The Netherlands' Budget Day 2021: the impact of the Dutch 2022 Tax Package on international businesses

NL Law

On Tuesday 21 September 2021 (Budget Day; Prinsjesdag) the Dutch Ministry of Finance published the 2022 Tax Package (Belastingpakket) including the 2022 Tax Plan (Belastingplan).

Certain proposals are relevant to international businesses, including the proposed amendment to the crediting rules with respect to dividend withholding tax (section 1). Following earlier public consultations, the government also published legislative proposals with respect to the Dutch tax treatment of stock option plans (section 2), the introduction of the reverse hybrid rules (section 3) and the amendment of the arm’s length principle (section 4). Various other measures are discussed in section 5.

The proposed measures will in principle enter into force on 1 January 2022.

1. Alignment of Dutch CITA with the ECJ Sofina Case (C-575/17)

As announced on Budget Day 2020 (see our Tax Alert of 17 September 2020) and further to the ruling of the European Court of Justice (“ECJ”) in the Sofina Case (C-575/17) the Dutch government proposes to amend the rules included in the Dutch Corporate Income Tax Act 1969 (“CITA”) for crediting dividend withholding tax and gambling tax against corporate income tax, as of 1 January 2022. Under the current rules, Dutch taxpayers that are in a tax loss position (and accordingly cannot credit dividend withholding tax or gambling tax in a given year) can effectively obtain a refund of dividend withholding tax or gambling tax for the tax withheld but not credited. The current proposal implies that Dutch taxpayers that are in a tax loss position will no longer be able to obtain such refund. Instead, the dividend withholding tax or gambling tax withheld (but not credited) can in principle be carried forward indefinitely and can be credited against corporate income tax due in future financial years (albeit that limitations can apply).

Furthermore, under the current rules included in the Dutch CITA, non-Dutch taxpayers that are in a tax loss position (and accordingly cannot credit dividend withholding tax or gambling tax) are not able to obtain a refund of dividend withholding tax or gambling tax. However, in order to avoid any breach of EU law during the period after the ruling of the ECJ in the Sofina Case (and prior to the entry into force of the amended rules to be included in the Dutch CITA), the Dutch Under-Minister of Finance has issued a policy decree (termed the 'Sofina Case Decree') on the basis of which non‑Dutch taxpayers that are in a tax loss position may under certain circumstances (also) claim a refund of dividend withholding tax or gambling tax. In light of the entry into force of the amended rules for Dutch taxpayers, this policy decree will be abolished per 1 January 2022.

2. Proposed amendments to the Dutch tax treatment of stock option plans

Following consultation (see our Tax Alert of 23 August 2021), a legislative proposal has been published to amend the tax treatment of stock option plans in the Netherlands as per 1 January 2022. Under the current regime, stock options are generally subject to Dutch wage taxes and social security contributions (if applicable) or personal income taxes (in box 1) at the moment the employee exercises or sells the stock options. However, the stock option holder (or the company) does not always have sufficient liquidity to pay the tax claim at the moment Dutch wage taxes or personal income taxes become due. To make it more attractive for employers to grant stock options to their employees, the government proposes to shift the moment the stock options would become subject to tax. This should also make the Netherlands a more attractive location for start-ups and scale-ups.

The legislative proposal accommodates a deferral of the taxable moment for wage tax regarding exercised stock options until the moment the shares become tradable. By linking the taxable moment to the moment the shares become tradable, the former stock option holder would be considered to have the possibility to have sufficient funds available to satisfy its tax liability. Although deferral will be the default, the legislative proposal offers the stock option holder the possibility to nevertheless opt for taxation on exercise, which may be beneficial as increases in value after that moment will not be subject to wage tax.

