The Netherlands’ Budget Day 2024

In this Tax Alert we will discuss certain proposals included in the 2025 Tax Package that are relevant to international businesses and their employees. Unless otherwise stated, the proposed measures, if adopted by Parliament, will enter into force on 1 January 2025. We will also discuss some further legislative changes which were already part of the 2024 Tax Package and will enter into force on 1 January 2025, as well as proposed legislative changes that are not yet part of the 2025 Tax Package but, according to the accompanying letter of the State Secretary for Finance to the 2025 Tax Package (the Accompanying Letter), will be included in it through bills of amendment (nota’s van wijziging) in the coming weeks.

Content:

1. Conditional withholding tax
2. Corporate income tax
3. Dividend withholding tax
4. Minimum Tax (Pillar 2)
5. Real estate related tax measures
6. Payroll tax and personal income tax
7. Entry into force of previously adopted legislation

1. Conditional withholding tax

1.1 New group concept

Since 1 January 2021, a conditional withholding tax (CWHT) has applied to (deemed) interest and/or royalty payments to related companies in low tax jurisdictions1 and in certain cases of (deemed) abuse (i.e. conduits and certain hybrid mismatches). Since 1 January 2024, the scope of CWHT has been expanded and CWHT has also applied to (deemed) dividend payments. The applicable tax rate is equal to the standard corporate income tax (CIT) rate (currently 25.8%). 

In short, in this context, companies are considered related if the recipient company has a qualifying interest in the paying company or vice versa, or if a third company has a qualifying interest in both the paying and recipient company. An interest is considered “qualifying” if it directly or indirectly represents influence in the decision-making process of an entity whose activities can be determined. If the recipient does not have a qualifying interest on a stand-alone basis, under current law, it can still be deemed related based on the presence of a cooperating group. 

The cooperating group concept was introduced as an anti-abuse measure in a specific interest deduction limitation rule to capture abusive structures that were created to avoid the applicability of this rule. In this light, the Dutch legislature deliberately did not provide a statutory definition of the term ‘cooperating group’ and application depends on the facts and circumstances of the individual case. To date there has been limited guidance on the scope of a cooperating group. 

After various signals emerged from practitioners that the cooperating group concept is unclear in many cases and that the uncertainty affects actual investments in the Netherlands, the State Secretary for Finance now proposes, after an earlier announcement last spring, to replace the current concept of a ‘cooperating group’ in the Dutch CWHT with a new and distinct group concept which is referred to as the 'qualifying unity'. 

With the new concept of a qualifying unity, the Dutch State Secretary for Finance proposes to better align to the objective of the CWHT, which is to combat abusive structures. A qualifying unity will be defined as companies acting together with the main purpose or one of the main purposes of avoiding the imposition of CWHT at the level of one (or more) of those entities. The assessment should be made by reference to all the facts and circumstances at the time of the payment. However, some non-exhaustive elements that may be taken into account when making this assessment have been listed in the legislative proposal.

• Indications of acting together can generally be found in the totality of agreements entered into between the parties, such as the mutual arrangements regarding the investment and financing. This may show, for example, that a management company or a general partner has a coordinating and directing role.
• Acting together must have the effect of preventing CWHT being payable by one or more entities within the unity. Acting together is deemed to apply in a situation in which a qualifying interest is 'divided' by splitting a qualifying interest into non-qualifying interests. All companies involved with the objective of avoiding withholding tax are deemed part of the qualifying unity.

An indication that there is no acting together with the main purpose or one of the main purposes of avoiding withholding tax may be, for example, a situation in which none of the participants is located in or acting from a low-tax jurisdiction. According to the Dutch State Secretary for Finance, the replacement of the new concept may have the effect that situations that do not qualify as a cooperating group under current law may qualify as a qualifying unity after 1 January 2025.

It is also being proposed to make changes to the escape rule, which is relevant to structures whereby the recipient of the payment is, in principle, a taxpayer for CWHT purposes as a result of a hybrid mismatch (i.e. the recipient is considered non-transparent by the Netherlands and transparent in its jurisdiction of residency). As a result of this specific escape rule, the recipient will not be a taxpayer for CWHT purposes if it can be demonstrated that either (i) all the underlying participants with a qualifying interest are “good” participants (under current law taking into account the cooperating group concept); or (ii) none of the underlying investors has a qualifying interest. It is now proposed to delete the reference to the cooperating group concept in this escape rule. However, in the event of a qualifying unity, the escape rule can no longer be applied. The rationale is that a qualifying unity implies abuse, and in such cases, no rebuttal scheme should be available.

