The Netherlands' Budget Day 2023

In this Tax Alert we will discuss certain proposals that are relevant to international businesses and their employees.

Content:

1. Legislative proposals regarding the Dutch tax classification rules for Dutch and foreign entities
2. Abolishment of the real estate FII regime
3. Limiting the scope of the RETT concurrence exemption for share deals
4. Additional measures to prevent dividend stripping
5. Amendments in the lucrative interest scheme
6. Legislative proposal for Minimum Tax Act 2024 (Pillar Two)
7. Other measures

Unless indicated otherwise, the proposed measures will, if adopted by the parliament, enter into force on 1 January 2024.

1. Legislative proposal regarding the Dutch tax classification rules for Dutch and foreign entities

The Dutch tax classification of foreign entities (including partnerships) as either transparent or non-transparent for Dutch direct tax purposes is currently based on a comparison of certain civil law characteristics of the respective foreign entity and existing Dutch entities (the comparison method). However, the comparison method does not always provide a satisfactory solution as not all foreign entities have a Dutch equivalent. Furthermore, as the current Dutch tax classification rules are rather unique and deviate from international standards, the Dutch tax classification rules often result in hybrid mismatches. This is mainly caused by the very specific criterion for a Dutch (commanditaire vennootschap, or “CV”) whether accession or substitution of a limited partner requires unanimous consent of all (general and limited) partners. Only if such unanimous consent is required and in practice obtained (consent requirement),  a CV is considered transparent for Dutch direct tax purposes. As a result, comparable foreign limited partnerships, generally transparent in the jurisdiction where they are established, are often non-transparent from a Dutch tax perspective.

Following an initial proposal published for consultation in 2021 (see our earlier blog in this respect), the Dutch government proposes as from 1 January 2025 to amend the Dutch tax classification rules for Dutch and foreign entities.

The proposed classification of the Dutch “open” CV

Currently, as also set out above, a CV can be qualified as either tax transparent (“closed” CV) or non-transparent (“open” CV) depending on its terms and conditions in respect of the consent requirement. In case no unanimous consent is required or in practice obtained, the CV is classified as a non-transparent entity for Dutch direct tax purposes (“open”).

It is now proposed to abolish the consent requirement and no longer make such distinction between open and closed CVs. This amendment means that all CVs will be classified as transparent starting from 1 January 2025. The current “open” CVs will become tax transparent, which results in a deemed taxable moment both for the CV and its partners (i.e. CVs will be deemed to have disposed all their assets (including goodwill) and liabilities to their participants at fair market value). Several transitional rules and facilities are available to defer tax (inter alia a roll-over facility, a share for share merger and a deferred payment facility of maximum ten years). Any restructurings using such facilities may be executed in 2024 to mitigate the tax triggering moment on 1 January 2025 (the RETT exemption only applies in structures which were already in existence on 19 September at 15:15). Please note that the same tax consequences may apply for foreign entities that are comparable with a CV and which are resident in the Netherlands or hold Dutch assets.

The proposed classification of foreign entities

The amendments to the “open” CV may already solve certain hybrid mismatch situations with foreign entities. This will, however, mainly help foreign entities which are comparable to a CV. It is therefore also proposed to introduce two supplementary methods to classify foreign entities. As of 2025, the comparison method will only apply to foreign entities with a Dutch equivalent. For situations where the comparison method does not provide a clear solution, the following rules will apply:

• Foreign entities without a clear Dutch equivalent which are residing in the Netherlands are deemed to be non-transparent (fixed method); and
• Foreign entities without a clear Dutch equivalent residing outside the Netherlands are classified as non-transparent if, according to the tax regulations of their resident state, they are considered a taxpayer (regardless of whether any taxes are levied). Foreign entities which are not considered independent taxpayers in their resident state, are classified as transparent for Dutch direct tax purposes (symmetrical method).

Guidance will follow on how to apply these tests and when a foreign entity can be considered to be similar to a Dutch equivalent, but at this moment it is not yet clear what this guidance will entail.

Dutch classification rules for funds for joint account

In addition to the above proposed changes to the CV, the following amendments have been proposed in a separate proposal with respect to Dutch funds for joint account (fonds voor gemene rekening, or “FGR”). A FGR is a contractual entity and does not have legal personality. Currently, a FGR can be qualified as either tax transparent (closed FGR) or non-transparent (open FGR) depending on its terms and conditions in respect of the repurchase and transferability of the participations.

