Upper House Approval of Dutch 2024 Tax Package and certain other proposals

Content:

1. Abolishment of the tax relief for redemption of shares / Increased rates 
2. Further amendments to the 30% payroll scheme
3. Amendments the Dutch tax classification rules for Dutch and foreign entities
4. Amendments to the legislative proposal for the Minimum Tax Act 2024 (Pillar Two)
5. Limiting the scope of the RETT concurrence exemption for share deals
6. The national implementation of the public CbCR Directive

1. Abolishment of the tax relief for redemption of shares / Increased rates

Following an amendment to increase the statutory minimum wage by 1.2%, certain tax rates will be increased. With respect to the Personal income tax Act, the top rate in box 2 (for income from a substantial interest exceeding EUR 67,000) will increase from 31% to 33% as of 1 January 2024 and the Box 3 tax rate will increase to 36% as of that date. The bank levy will also be increased as of 2024. Finally, the tax relief for the redemption of shares for listed companies will be abolished for dividend withholding tax purposes (DWT) as of 1 January 2025. 

The redemption of shares is an often used tool for listed companies to (i) enhance earnings per share; (ii) lower excess equity; (iii) reshape the capital structure; and (iv) return excess cash to shareholders. Currently listed companies can rely on a specific redemption facility, deviating from the main rule that, in principle, share redemptions are subject to Dutch DWT. This facility allows a Dutch listed company to redeem shares free of DWT if certain conditions are met. These conditions include a cap that the total amount in share redemptions in any 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 in share buybacks in the four preceding calendar years. 

Following the parliamentary debate in relation to the budget for 2024, the parliament has decided to abolish this facility for share redemptions as a result of which a share redemption by a listed company will be subject to DWT starting in 2025. The amendment significantly impacts the attractiveness of share redemptions for both the company and its shareholders

2. Further amendments to the 30% payroll tax facility

As mentioned in our Tax Alert of 21 September 2023, it had already been announced that as of 1 January 2024, the scope of the 30% payroll tax facility would be limited to a maximum amount of EUR 216,000 (also known as the Balkenende norm), subject to a two year transition period for employees who already applied the 30% payroll tax facility in 2022. Further amendments were adopted during the legislative process to limit the benefits of the scheme. Based on these amendments, the 30% ruling will be set at a maximum of 30% of the taxable salary for the first 20 months of the maximum five-year period for which the 30% ruling is issued. It will drop to 20% of that taxable salary for the next 20 months and to 10% of that salary in the last 20 months. Transitional rules will apply to employees who in the last period of 2023 benefited from a 30% ruling that had already been issued to them.

It has furthermore been decided to abolish the partial foreign taxpayer status. The partial foreign taxpayer status is an additional tax facility for expats using a 30% ruling. Under this facility, in principle, their foreign capital income is not subject to Dutch taxation. Transitional rules will apply under which expats who were already applying the 30% ruling on 31 December 2023 can still benefit from the partial foreign taxpayer status until the end of 2026. 

3. Amendments to the Dutch tax classification rules for Dutch and foreign entities

Certain amendments to the legislative proposal regarding the Dutch tax classification rules for Dutch and foreign entities have also been adopted. Based on one of the amendments, rules have been introduced whereby if an open limited partnership in 2024 has a withholding tax obligation in respect of dividends on the grounds of the hybrid provision in the Conditional Withholding Tax Act 2021, it is nevertheless possible to ‘look through’ the structure to the underlying participants. The question whether a withholding tax obligation applies to the relevant dividends must then be answered at the level of these underlying participants.

These rules are limited to benefits in the form of dividends (i.e. not to interest and royalties). It is further relevant that the rules apply only if the open limited partnership has a withholding tax obligation on the grounds of the hybrid provision in the Conditional Withholding Tax Act 2021. The concession therefore does not apply, for example, if the open limited partnership has a withholding tax obligation due to it being established under the laws of a low-tax jurisdiction or it being resident there.

The announced guidance on how to apply the relevant classification tests and when a foreign entity can be considered similar to a Dutch equivalent, is expected to be published in Q1 of 2024.