For further background on the CWHT, we refer to our Tax Alert of 22 November 2021 on the introduction of the CWHT and our Tax Alert of 30 March 2021 on expansion of the CWHT to include dividends. 

2. Corporate income tax

2.1 Changes to debt waiver exemption

A waiver of debt may lead to taxable income at the level of a Dutch debtor. Dutch tax law provides for a debt waiver exemption if certain specific conditions are met. The key conditions are that the receivable is not realistically collectable from a creditor's perspective and that the creditor expressly waives the receivable. 

The Dutch debt waiver exemption applies only to the taxable income exceeding the in-year loss and the available past-year tax losses (i.e. all tax losses should be utilised first). Since 1 January 2022, the loss compensation rules have changed significantly and this change has an impact on the outcome of the Dutch debt waiver exemption if taxpayers have tax losses available. Under the tax loss compensation rules that have applied since 2022, only EUR 1 million plus 50% of the taxpayer’s taxable income (minus the EUR 1 million threshold) can be set off against tax losses from previous years. Any excess profits are taxable. Tax losses can be carried back one year and carried forward indefinitely.

The Dutch debt waiver exemption stems from the idea that debtors in an insolvent position should not be paying tax on waived debt, but should utilise their tax losses (to the extent available). However, as a result of the change in the law since 2022 (described above), taxpayers may end up in a tax paying position. We have illustrated the concurrence under current law (i.e. before the proposed change) in the following example.

• A Dutch taxpayer has a debt waiver profit of EUR 6 million, an in-year loss of EUR 0.5 million, and tax losses available for carry forward of EUR 4 million. As a result of the application of the debt waiver exemption, only EUR 1.5 million can be exempt (EUR 6 million – 0.5 million – 4 million). As a result of the rules that have applied since 2022, only EUR 3 million may be set-off against tax losses (i.e. 0.5 million (in-year loss) + 1 million + 50% of 3 million). The taxable amount in the case at hand would be EUR 1.5 million and hence tax would still be payable as a result of the waiver. 

The Dutch State Secretary for Finance now proposes to fix this unintended outcome for situations in which the taxpayer has past-year tax losses available that exceed EUR 1 million. In such a case, the adverse effect for taxpayers should be removed by a full debt waiver exemption (i.e. the requirement to first utilize past-year tax losses will be removed and only in-year losses should be taken into account). However, the available loss carry forward will be reduced by the  amount of the debt waiver exemption. If the tax losses available for carry forward do not exceed EUR 1 million, nothing will change for taxpayers. 

Under the proposed law, the example illustrated above will have the following effect:

• The debt waiver exemption will be applied to the full amount as far as it exceeds the in-year loss (i.e. EUR 5.5 million): the taxpayer therefore does not need to pay any taxes. However, the past-year tax losses will be reduced from EUR 4 million to zero. 

Contrary to expectations from practitioners, the proposed amendment will not have retroactive effect. 

2.2 Earnings stripping rule

The earnings stripping rule limits the deductibility of 'excess' net interest paid to related and unrelated parties by a Dutch taxpayer. Pursuant to the earnings stripping rule currently in place, net interest costs are only deductible up to the higher of (i) 20% of the taxpayer's earnings before interest, tax, depreciation and amortisation (EBITDA) or (ii) a threshold of EUR 1 million. The legislative proposal increases the EBITDA cap from 20% to 25%.

See under 5.1 below for a proposed change that will be relevant for real estate investors.

2.3 Proposed implementation of GAAR

With the initial implementation of the first EU Anti Tax-Avoidance Directive (ATAD 1) in the Dutch legislation in 2019, the Dutch legislature chose not to include the General Anti-Abuse Rule (GAAR) in the Dutch CIT Act (CITA). The rationale was that, according to the Dutch State Secretary for Finance, the GAAR had already been sufficiently implemented in Dutch tax law in the form of the Dutch fraus legis doctrine.

The European Commission (EC) recently requested that the GAAR be legally embedded in the Dutch CITA. As a result, it is now being proposed to include the following GAAR provision in the Dutch CITA (unofficial translation): 

For the purposes of this law, an arrangement or a series of arrangements which have been put in place with the main purpose, or one of the main purposes, of obtaining a tax advantage that defeats the object or purpose of this law, and which are not genuine having regard to all relevant facts and circumstances, will be ignored, whereby:

1. an arrangement may comprise more than one step or part;
2. an arrangement or a series of arrangements will be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.