Under the legislative proposal, as from 1 January 2025, a FGR will only be considered non-transparent if: (i) it is considered as an investment fund or fund for collective investment in securities within the meaning of article 1:1 of the Financial Supervision Act (Wet op het financieel toezicht) and (ii) its participations are tradable. For the first condition, it is amongst others key that the capital of the FGR is raised from a wide range of investors and the fund (or its manager) has a license to provide financial services based on the AIFM-directive or the UCITS-directive, or qualifies as an entity that is exempt from these directives. With respect to the second condition, in case the participations of a FGR can solely be repurchased by the FGR, the participations are not considered to be tradeable.

Due to these proposed changes to the definition of a FGR, many FGRs that are now considered non-transparent will no longer meet the conditions as of 1 January 2025 and will be considered tax transparent by the Netherlands. This legislative change may therefore have a large impact on certain fund structures. Currently, the open FGR is mostly used for private and family-owned investment vehicles. These FGRs will most likely no longer meet the requirements for a qualifying FGR and will become tax transparent. Such reclassification will trigger a deemed taxable moment for both the FGR and its participants. Several transitional rules and facilities are available similar to the transitional rules mentioned above for the CVs.

Changes to vbi-regime

The changes to the definition of FGR, are also relevant for the application of the tax-exempt investment institution regime (vbi-regime) which fully exempts a taxpayer from corporate income tax and dividend withholding tax. Only NVs and FGRs (or a qualifying equivalent hereof) can apply, assuming other conditions are met, for this vbi-regime. In line with the changes to the definition of a FGR, the vbi-regime will from 1 January 2025 only be open to qualifying investment funds or UCITS that offer their interests to a wide range of investors. This means that it will no longer be possible to apply this beneficial regime for private investments.

2. Abolishment of the real estate FII regime (vastgoed FBI-regime)

The legislative proposal for the so-called “real estate measure” for Fiscal Investment Institutions (FII; fiscale beleggingsinstelling) has been published on 2023 Budget Day. We refer to our 2022 Budget Day Tax Alert for more background information. The legislative proposal should enter into force as of 1 January 2025.

In short, last year it was announced that FII’s would no longer be allowed to directly invest in any real estate and as a result the “financing requirement”, which provides that financing of the investments with debt may not exceed 60% of the book value of the real estate, would also be abolished. Contrary to the earlier announcement, the following changes have been made:

1. FII’s are not allowed to directly invest in Dutch real estate, but are allowed to directly invest in non-Dutch real estate;
2. As a result of the change under 1, the financing requirement will no longer be abolished for non-Dutch real estate, but will be amended to cater for the fact that it only applies to non-Dutch real estate. The foregoing also applies for certain investment fictions that exist in the current regime;
3. FII’s may, in accordance with the announcement in 2022, indirectly invest in Dutch real estate through a subsidiary that is a regular taxpayer, however the earlier announced prohibition to manage such subsidiary has been abolished. 

Following the new “real estate measure” a temporary RETT exemption has been introduced for existing FII’s that envisage to convert to a tax transparent structure before the effective date of the “real estate measure” (i.e. 1 January 2025). The RETT exemption can only be applied for restructurings whereby the economic ownership of the Dutch real estate is transferred and that take place between 1 January 2024 and 31 December 2024. The exemption is specifically aimed at restructurings whereby (i) the existing FII transfers the economic ownership of the Dutch real estate to a transparent entity, (ii) the transparent entity in its turn issues participations to the existing participants of the FII, and (ii) the FII keeps the legal ownership of the Dutch real estate and becomes, for example, the custodian of the transparent entity. Generally, the FII regime would be abolished with retroactive effect to the beginning of the fiscal year in which the restructuring has taken place, but such retroactive effect will not be applied with respect to restructurings that fall under the scope of the exemption.

Please note that specific rules, such as aggregation arrangements, have also been introduced to prevent any abuse of the aforementioned exemption. This, for example, could be the case with respect to increasing the interest in the respective real estate structure while applying the exemption.

Based on current law, when a FII will no longer qualify under the FII regime, the value of the assets of such FII (including real estate) will be set at the fair market value directly prior to the loss of its status. As a result, any increase or decrease of such value will remain exempt under the FII regime.

3. Limiting the scope of the RETT concurrence exemption for share deals

The 2024 Tax Package includes the already announced legislative proposal to limit the application of the RETT concurrence exemption (samenloopvrijstelling) in certain situations. For more background and earlier announced amendments to the proposal, we refer to our blog post of 26 June 2023. The current proposal is largely in line with what has already been announced including the amendments. As a result, the acquisitions of real estate structured through a share deal:

1. may continue to benefit from the RETT concurrence exemption, provided that it involves an entity holding real estate (or rights in rem) that is used for 90% or more for activities subject to VAT (e.g. office buildings) for a period of two years after the acquisition; or
2. are subject to a reduced 4% RETT rate (instead of the standard 10.4% RETT rate) if it involves an entity holding real estate (or rights in rem) that is used for more than 10% for VAT exempt activities(e.g. residential or healthcare properties) and such real estate would be subject to VAT if it would have been acquired directly.  

