The Netherlands' Budget Day 2020: the impact of the Dutch 2021 Tax Package on international businesses

First, on Budget Day, Tuesday 15 September 2020 (Prinsjesdag), the Dutch Ministry of Finance published the 2021 Tax Package (Belastingpakket). The Tax Package consists of a set of legislative proposals amending the national tax laws for the upcoming years as well as the announcement of its legislative agenda for the coming months. Second, separate from the Tax Package, the government sent a legislative proposal to the Dutch parliament limiting the deduction of so-called liquidation losses and permanent establishment losses. Third, the government sent its response to the recent report of the advisory committee on taxation of multinationals in The Netherlands (the “Committee Report”, see our Short Read of 18 April 2020) and a letter setting out its views on a new corporate income tax (“CIT”) group regime (replacing the current fiscal unity regime) to the Dutch parliament.

1. Tax Package

Corporate income tax rate
For 2021, the standard CIT rate will remain 25%. This means that the reduction of the CIT rate for 2021 to 21.7% that was included in the 2020 Tax Plan (see our Tax Alert of 18 September 2019) will be reversed. However, the CIT rate for the first bracket of profits will still be reduced from 16.5% to 15%. Additionally, it is proposed to expand the first bracket (that is thus taxed at 15%) from EUR 200,000 to EUR 245,000 for 2021 and to EUR 395,000 for 2022.

Conditional withholding tax on interest and royalties
As part of the 2020 Tax Plan, effective 1 January 2021 a conditional withholding tax on interest and royalties to low tax countries and in certain abusive situations will be introduced (see our Tax Alert of 18 September 2019). Please note that as a result of the increase of the standard CIT rate also the rate for this conditional withholding tax will increase to 25%.

COVID-19-reserve
It is proposed to allow corporate income taxpayers to form a COVID-19-reserve in fiscal year 2019, reducing the 2019 taxable profit, for COVID-19 related losses that they expect to incur in 2020. To add expected 2020-losses to a COVID-19-reserve in fiscal year 2019, certain conditions must be met. For example, the amount of the reserve may not exceed (i) the amount of the profits of 2019 (prior to the formation of such reserve) and (ii) the amount of the overall loss in 2020 (i.e. a taxpayer is not allowed to form a COVID-19-reserve if it expects Corona losses but still would make overall taxable profits in 2020). The COVID-19-reserve must be fully released in the year following in which the reserve was formed.

Example
Dutch BV made a taxable profit of EUR 600,000 in fiscal year 2019. Dutch BV expects to incur a loss of EUR 400,000 due to COVID-19 in 2020. Dutch BV’s expected overall losses for 2020 amount to EUR 500,000. Dutch BV can therefore form a COVID-19-reserve of EUR 400,000 in fiscal year 2019. By forming such reserve, Dutch BV’s taxable profit for fiscal year 2019 is reduced from EUR 600,000 to EUR 200,000. The COVID-19 reserve must be fully released in 2020. Therefore, if Dutch BV indeed incurs an overall loss of EUR 500,000 in 2020, its tax loss is reduced to EUR 100,000 by the release of the COVID-19-reserve.

Taxpayers whose book year is not equal to the calendar year may form the COVID-19-reserve in the last book year that ends in the period of 1 January 2019 to 31 March 2020 (provided that all conditions are met).

Interaction between hybrid mismatch rules and interest deduction limitation rules
The CIT Act currently contains detailed rules on the interaction between the interest deduction limitation rules introduced as a result of ATAD 1 (including earnings stripping rules, see our Tax Alerts of 20 September 2018, 16 October 2018 and 16 November 2018) and as a result of ATAD 2 (the hybrid mismatch rules, see our Tax Alerts of 1 March 2017 and 9 July 2019).

As a general rule interest that is disallowed under the hybrid mismatch rules cannot again be disallowed under the earnings stripping rules but interest that is not affected by the hybrid mismatch rules can be disallowed under the earnings stripping rules.

