Dutch state-owned companies
The position of Dutch state-owned companies in terms of their requirement to pay corporation tax changed drastically with effect from 1 January 2016. With the entry into force of the Modernization of Liability for Corporation Tax (Government Enterprises) Act (Wet modernisering Vpb-plicht overheidsondernemingen), the government has provided a framework for its intention to subject state-owned companies that engage in economic activities to the obligation to pay corporation tax in the same manner as private companies. It should be observed that it makes no difference whether companies legally form part of a government institution (direct public companies) or whether business activities are carried out via an independent body, such as an NV (public limited company), BV (private limited company), foundation or association (indirect public companies). The new starting point is that state-owned companies are subject to corporation tax, except where exemptions are the case.
Consequences of the new legislation in practice
State-owned companies that are subject to corporation tax pursuant to the new legislation will need to give some consideration to how to prepare the opening balance sheet for tax purposes, the way in which taxed and untaxed activities are to be defined and the determination of profit for tax purposes. From a practical point of view, economic activities must be administrated separately when applying the new legislation, after which the results must be determined on the basis of the regulations for taxable profit. It will also need to be established whether the prices and conditions agreed on with other parties or government entities are to be determined on a commercial basis. Based on the information available, the impression could be created that no corporation tax is due, as no profit is ever made. However, it must also be considered that:
- tax rules on the determination of profit are different to the principles applied internally and also that no allowance may be made for certain costs and provisions, or just partially;
- where government institutions deliver performances among themselves, pricing should be established on a commercial basis. As such, the performance of an activity without a profit mark-up will not generally be accepted and the taxable profit will be adjusted (incidentally, this is not the case in the event of a collaborative arrangement that has been established for the purpose of cost pooling and in which performance is delivered solely for the affiliated authorities);
- it is possible that activities that generate profit and activities that result in a loss will now be offset. However, it is uncertain whether offsetting of this nature is actually permitted for tax purposes.
The new legislation has had major consequences for local and regional authorities. The activities in which a municipality engages can very quickly fall under the regime of the new legislation. Consider, for example, municipal activities in the field of land development, sports hall operation, fields and swimming pools, the operation of residual capacity, childcare and service provision as an ancillary activity (secondment, statistical research and help with buying processes, etc.). Where provinces are concerned, examples include regional development corporations, airports, recreation, water companies and cultural heritage.
Various forms of collaboration between public bodies are subject to the payment of corporation tax too. For example, collaboration in the field of ICT, personnel administration or taxation and tendering processes and the joint performance of public duties in the field of safety or public health. Many of these consequences are possible to avoid with careful organisational design. There is often an absence of any genuine collaboration and it will be necessary to seek to achieve a careful balance between the activities carried out and participations. It can be possible to avoid becoming subject to the payment of corporation tax if early consideration is given to the question of whether changes can be made to the organisational design and, as such, meet the legal conditions governing exemptions (genuine collaboration and a balance between activities and participation).
Despite the explanation of and guide provided to the new statutory provisions, many questions remain unanswered. Given the wide range of activities and the way in which they are organised, it will only be possible to answer many of the questions as they arise in practice. Local and regional authorities are advised to analyse their positions and bring their organisations in line with the new legislation. The specialist State-Owned Companies Team here at Loyens & Loeff is always pleased to help clients complete this process successfully.
The State-Owned Companies Team at Loyens & Loeff consists of lawyers, tax advisers and civil-law notaries from various practice groups; they specialise in the corporation tax obligation of state-owned companies. The consequences ensuing for the state-owned companies in question from the introduction of the corporation tax obligation are not limited to the imposition of corporation tax, but also extend to the internal organisation, corporate governance and the legal structure. The services provided by the team include guidance in relation to:
- the definition of economic activity versus public duties;
- unbundling processes: the implementation or division of public and economic activities, privatisation, the organisation of corporate governance, setting out mutual relations in contracts, service level agreements and the formation of companies;
- Tax aspects: agreement on what is to be taxed or untaxed, the opening balance sheet for tax purposes, the tax control framework, preparations to be put in place prior to commencement of the corporation tax obligation and guidance once the corporation tax obligation becomes applicable.
Guidance includes advice, in-house seminars and training, implementation processes and guidance of the process in relation to the Dutch Tax and Customs Administration, central government and Brussels.
For more information, please contact one of our specialists or send us an e-mail. We will respond to you as quickly as possible.