Background of Pillar Two
As of 1 January 2024, large-scale domestic and multinational groups within the EU will face a minimum effective tax rate of 15%, as a result of the agreement reached by the EU Member States on the Directive.
In short, the agreed Directive aims to target both international and domestic groups whose consolidated group revenue exceeds EUR 750 million in at least two of four consecutive years. Based on the Directive, the basic mechanism of the rules is that if the group which is in scope of the Directive is subject to an effective tax rate that does not meet the minimum standard in a country where the group carries out activities, Member States will collect a ‘top-up’ tax by means of either the Income Inclusion Rule or the Undertaxed Payments Rule (potentially in the country where the minimum standard is not met based on the Qualified Domestic Minimum Top-up Tax).
Pending the agreement at EU level, the Dutch government had already initiated steps to avoid delay in the national implementation of Pillar Two. A public consultation was held for that reason from 24 October until 5 December 2022. The text of the draft legislative proposal largely corresponded with the EU Draft Directive, demonstrating the Netherlands’ intention to align its national legislation with the European regulations.
On 31 May 2023, the Dutch government presented the (final) legislative proposal to the Lower House. Broadly speaking, the legislative proposal corresponds with the draft proposal published last October for purposes of public consultation. However, some new rules have been introduced and a further explanation has been given in response to questions from, among others, the Dutch Association of Tax Advisers (NOB).
The introduction of safe harbours
On 15 December 2022, the OECD published guidance on the introduction of safe harbours and penalty relief. The OECD introduced a Transitional CbCR Safe Harbour and permanent safe harbours with respect to Pillar Two for the jurisdictions to incorporate in their legislation.
In the legislative proposal, the Dutch government introduced the Transitional CbCR Safe Harbour, which corresponds with the rule included in the OECD guidance, based on which the top-up tax for a reporting year is deemed zero if:
- the multinational group reports a total revenue in its CbC Report of less than EUR 10 million and profit before tax of less than EUR 1 million; or
- ’the multinational group has – based on a simplified calculation (which Is currently further developed in the Inclusive Framework) – an ETR that is equal to or greater than the transitional rate which applies for the relevant reporting year (i.e. the rate for 2023/2024 will be 15%); or
- the profit of the multinational group before tax is equal to or less than the substance-based income exclusion amount for group entities under the CbCR.
The provisions of the Transitional CbCR Safe Harbour will apply to joint venture entities as if they were group entities of a separate multinational group.
The Dutch government also introduced a permanent safe harbor, which corresponds to the Permanent Simplified Calculations Safe Harbour included in the OECD guidance. Based on the permanent safe harbour, the top-up tax amounts to zero if certain conditions are met which are largely similar to the conditions as set out above in respect of the Transitional CbCR Safe Harbour.
Further explanation regarding the joint and several liability has been provided
The legislative proposal introduces a joint and several liability for group entities of large-scale international and domestic groups based on which each of the group entities that is or was part of that large-scale international or domestic group is liable for the top-up tax in the respective reporting year (in line with the consultation document). The Dutch government included in the explanatory notes that the joint and several liability is not limited to Dutch entities, but that all group entities of such large-scale international or domestic group are liable, since in its opinion this is in line with the international character of the legislation. However, due to a wider range of collection powers, the collector will first hold the Dutch group entities (if any) liable if the designated Dutch taxpayer fails to pay the top-up tax.
Concurrence of Pillar Two with US GILTI/CAMT
The Dutch government mentions in the explanatory notes that it is aware of the (partial) misalignment between the Pillar Two rules and the US GILTI and CAMT, but that neither the Netherlands nor other any member state is in the position to unilaterally remove such misalignment. Some relief has been provided by the recently published OECD guidance, which states that the US GILTI rules are qualified as a CFC regime for Pillar II purposes. This means, in short, that the taxes levied based on the US GILTI rules are included in the calculation of the top-up tax (except for the qualified domestic top-up tax).
The Minimum Tax Rate Act 2024 will first be subject to review and approval by the Lower House, after which it will be sent to the Upper House for approval. Once the legislative proposal has been approved, it will be published in the Official Gazette. Based on the required implementation date in the Directive, the Minimum Tax Rate Act 2024 will likely enter into force on 1 January 2024. It is important now for multinational and large-scale domestic groups to assess the potential impact of Pillar Two on the group and the Dutch entities. More specifically, it is essential to analyse whether Pillar Two could lead to top-up tax being due and which reporting obligations may exist.
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