During the Parliamentary debate on the hybrid mismatches rules it already became clear that application of these “interaction rules” can turn out to be complex, in particular if under the hybrid mismatch rules deductions are not allowed in a particular year but are allowed in a subsequent year (i.e. timing differences as a result of the “dual inclusion income” rule).

A number of very technical amendments are now being proposed to these “interaction rules” both in relation to the earnings stripping rules and the rules on minimum capital requirements for banks and insurance companies (see further below). As a result of these amendments interest deductions which in the end are not affected by the hybrid mismatch rules will be disallowed under the earnings stripping rules.

Amendment of Dutch anti-base erosion rules
The Dutch anti-base erosion rules included in article 10a CIT Act are proposed to be amended as per 1 January 2021. This proposed amendment will limit the possibility (sanctioned by the Supreme Court) that negative interest and currency exchange gains on qualifying base eroding loans can be off set against positive interest and currency exchange losses on such qualifying base eroding loans.

Increase of effective tax rate innovation box regime
To stimulate innovation, corporate taxpayers may, under certain conditions, opt to apply the innovation box regime, which, via a tax base reduction, effectively results in a lower effective tax rate on income generated by innovations developed under the innovation box. As announced on Budget Day 2019 (see our Tax Alert of 18 September 2019), the effective tax rate for profits derived from self-developed intangible assets is proposed to be increased from 7% to 9% as per 1 January 2021.

Amendment minimum capital requirement for banks and insurers and temporary increase bank levy
The minimum capital requirement was introduced as an interest deduction limitation rule for banks and insurers as per 1 January 2020 (see our Tax Alert of 18 September 2019). In short, interest deductions are limited when the loan capital (vreemd vermogen) exceeds 92% of the total assets. In other words, banks and insurers are required to have a minimum level of equity capital of 8% in place to stay out of the scope of this interest deduction limitation rule.

Additional tier 1 capital (“AT1-capital”) is currently considered equity capital for purposes of the minimum capital requirement. A specific statutory rule allowing deduction of payments on AT1-capital was abolished as per 1 January 2019. On 15 May 2020, the Dutch Supreme Court, however, ruled that AT1-capital should be considered debt for Dutch corporate income tax purposes. Accordingly, payments made on AT1-capital are (in principle) deductible for Dutch corporate income tax purposes.

In response to this Supreme Court decision, the 2021 Tax Plan proposes not to take AT1-capital into account as equity capital for the application of the minimum capital requirement and to increase the minimum capital requirement from 8% to 9% as per 1 January 2021. Further, in an attempt to mitigate the incidental budgetary loss over the years 2019 and 2020 due to the Supreme Court decision, it is proposed to temporarily increase the bank levy in 2021 (the current 0.044% rate is proposed to be increased to 0.066% and the current 0.022% rate is proposed to be increased to 0.033%). It is envisaged for 2022 that the bank levy rates will be reduced back to their current rates.

Legislative agenda for the coming months
The Dutch government already announced the following two measures that will be added to the above-mentioned legislative proposals, later in the parliamentary debate:
 

• Introduction of Job Related Investment Credit (“JRIC”, Baangerelateerde Investeringskorting)
  Under the JRIC, taxpayers will be allowed to deduct a percentage of investments made from the wage tax that they collect as wage tax withholding agent. The measure intends to provide relief to employers and is of a temporary nature (i.e. to mitigate the financial effects of the COVID19 pandemic for employers). It is noted that, at the level of the employees, wage withholding tax is credited against personal income taxation. This is not affected by the proposed measure.

• Limitation of tax loss carry forwards
  In response to the Committee Report (see further under 3 below) as per 1 January 2022 tax loss carry-forwards will be limited to 50% of the taxable income exceeding EUR 1 million for that year. At the same time the current six year tax loss carry forward period is abolished so that tax losses can be carried forward indefinitely (but limited to 50% of the taxable income in a financial year).