3. Legislative proposal targeting reverse hybrid mismatches (ATAD2)

As the final part of the implementation of the EU Anti-Tax Avoidance Directive 2 (“ATAD2”) (on which we reported in our Tax Alerts of 9 July 2019 and 1 March 2017), the Dutch government has published a legislative proposal providing for (amongst others) a reverse hybrid rule targeting so‑called “reverse-hybrid” mismatches, which is envisaged to become effective as of 1 January 2022. This legislative proposal follows a consultation document (containing a draft legislative proposal and explanatory memorandum) released by the Dutch Ministry of Finance on 4 March 2021 (which we discussed in our Tax Alert of 9 March 2021).

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 of the proposed reverse hybrid rule, a reverse hybrid entity that is located in or incorporated/established under the laws of the Netherlands will, under certain circumstances, become subject to Dutch corporate income tax. In addition, distributions or (other) payments made by such reverse hybrid entity can under certain circumstances be subject to dividend withholding tax or conditional withholding tax (for interest and royalties). See for further background on the reverse hybrid rule our Tax Alert of 9 March 2021 and clip 2 of our Tax Webinar of 15 April 2021 in which this rule is discussed in more detail.

The reverse hybrid rule that is included in the legislative proposal is broadly in line with the reverse hybrid rule set out in the consultation document, save for certain technical amendments and clarifications. However, one thing to note is that the legislative proposal also includes proposed amendments to the existing 'regular' hybrid mismatch rules (as discussed in our Tax Alert of 9 July 2019). These amendments are effectively aimed at expanding the scope to encompass associated individuals (and personal income tax), whereas these rules currently in principle only apply to associated companies (and corporate income tax). According to the explanatory memorandum, these amendments remedy a technical omission in the existing 'regular' hybrid mismatch rules and are required in order to align these rules with the definitions included in ATAD2 (and ATAD1).

4. Transfer pricing mismatches

The Dutch government has also released the legislative proposal targeting mismatches resulting from the application of the arm’s-length principle (notably, the abolishment of the ‘informal capital’ doctrine). Under the current Dutch interpretation of the arm’s length principle, the pricing of a transaction between related entities is adjusted (either upwards or downwards) if it differs from the pricing agreed by unrelated parties, irrespective of whether the counterparty reports a corresponding adjustment in the opposite direction. The proposal aims to render the arm’s-length principle ineffective in cross-border situations to the extent that it leads to downward profit adjustments in the Netherlands without a corresponding upward adjustment in the counterparty’s jurisdiction. The explanatory memorandum mentions the following example, if an interest for an interest-free loan would actually be 5% based on the at arm’s length principle, the Dutch taxpayer may not deduct the arm’s length interest of 5% if no interest is included in the taxable base at the level of the related party. It is not relevant whether the adjustment is taxed effectively; it just needs to be included in the taxable base. The measure also targets deductions of the same costs by Dutch tax residents and related parties in other jurisdictions. The measure would essentially apply to downward adjustments associated with increased expenses, reduced revenue, or increased value of assets acquired from a related party.

The proposal consists of similar rules for adjustments of assets and liabilities acquired by the taxpayer from a related entity (including by way of contribution or distribution). Such assets may only be included in the tax balance sheet for their higher fair market value if the taxpayer can substantiate that the related entity reports a corresponding upward adjustment to fair market value for profit tax purposes. Similarly, if the arm’s length price of liabilities is lower than the acquisition price, the arm’s length price may only be included in the tax balance sheet if it can be substantiated that, at the level of the counterparty, the corresponding adjustment is taken into account for profit tax purposes.

It should be noted that the proposal contains a certain retroactive effect. The proposal includes restrictive measures for assets acquired by the taxpayer from a related entity in the period from 1 July 2019 until 1 January 2022, to the extent the asset may still be depreciated at the beginning of the tax book year starting on or after 1 January 2022 or a subsequent year.

5. Miscellaneous measures

Tax rate
As already approved by Parliament last year, the current proposal also include an increase of the lower bracket of the corporate income tax rate. As a result of this increase the first EUR 395,000 of taxable profits is taxed at 15% and the remainder of taxable profits is taxed at 25%.

