The proposals that may impact your business include the introduction of a conditional withholding tax on interest and royalty payments (section 2) and the transposition of the CJEU’s recent interpretation of ‘abuse’ into the Netherlands' corporate income tax and withholding tax levy, on dividends, interest and royalties (section 3). Also, a national, uniform definition of a ‘permanent establishment’ ("PE") is introduced (section 4). Further, the earnings stripping rules are slightly changed and a minimum capital rule is introduced for banks and insurers (section 5). Entrepreneurs should also take careful notice of the "quick fixes" in VAT with respect to EU-trade (section 6). Various other measures are proposed which may affect international business (section 7).
Most of the proposed measures will enter into force on 1 January 2020. The conditional withholding tax on interest and royalty payments, however, will be effective as per 1 January 2021.
Note that the relevant bills are yet to be approved by the Dutch Parliament and may therefore be subject to change. We further emphasize that the potential impact and implications of the proposals should be carefully assessed on a case-by-case basis. The bills in relation to the implementation of the ATAD2 (see our Tax Alert of 9 July 2019) and DAC6 ( Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements) have been sent to the Dutch parliament just before the parliamentary summer recess and are scheduled to be debated along with the proposals sent on budget day.
1. Conditional withholding tax on interest and royalty payments
As announced by the Dutch government before (see our Tax Alerts of 20 September 2018 and 16 October 2018), as per 1 January 2021 a conditional withholding tax ("CWHT") is proposed to be introduced on intragroup interest and/or royalty payments to low tax jurisdictions ("LTJ's") and in cases of abuse. The applicable tax rate will equal the standard corporate income tax rate, which, for 2021 will expectedly be 21.7%.
Essentially the aim of the CWHT is to discourage the use of the Netherlands for channeling interest and royalties to LTJ's (e.g. the use of letterbox companies), making use of the large Dutch double tax treaty network, with generally speaking low interest and royalty withholding tax rates on incoming payments in combination with the absence of a withholding tax on outgoing interest and royalty payments. However, the legislator specifically stated that (a) CWHT can also be triggered in case of real substance in the Netherlands (since also companies with real substance just as well may channel there income to LTJ's) and (b) that CWHT can be applied in addition to other (anti-abuse) provisions, potentially triggering double (or more) taxation.
CWHT is restricted to payments between related companies
CWHT applies only to interest/royalty payments between related companies. Companies are related to one another if (a) the recipient company has a qualifying interest in the interest/royalty paying company or if (b) the interest/royalty paying company has a qualifying interest in the recipient company or (c) if a third company has a qualifying interest in both the recipient company as well as the interest/royalty paying company. Companies can also be related if they are considered a cooperating group that jointly, directly or indirectly have a qualifying interest in a company. An interest in a company is considered a qualifying interest if directly or indirectly the influence in the decision making is such that the decisions of a company and thus its activities can be determined. In any case, an interest is qualifying if it represents more than 50% of the statutory voting rights in a company.
Low tax jurisdictions
The definition of a LTJ for CWHT purposes is consistent with the existing definition included in the Dutch CFC-regime (following the implementation of the EU ATAD1;see our Tax Alerts of 20 September 2018 and 16 November 2018). The LTJ's are listed in a ministerial decree, i.e. jurisdictions (a) with a profit tax applying a statutory rate of less than 9% (updated annually based on an assessment as per 1 October of the year prior to the tax year) or (b) included on the EU list of non-cooperative jurisdictions (see our Tax Alert of 25 April 2019 for an overview of the current list of LTJ's). To the extent a LTJ is a jurisdiction with which the Netherlands has concluded a double tax treaty, it will be deemed no LTJ until three calendar years have passed (since the date the jurisdiction was first included in the list of LTJ's). The three years period aims to give both tax treaty partners sufficient time to renegotiate the existing double tax treaty.
Scope of CWHT: payments to low tax jurisdictions
The CWHT focusses primarily on direct interest/royalty payments to LTJ's by Dutch resident tax payers as well as non-resident tax payers with a Dutch PE. Besides these direct payments to a LTJ, CWHT is in principle also triggered in case of (a) payments by a Dutch tax payer to a foreign group company that is not a resident of a LTJ but has a PE in LTJ to which the payment should be allocated (b) payments to an entity in a LTJ that is considered transparent for Dutch tax purposes and non-transparent in the state of the underlying participants in the entity or (c) payment to an entity in a LTJ that is considered non-transparent for Dutch tax purposes and transparent in the state of the underlying participants in the entity.