Furthermore, the Dutch government announced that legislative proposals will be sent to the Dutch parliament in the coming months in relation to the following subjects:

• Amendment of the at arm’s length principal (abolishment of informal capital doctrine)
  Under the current (Dutch interpretation of the) at arm’s length principle, at arm’s length expenses are in principle deductible, regardless of whether the corresponding income is recognized and/or taxed at the level of the recipient (the so-called informal capital doctrine). In response to the Committee Report (see further under 3), a legislative proposal will be sent to parliament in the Spring of 2021 that will deny the deduction of at arm’s length expenses, to the extent that the corresponding income is not taxed at the level of the recipient. The legislative proposal is intended to enter into force as per 1 January 2022. In response to the Committee Report, the Dutch government also considered that international mismatches also occur via a different income allocation (on the basis of the at arm’s length principle) to a PE by the resident state and source state, respectively. However, given the extra complexity of income allocation to PE’s, the Dutch government currently does not see a need to unilaterally introduce measures in this respect. 

• Alignment of Dutch CIT Act with the European Court of Justice (“ECJ”) Case Sofina (C-575/17)
  As a consequence of the ruling of the ECJ in the Sofina case (C-575/17) of 22 November 2018, the rules included in the Dutch CITA for crediting dividend withholding tax and gambling tax against corporate income tax will be amended. The current rules allow Dutch taxpayers that are in tax loss position (and accordingly cannot credit dividend withholding tax or gambling tax) effectively to obtain a refund of dividend withholding tax or gambling tax. Such refund at present is not available to non- Dutch taxpayers that are in a loss position. In light of the Sofina case, Dutch companies in a loss position will no longer be able to obtain a refund. Instead, the tax withheld will be carried forward and can be credited against corporate income tax due in future financial years. The legislative proposal is intended to enter into force as per 1 January 2022. To avoid any breach of EU-law in the intermediate period (prior to the entry into force of the legislative proposal) further administrative guidance will be issued shortly.

Finally, the government announced the investigation of a budget neutral introduction of a deduction on equity, accompanied by the tightening of the Dutch earnings stripping rules in order to achieve a more balanced tax treatment of capital (equity) and debt. No concrete legislative proposals have been announced in this respect.

Amendments work-related cost rules Payroll tax
Several amendments to the work-related cost rules (werkkostenregeling) are proposed. This includes the codification of the approval previously included in the Decree Emergency Measures COVID-19 that increases the budget that can be used for tax-free reimbursements and provisions of work-related cost to employees (vrije ruimte) for 2020. For background, as per 1 January 2020 the tax-free budget was, in short, calculated as follows: 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. The Decree Emergency Measures COVID-19 approved that for 2020 the tax-free budget may be calculated as follows: 3% 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. The 2021 Tax Plan proposes to codify this temporary increase of tax-free budget. In addition, it is proposed to limit the tax-free budget as per 1 January 2021 again by lowering the 1.2% over the total taxable wages of the company in excess of EUR 400,000 to 1.18%.

Legislative proposal introducing a CO2 levy for industry
In pursuance of the Paris Climate Agreement, a CO2 levy for industrial production and waste incarceration is proposed to be introduced as per 1 January 2021. The proposal is largely in line with the EU Emissions Trading Scheme (“ETS”) - the existing system for pricing of CO2 at EU level – and will be introduced alongside EU ETS. The statutory rate, in short, is proposed to amount to EUR 30 per ton of CO2 in 2021. It is envisaged that the rate will increase on a straight-line basis with EUR 10.56 per year through 2030, causing the rate to amount to EUR 125 per ton of CO2 in 2030. The rate development will however be subject to recalibrations. The levy that should be paid per ton of CO2 is however not the statutory rate, but the rate minus the EU ETS price in that year, unless the EU ETS price is higher than the CO2 rate in that year; in that case a nil tax return should be filed. Further, part of the CO2 emissions are exempt in the form of dispensation rights. These exemptions will decrease on a straight-line basis through 2030.

Increase and diversification of of real property transfer tax rates
Currently real property transfer tax (“RPTT”) is levied at a reduced rate of 2% upon the acquisition of residential properties and a general rate of 6% for all other real property.