The proposed GAAR provision does not intend to effectuate any material change to the Dutch fraus legis doctrine, nor does it aim to affect any other (Dutch) taxes or the currently existing special anti-abuse provisions. Consequently, no material change is intended with the codification of the GAAR in the Dutch CITA. 

2.4 Intermediate holding provision in liquidation loss regime

Under the liquidation loss regime, certain liquidation losses realised on a participation (i.e. the difference between the amount sacrificed by the taxpayer for the participation and the liquidation distribution) can be deducted for CIT purposes. The liquidation loss regime includes a specific provision for intermediate holdings, which states that if an intermediate holding company is liquidated, the liquidation loss is taken into account only to the extent that this loss exceeds the amount of the decrease in value of the participation(s) held by the dissolved entity. This specific provision eliminates negative participation results of an intermediate holding company, which would be non-deductible under the participation exemption, from the deductible liquidation loss. Contrary to the purpose of the liquidation loss provision, in practice it appeared to be possible to convert non-deductible participation losses on indirectly held participations into deductible liquidation losses on directly held participations. The proposed legislative change to the intermediate holding provision aims to eliminate this possibility and to align the liquidation loss regime with its purpose. 

2.5 Abolishment of gift deduction for companies

Currently, gifts by companies to designated public and social benefit organisations are (under certain restrictions) deductible for CIT purposes. The legislative proposal abolishes the CIT deductibility of all gifts. These gifts by companies (which are considered driven by shareholders motives) will also no longer be exempt for dividend withholding tax (DWT) and personal income tax purposes. Business related donations, such as sponsoring, will remain CIT deductible. 

3. Dividend withholding tax

3.1 Share repurchase facility for listed companies

Under current law, listed companies can rely on a specific repurchase facility, deviating from the main rule that a share repurchase is subject to Dutch DWT. The current facility allows a Dutch listed company to repurchase shares free of DWT if certain conditions are met. These conditions include a cap according to which the total amount in share repurchases in one calendar year may not exceed (i) twenty times the average amount of cash dividends in the five preceding calendar years; less (ii) the amount paid on share repurchases in the four preceding calendar years. 

As part of the 2024 Tax Plan, Parliament decided in 2023 that a share repurchase by a listed company would become subject to Dutch DWT as from 2025. It is now being proposed to reverse this legislative change. The current share repurchase facility will remain in place to prevent adverse effects on the competitive position of Dutch companies compared to foreign companies. 

3.2 Mandatory application of Dutch dividend withholding tax exemption

Currently, the Dutch DWT exemption is optional in situations where the Dutch participation exemption (deelnemingvrijstelling) or the Dutch fiscal group regime (fiscale eenheid) of the CITA applies. The optionality was introduced because it was difficult in practice for withholding agents to assess for each recipient whether the conditions of the Dutch DWT exemption were met. 

As withholding agents increasingly do possess the relevant information about the recipients of the dividends, it is now envisaged that these Dutch DWT exemptions should be applied imperatively. This amendment aims to accommodate shareholders by providing the option to file an objection when the withholding agent incorrectly omits to apply the Dutch DWT exemption. If the shareholder's objection is justified, the shareholder will receive the repayment of DWT directly and without interference of the withholding agent. 

4. Minimum Tax (Pillar 2) 

On 31 December 2023, the Minimum Tax Act entered into force, embedding Pillar Two in Dutch law. The OECD Inclusive Framework published additional administrative guidance on Pillar Two in February 2023, July 2023, December 2023 and June 2024. Several elements of that guidance were already legally anchored in the Dutch Minimum Tax Act. The legislative proposal now legally anchors additional elements of the OECD’s administrative guidance in 2023, such as the definition of qualifying interest, the treatment of tax credits, rules on currency exchange, guidance on qualifying domestic top-up tax, and the determination of excluded income. Furthermore, some technical amendments are being proposed. 

5. Real estate related tax measures

The 2025 Tax Package contains several tax measures that are relevant for real estate investments in the Netherlands. Some of these measures, such as the abolishment of the EUR 1 million threshold under the Dutch earning stripping rule for real estate investment companies and the introduction of VAT revision for certain services, had already been announced (see also our blog post of 4 May 2023 and our Tax Alerts of 21 September 2023 and 21 December 2023).

5.1 Abolishment of the EUR 1 million threshold under the Dutch earnings stripping rules for real estate investment companies

The Dutch earnings stripping rule that limits the deductibility of 'excess' net interest paid to related and unrelated parties by a Dutch taxpayer will be amended. Pursuant to the earnings stripping rule currently in place, net interest costs are deductible only up to the higher of (i) 20% of the taxpayer's earnings before interest, tax, depreciation and amortisation (EBITDA); or (ii) a threshold of EUR 1 million. As noted in 2.2 above, it is now being proposed to increase the percentage under (i) to 25%.