Amendments work-related cost rules wage tax
A number of amendments to the work-related cost rules (werkkostenregeling) have been proposed, including an increase of the budget that can be used for tax-free reimbursements and provisions of work-related cost to employees (vrije ruimte). There was also a proposal to increase this budget for the calendar year 2021; due to COVID-19-related measures, the tax-free budget for 2020 was temporarily increased and could be calculated as follows: 3% over the first EUR 400,000 of taxable wages payable by the employer plus 1.2% over the total taxable wages in excess thereof. The 2022 Tax Plan proposes that for the calendar year 2021 the tax-free budget can be calculated as 3% over the first EUR 400,000 of taxable wages payable by the employer plus 1.18% over the total taxable wages in excess thereof.
Another proposal would accommodate remuneration for costs related to working from home being provided on a tax-free basis by the employer (i.e. without the withholding of wage tax). Due to the coronavirus, employees may incur additional costs associated with working at home (e.g. costs regarding heating, electricity and coffee). It is expected that after the COVID-19 crisis employees will continue to partly work from home. Therefore, it is announced that as per 2022 an employer can grant to its employees a tax free amount for costs related to working from home of a maximum of EUR 2 per (part of) a day that an employee works from home.

Changes to the R&D tax credit
A number of amendments to the R&D tax credit have been proposed. The R&D tax credit may reduce the Dutch wage tax/national insurance contributions payable by employers. The amendments include for example several measures to (further) simplify the request of an R&D declaration (S&O-verklaring) as per 1 January 2022 (e.g. in the event that more R&D declarations are or have been requested). In addition, flexibility will be offered to employers in respect of the reduction for the payable wage tax. Measures will be also taken to clarify that in a R&D notification (mededeling) only costs and expenses can be included for which an R&D-declaration is actually granted.

Credit order for CFC’s foreign profit taxes introduced
As of 1 January 2019, the CFC (Controlled Foreign Company) regime entered into effect as a result of the implementation of ATAD1. If CFC benefits are included in the taxable income of the corporate income tax payer, foreign profit taxes can be credited against Dutch CIT payable, subject to certain requirements. For corporate income tax payers with multiple CFCs, a mandatory credit order for the CFC’s foreign profit taxes has now been introduced. The mandatory credit order entails that the credit will be calculated on the basis of the ascending order of the size of the CFC’s foreign profit taxes (i.e. the smallest amount of foreign profit taxes will first be credited, etc.). The foreign profit taxes that cannot be credited can be carried forward. According to the government, no claims to carry forward foreign profit taxes will be lost due to the introduction of the mandatory credit order.

Decrease in landlord levy
To stimulate the construction of (temporary) accommodation, the Landlord levy (verhuurderheffing) will be decreased as per 1 January 2022. A structural reduction in the landlord levy is proposed for new construction of affordable (rental) residential properties. 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 determined yearly by the municipality where the residential property is situated (subject to a certain maximum value and threshold). In the current proposal the government suggests to structurally reduce the landlord levy by EUR 180 million (meaning a rate of 0.485% instead of 0.527%).

Conditional withholding tax
Although a proposal has not yet been published, the government indicated in the Tax Plan’s cover letter that hybrid entities will no longer be subject to the Dutch conditional withholding tax if none of the beneficiaries has a qualifying interest in the hybrid entity. If enacted, this change would have retroactive effect to 1 January 2021.

In addition, it was confirmed that the proposal (which is expected in the next few weeks) will also include wording to align the permanent establishment definition with the definition for corporate income tax purposes, which includes for example real estate located in the Netherlands. This change would apply as of 1 January 2022.

The above proposals need to be approved by the Dutch Parliament in order to enter into force. The proposals may be subject to change throughout the legislative procedure. Please consider that the potential impact and implication of the proposals should be assessed carefully on a case-by-case basis.