Scope of CWHT: abusive situations
Besides direct payments to a LTJ, to avoid circumvention through indirect payments to LTJ's via conduit companies, CWHT is also due in case of interest/royalty payments that are considered abusive. In this respect the existing rules for the determination, as proposed to be amended as a consequence of the ECJ’s case law (see section 3) of whether or not dividend payments are considered abusive, will also apply to interest/royalty payments.
The CWHT is due on gross interest/royalty payments after adjustment of such payments on the basis of the at arm's length principle (i.e. payments should match those between third parties in similar circumstances). For example, in case of a not at arm's length interest free loan provided by a company in a LTJ, CWHT applies to the adjusted deemed interest payments.
The term 'Interest' should be interpreted broadly and includes any consideration in relation to a loan agreement. Besides a typical loan agreement the term 'loan agreement' also comprises for example financial lease agreements. The term 'royalty' is defined in line with the existing definition included in the current OECD Model Tax Convention and includes (a) payments in consideration of the use or the right to use any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or (b) for information concerning industrial, commercial or scientific experience.
The rate for the CWHT equals the highest Dutch corporate income tax rate. Currently, the highest Dutch corporate income tax rate as per 1 January 2021 (the proposed entry into force of the CWHT) is 21.7%. CWHT is triggered upon the realization of the income. That is to say: the payment, settlement or disposition of the interest/royalty income or in case it is recoverable and collectable. Interest/royalties that have accrued during a financial year but are not realized, are deemed to be realized on 31 December of the respective financial year. If CWHT has been withheld, within one month after the ending of the calendar year, a tax return should be filed and the withholding tax should be paid to the Dutch tax authorities.
Several procedural rules are being proposed to, for example, enable the tax inspector to collect information, issue additional assessments and collect CWHT. Under certain circumstances, directors of the tax payer (i.e. the recipient of the income) or the withholding agent (i.e. the company making the interest/royalty payment) can be held jointly and severally liable for unpaid CWHT. Please note that CHWT cannot be credited against corporate income tax payable under the Dutch substantial interest rules.
2. Anti-abuse provisions
Substance and ‘abuse’: impact on CFC-rule, substantial interest rule and withholding tax exemption
Recently introduced anti-abuse provisions (part of the substantial interest rule and withholding tax exemption and controlled foreign companies rules) will be amended to –according to the legislator- align them with the ECJ’s interpretation of ‘abuse’ and ‘avoidance’ in its cases of 26 February 2019 on the EU Parent-Subsidiary Directive (PSD, joined cases C-116/16 and C-117/16) and on the Interest and Royalties Directive (IRD, joined cases C-115/16, C-118/16, C-119/16 and C-299/16). In these cases, the ECJ ruled on 'tax avoidance and abuse' with a particular focus on ‘beneficial ownership’.
On 14 June 2019 the Dutch State Secretary of Finance already expressed its interpretation of the cases and the possible implications thereof for Dutch tax practice. (See our Tax Alert of 18 June 2019). The legislative proposal is largely in line with these earlier statements and states that the assessment whether a structure is abusive of nature is to be made by analysing all relevant facts and circumstances of the respective case and should be determined on a continuous basis. The current substance requirements will no longer function as ‘safe harbour’ rules but divide the burden of proof between the taxpayer and the tax authorities. Meeting the substance requirements will lead to the presumption of 'non-abuse' which is respected, unless the tax authorities provide evidence to the contrary. Furthermore, if the substance requirements are not met, the tax payer is still allowed to provide other proof that the structure at hand is not abusive.
According to the explanatory memorandum legal certainty in advance with respect to the application of the anti-abuse rules may be obtained via an advance tax ruling, provided that the conditions of the revised international tax ruling practice are met. This, amongst others, requires that the taxpayer has sufficient ‘economic nexus’ with the Netherlands, the sole or decisive motive of the relevant structure is not to avoid Dutch or foreign taxes; and no companies are involved in the relevant transaction or structure which are included on the Dutch list of so-called [LTJ and/or the EU list of non-cooperative jurisdictions (See our Tax Alert of 1 July 2019).