In general, if the same real estate would be acquired, subject to RETT, by a different acquirer within six months after a transaction that was subject to RETT exemption reduced tax basis for RETT may be applied with respect to the second transaction. It has been included in the current proposal that if in such situation the first transaction was subject to 4% RETT following the new measures, the facility for the second transaction only applies to 4% and the RETT due will be topped up to 10.4% (i.e. the current RETT rate).      

The proposal will enter into force as of 1 January 2025. Please note that transitional rules have also been published pursuant to which pending transactions, whereby the completion of the acquisition ultimately takes place on 31 December 2029, are respected, provided that:

1. there is an agreement (e.g. a letter of intent) which has been signed before 3.15 pm on 19 September 2023;
2. a request (including the signed agreement) has been submitted to the Dutch tax authorities within 3 months after 1 January 2024; and
3. at the time the agreement is concluded, it is likely that the agreement is not primarily signed for the purpose of qualifying for the concurrence exemption.

The burden of proof for the third condition lies with the inspector. An example of when the third condition would not be met, is if a seller would conclude multiple letters of intent with different potential acquirers to fall under the scope of the transitional rules in any case. As a result, it would be key to submit a request to fall under the scope of the transitional rules before April 2024 if the above conditions are met. 

4. Additional measures to prevent dividend stripping

The Dutch dividend withholding tax (DWT) Act contains several exemptions, including for EU and tax treaty situations. Such exemption is denied if it appears that the recipient of the distributed dividend cannot be considered as the ultimate beneficiary of the dividend (also known as: dividend stripping). Dividend stripping may occur if the economic ownership and the legal ownership of shares is divided between a third party and the shareholder to obtain a DWT benefit. If the third party, for instance, is entitled to a more beneficial dividend treatment, such tax benefit (e.g. an exemption, a refund or a credit) can be obtained. Dividend stripping can take various forms of which cum/ex-transactions or securities lending are well known. We also refer to our Tax Alert of 24 March 2022.

Dutch tax legislation already contains an anti-abuse provision to counter dividend stripping. However, the current anti-abuse provision does, in practice, seem to be insufficient to properly address dividend stripping in all situations. Therefore, the Dutch legislator proposes three additional measures in order to combat dividend stripping more effectively. The proposed measures will enter into force on 1 January 2024 and will have direct consequences for Dutch personal income tax, corporate income tax and dividend withholding tax purposes.

(i) Reallocation of burden of proof

Under the current rules, in order to deny certain DWT benefits, the tax inspector must demonstrate that the recipient of the dividend is not the beneficial owner. With the new measures, the burden of proof will shift towards the (legal) person claiming a DWT benefit. This (legal) person must establish and make plausible that it is the beneficial owner of the dividends received, which improves the  position of the tax inspector. To avoid unduly burden for small investors, the reversal of the burden of proof will only apply for a taxpayers if the amount of DWT levied exceeds EUR 1,000 per year. According to the text of the legislative proposal this enhanced burden of proof applies in all situations where a DWT exemption is claimed, i.e. also if it is clearly not a dividend stripping situation.

(ii) Additional guidance on a series of transactions

One of the elements of dividend stripping is – in short – the presence of a 'series of transactions', which have been set-up to obtain a DWT benefit. To prevent such transactions from being concealed across borders, it is proposed that also a series of transactions entered into by related entities or related individuals will be attributable to the taxpayer or the beneficial owner, respectively. This means that the presence of a series of transactions will be assessed at group level.

(iii) Codification of the registration date

Currently, the Collective Dividend Withholding Tax Decree (the Collective Decree; Verzamelbesluit Dividendbelasting) stipulates that the registration date is used to determine which (legal) person is entitled to an exemption, credit, reduction or refund of DWT. The registration date is the business day on which it is determined which holders of shares are entitled to the proceeds of those shares. For the sake of legal certainty, it is proposed to codify this part of the Collective Decree. The codification of the registration date would however only apply to listed shares.