As the EUR 1 million threshold is applied per Dutch taxpayer, in practice real estate investors often spread their investments over different entities to be able to apply the EUR 1 million threshold multiple times. This results in an unequal treatment between equity and debt according to the Dutch State Secretary for Finance. To counter such fragmentation, the legislative proposal provides that the threshold of EUR 1 million will no longer apply to entities that qualify as “real estate investment companies”.

Based on the legislative proposal, a taxpayer will be considered a “real estate investment company” if the assets of that entity consist at least six months of the year - on a consolidated basis - for more than 70% of real estate (or part thereof) that, de jure or de facto, directly or indirectly, are made available (ter beschikking gesteld) to third parties. If entities are part of a fiscal unity, it will be determined at the level of the fiscal unity whether it qualifies as a real estate investment company. Making real estate available to third parties includes lease (verhuur), loan (bruikleen), leasing, agricultural lease (verpachting), and exchange. The proposal also provides that a right of superficies (recht van opstal), apartment rights (appartementsrechten), leasehold (recht van erfpacht), and usufruct (vruchtgebruik) with respect to real estate and its economic ownership (economisch eigendom) also qualify as real estate for purposes of this measure.

5.2 RETT rate for certain residential properties reduced from 10.4% to 8% as of 1 January 2026

According to the Accompanying Letter the Dutch real estate transfer tax (RETT) rate for the acquisition of residential properties, with the exception of acquisitions for which the lower 2% RETT rate applies or, the so-called ‘starters exemption’ applies (i.e. these exceptions apply if an individual acquires such housing as his/her main residence), will be reduced from 10.4% to 8% as of 1 January 2026. This reduction is therefore relevant for investors in residential properties.

The 2025 Dutch Tax Package does not contain further details about this proposal. The legislative proposal will be included in the 2025 Dutch Tax Package via a bill of amendment (nota van wijziging) expected to be published before the Tax Plan 2025 will be discussed in Dutch Parliament in October.

5.3 Introduction of VAT revision for certain services related to real estate

Currently Dutch law provides for a VAT revision period of ten years for new immovable property and a five-year VAT revision period for movable property. The 2025 Tax Package introduces a VAT revision period of five years for valuable investment services related to real estate and applies only when the costs of such services are above a threshold of EUR 30,000. The threshold is introduced to prevent very small refurbishments from falling under the scope of VAT revision.

“Investment services” are defined as services to one or more immovable properties that serve such real property on a multi-year basis, including materials, plant, machinery and equipment that, after installation or assembly, qualify as immovable for VAT purposes. This includes services to immovable property such as renovation, extension, repair or replacement and maintenance of immovable property. Demolition work associated with renovation is also included under the definition of refurbishment services. According to the State Secretary for Finance, the aforementioned terms, to the extent not already further explained by the Dutch Supreme Court, the CJEU and the Implementing Regulation (EU) No 282/2011220, have a clear meaning in common speech so that they can be used for the purposes of this proposal. It is noted that artificial fragmentation of one refurbishment service in multiple services to stay under the threshold will be seen as one refurbishment service to prevent abuse.

The VAT revision for investment services will come into effect as of 1 January 2026 to allow taxpayers to prepare for this new VAT revision period.

6. Payroll tax and personal income tax

6.1 30% ruling 

The 30% ruling is a payroll tax facility for certain foreign employees with specific expertise working in the Netherlands. As part of this regime, employers can apply a tax exemption of up to 30% of the employee’s salary as a reimbursement of extraterritorial expenses on a notional basis. As from 1 January 2024, the 30% ruling would be gradually phased down to a 10% ruling (we refer to our Tax Alert of 4 April 2024). In the Accompanying Letter, the State Secretary for Finance announced a reversal of the phase-down of the 30% ruling. As of 1 January 2027, the maximum tax-free allowance will be set at a flat rate of 27% instead of 30%. For the years 2025 and 2026, the rate will remain 30%. There will be transitional legislation for employees who applied the 30% ruling before 2024. The cap for the tax base (salary) (known as the Balkenendenorm) introduced on 1 January 2024 will remain in effect (currently set at EUR 233,000; for 2025 set at EUR 246,000). The legislative proposal will be included in the 2025 Dutch Tax Package via a bill of amendment (nota van wijziging) expected to be published before the Tax Plan 2025 will be discussed in Dutch Parliament in October.