In the 2020 Tax Plan it was already announced that as per 1 January 2021 the general tax rate will be increased to 7% (see our Tax Alert of 17 September 2020). It is now proposed (effective 1 January 2021) to further increase the general tax rate to 8%, to introduce a (temporary) RPTT exemption for “starters”, i.e. persons in the age of 18 to 35 buying their first primary residence and to apply the reduced 2% rate to all other individuals buying a primary residence. All other acquisitions of real property (whether residential or not) will be subject to 8% RPTT. These amendments are particularly relevant for real estate investors and individuals buying a vacation home.

It is also proposed to amend a special rule which is aimed at avoiding double payment of RPTT if real property is transferred multiple times within a six month period. Instead of applying a reduced tax base (often resulting in a full or nearly full RPTT exemption), only a credit for earlier paid RPTT will be allowed. This change is particularly relevant in case the 2% rate applied to the first transfer whereas the 8% rate applies to the subsequent transfer.

Decrease of the landlord levy
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 on annual basis by the municipality where the residential property is situated (subject to a certain maximum value and threshold). As part of a broader package to temporarily reduce rents for tenants who have financial difficulties as a result of the COVID-19 crisis, it is proposed to reduce the tax rate from 0.562% to 0.526% effective 1 January 2021. 

2. Legislative proposal to limit liquidation losses and permanent establishment losses

Under the current rules, a shareholder that holds at least 5% of the shares in a Dutch company is allowed to deduct a so-called liquidation loss, upon the completion of the dissolution of such company. This liquidation loss broadly equals the total capital invested in that company by the shareholder minus any liquidation proceeds received. Similar rules exist upon the dissolution of a permanent establishment (“PE”).

During a recent parliamentary debate several Dutch based multinationals acknowledged that as a result of these rules they have not been paying Dutch corporate income tax over an extended period of time. This led several Dutch members of parliament to draft a legislative proposal to limit the deduction of liquidation losses and permanent establishment losses. The Dutch government now issued a legislative proposal largely in line with the earlier (draft) proposal. The legislative proposal essentially limits the deduction of liquidation losses and PE losses if such losses exceed a threshold of EUR 5 million.

The legislative proposal includes the following additional requirements (i.e. on top of the existing requirements) that should be met to be able to deduct liquidation losses exceeding the threshold of EUR 5 million:

1. Quantitative requirement
2. Territorial requirement
3. Temporal requirement

Ad 1 Quantitative requirement
The shareholder/taxpayer must have decisive control to influence the decision making of the company that is liquidated. Usually this criterion should be met if the shareholder has at least 50% of the statutory voting rights in the company.

Ad 2 Territorial requirement
The company that is liquidated must be a resident of another EU member state, the European Economic Area or a state with whom the EU has concluded an association treaty that includes a provision similar to article 49 Treaty on the Functioning of the European Union. According to the explanatory memorandum, currently only the association treaty with Turkey includes such provision. Liquidation losses of companies located in other states no longer qualify.

Ad 3 Temporal requirement
Whether a liquidation loss may be claimed should be determined directly prior to the completion of the liquidation of the company. At that moment, the quantitative and territorial requirement must be met during a five-year look-back period. The purpose of this requirement is to avoid an easy access to the liquidation loss regime through a restructuring shortly before the completion of the liquidation of a company.

Several, rather complex, anti-abuse rules are included in the legislative proposal to avoid circumvention of said three requirements using intermediary holding companies.

Dissolution of a PE
With respect to the dissolution of PE’s, similar to the liquidation loss regime above, a territorial and temporal requirement are proposed. Due to the nature of a PE, a quantitative requirement is not applicable. A loss resulting from the dissolution of a PE, in excess of the EUR 5 m threshold remains deductible if it relates to the following two types of investments:

1. a portfolio investment in real estate located in a third state.
2. a portfolio investment as a participant in an enterprise located in a third state.

