rules for holding cooperatives and BVs/NVs (see also our Tax Alert of September 20, 2017). They include, in addition to the current minimum substance requirements (e.g. at least 50% Dutch resident board members and administration/bookkeeping in the Netherlands), that the relevant company incurs wage costs of at least EUR 100,000 and that it has its own office space at its disposal during a period of at least 24 months (the "Relevant Substance Requirements"). The Dutch CFC rules are envisaged to enter into force as per January 1, 2019.
Hybrid mismatches (ATAD)
The Letter does not yet contain a detailed description of the Dutch implementation of the ATAD hybrid mismatch rules, which will amongst others tackle the use of CV/BV structures. The Letter does state, however, that given the complexity of the matter, the Dutch government intends to open an internet consultation procedure for the hybrid mismatch rules as soon as possible in 2018. Internet consultation procedures granting interested parties the opportunity to provide their input on relevant legislative proposals in the field of Dutch tax law are becoming more common in the Netherlands. The hybrid mismatch rules should in principle take effect as per January 1, 2020.
Conditional withholding taxes
To discourage the use of letterbox companies the Dutch government wants to introduce conditional withholding taxes if the recipient of certain payments is resident in a Low Tax Jurisdiction or is resident in a jurisdiction that is on the EU Black List. From the Letter it follows that such withholding taxes would be levied only in respect of intragroup dividend-, interest- and royalty payments. Where necessary the Netherlands may seek to amend relevant tax treaties to effectuate the levy of these withholding taxes.
The rules regarding withholding taxes on intragroup dividend-, interest- and royalty payments will contain an adequate anti-abuse provision to tackle artificial arrangements, according to which payments are not legally but de facto made to recipients in Low Tax Jurisdictions or in jurisdictions on the EU Black List. The Letter does not provide guidance on what would be the actual rate of the envisaged withholding taxes.
The entry into force of the conditional withholding tax on dividend payments is envisaged to coincide with the (partial) abolishment of the Dutch dividend withholding tax as per January 1, 2020. The legislative proposal regarding the withholding tax on intragroup interest- and royalty payments is expected in 2019 and the entry into force thereof is envisaged as per January 1, 2021.
Increased substance in the Netherlands
The Dutch government does already spontaneously exchange information to relevant treaty- and EU countries on Dutch resident intragroup financing- and licensing companies, if such companies do not meet the current minimum substance requirements. The Letter states that the Dutch government wants Dutch international holding companies to be covered by these rules as well. Furthermore, both Dutch resident intragroup financing- and licensing companies as well as Dutch international holding companies should meet the Relevant Substance Requirements in the future. Albeit that the Dutch government intends to introduce these rules soon, no specific date for the entry into force is mentioned in the Letter.
Dutch resident companies wishing to obtain certainty in advance from the Dutch tax authorities by obtaining an advance tax ruling or an advance pricing agreement, will have to meet the Relevant Substance Requirements as well, expectedly as per January 1, 2019.
Stakeholders will be given the opportunity to provide input on this Letter by mid-April 2018. We will provide a further update when relevant developments arise.
1) A Low Tax Jurisdiction is a jurisdiction with no or a low statutory (corporate income) tax rate. The Letter does not address what should be considered 'low' in this respect.
2) The EU Black List currently consists of 9 non-EU jurisdictions (American Samoa, Bahrain, Guam, Marshall Islands, Namibia, Palau, Saint Lucia, Samoa and Trinidad and Tobago) that have been labelled as non-cooperative in light of inter alai tax transparency and fair taxation.