5. Amendments to the lucrative interest scheme

The Dutch government announced, in a letter dated 26 June 2023 (the June Letter), legislative amendments to the so-called lucrative interest scheme (lucratief belang regeling) followingthe Dutch Supreme Court ruling of 14 April 2023. We refer to our earlier Tax Alert of 20 April 2023 regarding the Dutch Supreme Court ruling. The amendments have been included in the 2024 Tax Package and will have retroactive effect to the date of the June Letter.

A lucrative interest with regard to shares may be present if one type of shares is subordinated to other classes of shares whereby the total issued share capital of that subordinated class of shares is less than 10% of the total issued share capital of the company (the 10% criterion).

Following the ruling of the Dutch Supreme Court of 14 April 2023, when calculating the 10% criterion to assess whether an instrument qualifies as a lucrative interest, only loans that are treated as informal capital (equity) for Dutch tax purposes should be taken into account.

According to the Dutch government, the Dutch Supreme Court ruling may lead to abusive situations where related party and shareholder loans that do not qualify as equity for tax purposes would be out of scope of the lucrative interest rules.

With the proposed amendments in the legislative proposal, loans that (partially) serve to remunerate performed activities, such as the aforementioned shareholder loans, will also be taken into account when assessing whether a lucrative interest is present (i.e. in the 10% criterion). This would limit the possibility for taxpayers to avoid the application of the lucrative interest scheme by designing loans in such a way that these loans actually function as a remuneration for performed activities within the meaning of the lucrative interest scheme but that do not qualify as equity for tax purposes.

6. Legislative proposal for Minimum Tax Act 2024 (Pillar Two)

Earlier this year, the Dutch government published its legislative proposal for the Minimum Tax Act 2024 (Wet minimumbelasting 2024). Through the Minimum Tax Act 2024, the Dutch government aims to introduce Pillar Two in the Netherlands by transposing the EU Minimum Tax Directive (Council Directive (EU) 2022/2523 of 14 December 2022) in Dutch tax law as of 1 January 2024. In a nutshell, large-scale domestic and multinational groups that meet the consolidated revenue threshold (in short: at least EUR 750 million on the basis of their annual consolidated financial statements) will be faced with a minimum tax rate of 15% as a result thereof. For further detail on and background to the implementation of the Pillar Two in the Netherlands and the proposed Minimum Tax Act 2024, we refer to our Tax Alert of 8 June 2023 and the Tax Alerts mentioned therein.

The proposed Minimum Tax Act 2024 is not part of the 2024 Tax Package. However, measures are proposed in the 2024 Tax Package through which a minimum tax largely similar to the Minimum Tax Act 2024 would be introduced to the Caribbean part of the Kingdom of the Netherlands (Bonaire, St. Eustatius and Saba). In addition, it was announced that the Dutch House of Representatives (Tweede Kamer) will consider the Minimum Tax Act 2024 simultaneously with the legislative proposals that form part of the 2024 Tax Package.

In that respect the Dutch Under-Minister for Finance has responded to questions of members of the House of Representatives and the Dutch Association of Tax Advisors (NOB) on 11 September 2023. Although the responses of the Dutch Under-Minister for Finance provide some clarification to certain points (such as certain views of the Dutch government on the interplay of the Minimum Tax Act 2024 and tax treaties), other questions remain outstanding (for instance relating to adequate dispute resolution mechanisms).

7. Other measures

Progressive personal income tax rate for box 2

Income from a substantial interest in a company’s shares (i.e. generally an interest of at least 5% of the shares, together with the interests of affiliated entities/relatives) is taxed in box 2 for personal income tax purposes. Currently, one flat rate of 26.9% applies to the entire amount of taxable income from a substantial interest. As of 1 January 2024, two brackets will apply: income from a substantial interest up to EUR 67,000 will be taxed at 24.5% and income in excess of that amount will be taxed at 31%.

30% payroll tax regime

As of 1 January 2024, the scope of the 30% payroll tax facility will be limited to a maximum amount of EUR 216,000 (also known as the Balkenende Norm). The amendment is accompanied with a two year transition period for employees who already applied the 30% payroll tax facility in 2022. With respect to these employees, the payroll tax facility will not be limited until 1 January 2026 (we also refer to our Tax Alert of 22 September 2022).

Next steps

The above proposals need to be approved by the Dutch Parliament in order to enter into force. Although elections will take place in November, Parliament indicated that it will nevertheless process the extensive number of proposals. It has scheduled to further discuss the 2024 Tax Package and Minimum Tax Act 2024 in the course of October and to vote on the legislative proposals at the end of that month. The proposals may be subject to change throughout the legislative procedure. Please bear in mind that the potential impact and implication of the proposals should be assessed carefully on a case-by-case basis.