In a separate proposal, implementing the EU Anti-Tax Avoidance Directive (ATAD1) new rules are introduced on the deductibility of interest (earnings stripping rules) and on taxation of Controlled Foreign Companies (CFC rules). The proposal also includes minor adjustments to the exit taxation rules for companies and broadly follows a preliminary proposal that was published for consultation purposes in 2017 (Tax Flash of 11 July 2017) and further clarifications provided by the Ministry of Finance early this year (Tax Flash of 23 February 2018). These provisions should enter into force per 1 January 2019.
Other relevant proposed changes (entering into force on 1 January 2019 unless indicated otherwise) in the Budget are:
- Reduction of the main corporate income tax rate to 24.3% in 2019, to 23.9% in 2020 and to 22.25% in 2021.
- Limitation of loss carry forward from nine years to six years for losses incurred as from 2019.
- Abolishment of the restriction of compensation of holding and financing losses incurred as from 2019.
- Abolishment of certain specific interest deduction provisions (i.e. art. 13l and 15ad of the Dutch corporate income tax act (CITA)).
- Abolishment of interest deduction on additional tier 1 capital for banks and insurance companies.
- Limitation of depreciation on buildings used within the group.
- Abolishment of the 0% rate for special investment funds in relation to direct investments in Dutch real estate as from 1 January 2020.
Abolishment of dividend withholding tax and introduction of withholding tax on certain intragroup dividends
It is proposed to abolish the dividend withholding tax as of 1 January 2020, without a transitional regime. In parallel, a withholding tax (WHT) will be introduced on intragroup dividends to jurisdictions with a statutory profit tax rate of less than 7% or to jurisdictions that are EU blacklisted. This WHT on dividends will furthermore apply in certain abusive situations and in case of (indirect) capital gains. Dividend distributions to individuals will not be subject to the WHT.
The WHT rate will be equal to the main corporate income tax rate, which is 23.9% in 2020.
The WHT on dividends will apply to Dutch entities with a capital divided into shares (such as BVs and NVs), but amongst others also to Dutch cooperatives. The WHT targets dividends to related entities whereby control (in short, >50% voting rights) is the relevant criterion. The artificial interposition of a non-low taxed intermediate holding company between the ‘low taxed jurisdiction’ and the Dutch distributing entity can for instance qualify as an abusive situation. In ‘business enterprise’ structures no WHT applies if such an intermediate holding company meets certain ‘relevant substance’ requirements (by reference to the Dutch minimum substance requirements and the so-called own office plus EUR 100k annual salary requirement).
The Dutch Government will also propose to apply this WHT regime to interest and royalties as of January 2021.
Earnings stripping rule
In line with ATAD1 the Netherlands will introduce an earnings stripping rule. The proposal does not distinguish between third party and related party interest. The earnings stripping rule needs to be applied per taxpayer, irrespective whether a taxpayer forms part of a corporate group. A fiscal unity is considered as a single taxpayer. The deduction of net interest expenses is limited to the highest of:
(i) 30% of the earnings before interest, taxes, depreciation and amortization (EBITDA); and
(ii) a threshold of Euro 1 million
The net interest expenses are defined as the balance of a taxpayer’s interest expenses, including certain related costs and foreign exchange losses, on the one hand, and a taxpayer’s interest income, including foreign exchange gains, on the other hand. EBITDA is calculated on the basis of tax accounts and excludes tax exempt income.
Any excess net interest expenses can be carried forward indefinitely. The proposal includes measures that may limit the carry forward in case of a change of control.
The proposal does not provide for a group escape rule or grandfathering rules for existing loans. However, the Dutch government has announced a separate proposal of law introducing a grandfathering rule for certain existing public infrastructure projects.
No exception is made for banks and insurance companies. The Dutch government intends to introduce a thin capitalization rule that will apply to banks and insurance companies as of 1 January 2020. The related proposal of law can be expected in 2019.
In connection with the implementation of the earnings stripping rule the interest deduction limitation rules for participation debt (art. 13l CITA) as well as for acquisition holding debt (art. 15ad CITA) will be abolished.
The Ministry of Finance takes the position that the Dutch at arm’s length principle already provides for a sufficient implementation of the ATAD1 Model B CFC rules. Based on this principle, the income of a controlled company should already be attributed to the Dutch controlling company to the extent this income is generated by significant people functions performed in the Netherlands.
Nevertheless, it is proposed to introduce a light version of Model A CFC regime specifically geared towards controlled companies in jurisdictions with a statutory profit tax rate of less than 7% or in jurisdictions that are EU blacklisted. Control is defined as a direct or indirect interest of more than 50% in nominal capital, voting rights or entitlement to profits, alone or together with related persons. A company that mainly earns non-tainted income or that is a financial institution receiving mainly income from third parties is not a controlled company.
Tainted income (including interest, royalties, dividends and leasing income) of a controlled company which is not distributed before year-end, is attributed to the Dutch controlling company on a pro rata basis.
Finally, tainted income of a controlled company is not attributed to the Dutch controlling company if the controlled company performs a genuine economic activity. The parliamentary explanation to the Budget sets out when a controlled company meets the genuine economic activity threshold (by reference to the Dutch minimum substance requirements and the so-called own office plus EUR 100k annual salary requirement).
The proposal includes provisions aimed at preventing double taxation (upon attribution and distribution or upon revaluation pursuant to existing anti-abuse rules for low-taxed passive portfolio subsidiaries). The proposal does not contain measures preventing double taxation due to the application of CFC rules by other jurisdictions.
Loss relief measures
The main proposed changes to the tax loss relief rules are:
- reduction of the loss carry forward period from currently nine years to six years for losses incurred as from 2019 (the carry back period remains one year). For losses incurred before 2019, the loss carry forward period remains nine years.
- abolishment of the restriction of compensation of holding and financing losses incurred as from 2019. This loss restriction will become redundant with the introduction of the earning stripping rules as of 2019, and will therefore be abolished for losses incurred as from that year. However, for holding and financing losses incurred before 2019, this loss restriction will continue to apply, together with the loss carry forward period of nine years.
We will keep you updated on further developments. Should you have queries, please contact your trusted adviser at Loyens & Loeff.