Increased substance applicable for taxes on outbound dividend also proposed for services companies
The legislator has expressed the intention to increasingly engage in the exchange of information to other states in case an entity has insufficient substance in the Netherlands. To this extent, for information exchange purposes, the substance requirements for ‘service companies’ (dienstverleningslichamen) will, essentially, be brought in line with those as applied for corporate income tax and withholding tax purposes. This may lead to an increased need for substance.
3. Permanent Establishment definition
It is proposed to include a definition of a PE in line with the revised PE concept under the 2017 OECD Model and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS ("MLI", i.e. including the explicit anti-splitting rule, anti-fragmentation rules and the rules regarding commissionaire PEs) in the Corporate Income Tax Act 1969 ("CITA"), Personal Income Tax Act 2001 and the Payroll Tax Act 1964. Note that for the latter, the definition of the North Sea Mining Area (Noordzeewinningsgebied) will be amended to be brought in line with the existing general practice for Dutch offshore PEs.
In case a double tax treaty applies, the term PE should be interpreted in line with the PE definition included in the treaty, taking into account the effect of the MLI. In case no double tax treaty applies, the new domestic PE definition applies.
4. Interest deduction limitation rules
Minimum capital requirement of 8% for banks and insurers
For Dutch corporate income tax purposes, it is proposed to limit interest deductions for banks and insurers in case, in short, the loan capital ('vreemd vermogen') exceeds more than 92% of the total assets. In other words, banks and insurers are under the proposed legislation required to have a minimum level of equity capital in place of 8% to stay out of scope of the proposed interest deduction limitation rule. The equity ratio is determined on 31 December of the preceding book year of the taxpayer. In this respect it should be noted that the interest limitation is based on the leverage ratio as included in regulatory guidelines (e.g. Regulation (EU) no 575/2013 of the European parliament and of the council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation, (EU) No 648/2012). The proposal largely follows a public online consultation that took place earlier this year.
Earnings stripping rules
Under the recently introduced earnings stripping rules in the CITA, a taxpayer is under certain circumstances allowed to carry forward an amount of non- deductible interest expenses to future financial years. The amount that is available for carrying forward is formalised in a decree, which is open to objection and appeal. It is now proposed that this decree may be revised by the tax authorities in certain circumstances (e.g. in case of bad faith). Furthermore, it is proposed to issue a (formal) decree in a year the taxpayer has sufficient tax capacity to use interest expenses that have been carried forward. The rules are inspired by the loss-relief rules currently already in place.
The ‘quick fixes’ for simplifying trade
Following the Council Directive (EU) 2018/1910 of 4 December 2018 and certain council (implementation) regulations, EU member states are obliged to adopt certain rules aimed at harmonizing and simplifying trades in cross-border situations between EU entrepreneurs (so-called “quick fixes”). These quick fixes (which apply from 1 January 2020) in short relate to:
- Call-off stock. This fix provides for a simplified and uniform treatment for call-off stock arrangements, where a supplier transfers stock to a warehouse at the disposal of a known VAT entrepreneur in another Member State.
- Chain transactions. To enhance legal certainty in determining the VAT treatment of chain transactions (i.e. successive deliveries of the same goods involving one cross-border transport), the quick fix establishes uniform criteria within the EU.
- Proof of cross-border trade. As a result of this quick fix, a common framework is established for the documentary evidence required to claim a VAT exemption for intra-EU supplies.
- VAT identification number. To benefit from zero rate for the cross-border trade, the quick fix entails that the identification number of the customer will become an additional condition.
As per 1 January 2020, the VAT rate of 9%, i.e. the lower rate, will apply to electronically supplied publications (such as books, newspapers or periodicals). This rate currently already applies to publications on any physical means of support.
6. Miscellaneous measures
Corporate income tax rate
For 2020, the standard CIT rate will remain at 25%. However, the CIT rate for the first bracket of EUR 200.000 in profit will be reduced from 19% to 16.5%. For 2021, the rates should be lowered to 15% and 21.7% respectively.