4. Amendments to the legislative proposal for Minimum Tax Act 2024 (Pillar Two)

After publication of the OECD’s model rules, administrative guidance was published by the OECD’s Inclusive Framework on 17 July 2023. The amendments to the Minimum Profit Tax Act 2024 aim to legally anchor several elements of that guidance in the Minimum Profit Tax Act 2024, such as the definition of a qualifying interest, deferred taxation with regard to obtaining a right to a tax credit as well as the crediting of tax, the temporary safe harbor rule for the undertaxed profit rule, and the qualifying domestic minimum top-up tax safe harbor rule. The Upper House has adopted the Minimum Tax Act 2024 which will therefore become effective as of 31 December 2023.

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

As described in our Tax Alert of 21 September 2023, the application of the RETT concurrence exemption (samenloopvrijstelling) will be limited in certain situations. Although no material amendments have been made to the proposal during the legislative proposal, it may be worthwhile to emphasise once more certain deadlines.

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

an agreement is in place (e.g. a letter of intent) that was signed before 3.15 pm on 19 September 2023;

1. a request (including the signed agreement) is submitted to the Dutch tax authorities within three months after 1 January 2024; and

2. at the time of entry into the agreement, it is likely that the agreement is not primarily signed for the purpose of qualifying for the concurrence exemption.

3. The burden of proof of the third condition lies with the inspector. An example of when the third condition would not be met is if a seller would sign multiple letters of intent with different potential acquirers to fall under the scope of the transitional rules in any event. 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. 

6. The national implementation of the Public CbCR directive

The European public Country-by-Country Reporting (CbCR) Directive (the Directive) was published in the Official Gazette of the European Union and entered into force on 1 December 2021. The aim of the Directive is to create transparency for companies and to improve public scrutiny. The Directive should have been implemented into national legislation by 22 June 2023.

Background of public CbCR

The Directive aims to ensure the monitoring and transparency of profit taxes paid worldwide by multinational groups operating within the European Union. The Directive seeks to achieve this by requiring the companies in scope to prepare a profit tax information report through national legislation in order to encourage those companies to behave responsibly in the area of profit taxation and contribute to prosperity by paying their fair share of tax in jurisdictions where they carry out activities and generate profits.

The Directive requires the ultimate parent entity of multinational groups with a consolidated revenue of more than EUR 750 million to annually prepare and disclose a separate profit tax report. Stand-alone entities with revenue of more than EUR 750 million that are not part of a group must also prepare and disclose such a report. In addition, medium and large subsidiaries in the European Union of a group which is in scope and whose parent company is not governed by the law of an EU member state must disclose a report on the profit tax paid by the whole group. Finally, EU-based branches of multinationals not governed by the law of an EU member state must disclose a group-wide report if the branch has a net turnover of EUR 12 million or more.

The Netherlands

As stated above, the Directive should have been implemented into national legislation by 22 June 2023. The Netherlands was late implementing the Directive, given that the legislative proposal on the Profit Tax Disclosure Directive Implementation Act was not submitted until 1 July 2023. Following the adoption of the legislative proposal on 6 July 2023 by the Lower House, the Upper House adopted the legislative proposal on 5 December 2023 as a formality.

In short, the primary purpose of the legislative proposal on the Profit Tax Disclosure Directive Implementation Act is to introduce a statutory basis for the disclosure of information on profit tax by the above-mentioned companies and branches. Under the Profit Tax Disclosure Directive Implementation Act, those companies and branches are obligated to prepare a report including information on profit tax and data that provide context to the information on profit tax, such as income and number of employees. The information needs to be provided per EU member state and per country that is on the so-called black or grey tax list of the European Union. The information may furthermore be provided in aggregated form. The reporting obligation set out in the Profit Tax Disclosure Directive Implementation Act will apply to financial years beginning on or after 22 June 2024.

Concluding remarks

The Profit Tax Disclosure Directive Implementation Act leads to public disclosure of information that companies have been required to provide to the tax authorities since fiscal year 2016 already, under agreements with the OECD and Directive 2011/16/EU. Although the reporting obligation is therefore not new, it is important now for companies in the EU to assess the potential impact in terms of administrative burden of the Profit Tax Disclosure Directive Implementation Act.