6.2 End of enforcement moratorium (handhavingsmoratorium) for self-employed workers

As of 1 January 2025, the Dutch tax authorities will actively start enforcement actions regarding false self-employment again. This means that if the Dutch tax authorities consider a working relationship between a self-employed worker and a principal as a (fictitious) employment relationship for Dutch payroll tax purposes, the Dutch tax authorities will impose correction obligations and additional Dutch payroll tax assessments (including interest and penalties) on the principal (i.e. the (fictitious) employer) again. However, a one-year transitional period will apply where (fictitious) employers during 2025 will not receive a penalty (vergrijpboete) if they can substantiate that there is a policy in place for taking steps against false self-employment. It is therefore advisable for companies, if they have not yet done so, to assess whether they conclude contracts with self-employed workers, the terms under which those services are performed, the possible risk of requalification as a (fictitious) employment relationship, and to take appropriate measures going forward to minimise the risk of false self-employment, such as having a policy against false employment in place or taking steps to prepare such policy. Furthermore, no correction obligations or additional Dutch payroll tax assessments will be imposed by the Dutch authorities for the period up to 1 January 2025 unless (i) the Dutch tax authorities can demonstrate that parties intentionally allowed, or continued to allow, a situation of obvious false self-employment; or (ii) instructions (aanwijzingen) by the Dutch tax authorities are not, or not sufficiently, followed within a reasonable term.

7. Entry into force of previously adopted legislation

7.1 Tax classification rules for Dutch and foreign entities

In 2023, the Dutch State Secretary for Finance adopted new tax classification rules for Dutch partnerships (commanditaire vennootschap or CV), funds for joint account (vennootschap onder firma or FGR) and comparable foreign entities to enter into force as of 1 January 2025. In short, Dutch CVs will by default become transparent for Dutch tax purposes. In addition, an FGR may maintain its non-transparent status only if it is regulated following the Dutch Financial Supervision Act and if the participations in the FGR are tradeable. This will also impact foreign equivalents of these entities. Furthermore, the Dutch tax classification rules for foreign entities will change. The 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). As of 1 January 2025, two additional methods to classify foreign entities will be introduced. Foreign entities without a clear Dutch equivalent which are resident in the Netherlands are deemed to be non-transparent (the fixed method). For foreign entities resident outside the Netherlands, the classification for foreign tax purposes will generally be followed for Dutch tax purposes (the symmetrical method). Final administrative guidance for classification of foreign entities has not yet been published. For further details, we refer to our Tax Alerts of 21 September 2023 and 4 April 2024. 

7.2 Changes to tax-exempt investment institution regime

The tax-exempt investment institution regime (vbi-regime) exempts certain NVs and FGRs from CIT and DWT (under strict conditions). In line with the changes to the classification rules for an FGR, this regime will as of 1 January 2025 be open only 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 to private investments.

7.3 Limiting the scope of the RETT concurrence exemption for share deals

As described in our Tax Alerts of 21 September 2023 and 21 December 2023, the 2024 Tax Package, adopted by Parliament last year, included the legislative proposal to limit the scope of the RETT concurrence exemption (samenloopvrijstelling) for share deals in certain situations that will enter into force on 1 January 2025. For more background we also refer to an earlier blog post. As a result, as of 1 January 2025 acquisitions of real estate structured through a share deal:

• 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
• 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 had been acquired directly. 

Transitional rules may apply to pending transactions, whereby the completion of the acquisition ultimately takes place on 31 December 2029, provided that certain conditions are met (see our Tax Alerts mentioned above). 

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

As of 1 January 2025, fiscal investment institutions (FIIs) can no longer apply the real estate FII regime (vastgoed FBI-regime) if they invest directly in real estate located in the Netherlands. In principle, profits of such real estate FIIs will be taxed at the general CIT rates instead of the 0% rate that currently applies for FIIs. In the Accompanying Letter it is mentioned that via a bill of amendment (nota van wijziging) to the 2025 Tax Package a certain anti-abuse situation in this respect will be repaired.

• 1 The list is updated annually in a ministerial decree which includes jurisdictions (i) with a profit tax applying a statutory rate of less than 9% (based on assessment as of 1 October of the preceding years) and (ii) included on the EU list of non-cooperative jurisdictions. The 2025 list is not published yet, but the 2024 list included, amongst others, the Bahamas, Barbados, Bermuda, Cayman Islands, Isle Of Man, Jersey, Guernsey, Panama, Russia, US Virgin Islands.