Increase of general transfer tax rate
It is proposed to increase the real property transfer tax rate from 6% to 7% in case of the acquisition of non-residential properties (according to the legislative proposal effective 1 January 2020 but according to the explanatory memorandum effective 1 January 2021). The acquisition of residential properties will still benefit from the 2%-rate.
Decrease of the landlord levy
To stimulate the construction of (temporary) dwellings, the Landlord levy (verhuurderheffing) will be decreased as per 1 January 2020. Two measures are proposed: (i) a structural reduction of the landlord levy for new construction of affordable (rental) residential properties in scarcity areas, and (ii) a temporary exemption from the landlord levy for the realization of temporary housing (in the period 2020-2024). Currently, landlords renting out more than 50 residential properties in the "regulated" sector (sociale huur) are subject to the “landlord levy”. This levy amounts to a small percentage of the value of the residential properties, which value is yearly determined by the municipality where the residential property is situated (subject to a certain maximum value and threshold).
Disclosure of fines imposed on intermediaries
Effective 1 January 2020, it is proposed to disclose (tax) fines imposed on intermediaries (such as tax advisors, lawyers, notaries and accountants) for offences committed after the proposal has entered into force. The aim of the proposal is to inform the public about intermediaries that (in short) facilitate tax avoidance. The fine will only be become public once the decision to disclose the fine is final. According to the proposal, the fine will not become public if the impact of such a publication will be disproportional. Information that will be published includes amongst others: (i) the name of the offender, (ii) the legal basis of the fine, (iii) the amount of the fine and (iv) the place where the offence has been committed. The information will be published on the website of the Dutch tax authorities for a period of five years.
Increase budget work-related cost rules Payroll tax
A number of amendments to the work-related cost rules (werkkostenregeling) is proposed, including but not limited to an increase of the budget that can be used for tax-free reimbursements and provisions of work-related cost to employees (vrije ruimte). As per 1 January 2020, this tax-free budget will, in short, be calculated as 1.7% over the first EUR 400,000 of taxable wages of a company plus 1.2% over the total taxable wages of that company in excess thereof.
Changes to the R&D tax credit
A number of amendments to the R&D tax credit are proposed. The R&D tax credit may reduce the Dutch wage tax/national insurance contributions payable by employers. The amendments, include for example an increase of the maximum number of moments per calendar year during which a R&D certificate - required to claim the R&D tax credit - can be applied for to 4 (instead of 3).
Tonnage tax regime
In order to comply with EU state aid rules, the tonnage tax regime will be amended with respect to time or travel charter, the flag requirement and activities other than the carrying of goods or persons in international maritime traffic.
7. Other tax measures announced in the 2020 Tax Plan
Amendment regime for liquidation losses and cessation losses
The legislator announced its intention to amend the liquidation loss regime and the cessation loss regime as per 1 January 2021, but no proposal to that effect has been published yet. Resident corporate taxpayers performing economic activities in another jurisdiction either directly via a PE or indirectly via a subsidiary are eligible to relief from international double taxation by means of an exemption method, i.e. the object exemption and the participation exemption regime respectively. Foreign losses are accordingly exempt, unless they arise from the liquidation of a subsidiary or the cessation of a PE. Such losses are currently taken into account for Dutch corporate income tax purposes via respectively the liquidation loss regime (liquidatieverliesregeling) and the cessation loss regime (stakingsverliesregeling). It is expected that the application of these regimes will be limited to EU/EEA-situations as of 1 January 2021 and that further restrictions will be imposed.
Increase effective tax rate innovation box regime
The legislator announced its intention to increase the effective tax rate for profits derived from self-developed intangible assets from 7% to 9%. This change should probably take effect as per 1 January 2021, but no proposal to that effect has been published yet. To stimulate innovation, corporate taxpayers may opt to apply the ‘innovation box regime’ which, via a tax base reduction, effectively, results in a lower effective tax rate on the innovation-related profits. Conditions do apply.
Annulment payment discount if tax is paid at once
The legislator announced its intention to abolish the discount that is currently provided to corporate taxpayers that pay the corporation income tax due at once. This annulment should probably take effect as per 1 January 2021, but no proposal to that effect has been published yet.
Please contact your Stibbe tax lawyer to receive more detailed information about the Tax Package or to discuss the implications for your business.