Entry into force and transitional rules
The legislative proposal is expected to enter into force for financial years starting on or after 1 January 2021. Transitional rules are included for the liquidation loss regime, most importantly in relation to the temporal requirement (but not in relation to the qualitative and territorial requirement). A liquidation loss may still be claimed under the transitional rules if the activities have ceased before 1 January 2021 or a decision to do so has been taken before 1 January 2021, whilst the liquidation is completed ultimately on 31 December 2023. Taxpayers can request advance certainty regarding the application of the liquidation loss regime and the PE-loss regime.

3. The Dutch government's response to the Committee Report and its views on a new group regime

The Committee Report
As discussed in our Short Read of 18 April 2020, the Committee Report provided several unilateral recommendations to achieve that profit making Dutch multinationals would in fact also pay corporate income tax. To accomplish that goal the committee proposed amongst others to limit the annual utilization of tax carry forward losses and to end the so-called informal capital doctrine, which proposals were made part of the legislative agenda for the coming months (see under 1 above). The committee also made other recommendations such as to: (i) limit the deductibility of shareholder costs, (ii) investigate a limitation of the deductibility of royalty payments and (iii) limit the deductibility of interest, shareholder costs and/ or royalty payments together to a maximum percentage of the taxable profits. These recommendations are not yet included in the legislative agenda, as according to the Dutch government, further investigation is required as to the nature and size thereof.

In addition, the Committee Report also proposed certain (other) unilateral measures to eliminate international mismatches by way of:

1. making the CFC-regime more effective; and
2. limit the tax depreciation of assets transferred to Dutch group entities to the extent that the depreciation relates to not-realized gains hidden in the asset that were not taxed sufficiently.

The Dutch government currently also does not see a reason to introduce the above unilateral measures proposed in the Committee Report.

According to its response, the Dutch government favors public country-by-country reporting and will commit itself in an international context to make arrangements to achieve that goal. The government also acknowledges the importance of gaining insight in the commercial figures of companies in order to understand the effective tax rate that companies report.

In relation to the application of the Dutch participation exemption by Dutch intermediary holding companies with no/low substance, the response states that currently it is being investigated whether as per 2022 legislation can be introduced to enable the exchange of information with other jurisdictions. Such information exchange currently is already in place for no/low substance Dutch resident conduit companies (whose main activity consists of receiving/paying interest and royalties). No additional substance requirements are currently being considered.

A new Dutch CIT group regime
On 22 February 2018, the ECJ effectively allowed taxpayers to cherry pick benefits from the Dutch CIT fiscal unity regime (see our Tax Alert of 22 February 2018 and our Tax Alert of 24 April 2018), which ruling was later followed by the Dutch Supreme Court.

In order to mitigate the budgetary impact of these rulings, emergency legislative repair measures (spoedmaatregelen) were introduced with retroactive effect until 1 January 2018 (see our Tax Alert of 11 June 2018). When the proposal for the emergency legislative repair measures was published, the Dutch government already announced that over time the Dutch CIT fiscal unity regime would be replaced by a new Dutch CIT group regime. In this respect, a public consultation document was published by the Dutch State Secretary of Finance on 17 June 2019 that included four alternatives for such new Dutch CIT group regime on which interest parties were invited to comment.

In the letter that was sent to Dutch Parliament on Budget Day, the government, inter alia, summarizes the comments received on the public consultation document, further discusses the four alternatives for the new Dutch CIT group regime that were already included in the public consultation document, provides broad outlines of a possible new Dutch CIT group regime and describes next steps.

From the letter it might be inferred that the Dutch government favours two alternatives that were included in the public consultation document:

• continuation of the current Dutch CIT fiscal unity regime, as amended by the emergency legislative repair measures and, if required, additional repair measures; or
• implementation of a new group relief, group contribution or income pooling regime which will not be based on full consolidation of profits and capital of the members of the Dutch CIT group (as opposed to the current Dutch CIT fiscal unity regime).

However, the other alternatives are not yet definitely set aside and no final decision on the design of the new Dutch CIT group regime has been made. The Dutch Government leaves the submission of a legislative proposal for a new Dutch CIT group regime, and thus a decision on the design of the new Dutch CIT group regime, to the next Dutch government (which will be formed after the Parliamentary elections of 17 March 2021).

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.