The Dutch Advisory Committee on taxation of multinationals (Committee) explored potential corporate income tax measures ensuring that multinationals with a presence in the Netherlands are sufficiently taxed while not losing sight of the Dutch investment climate.
The report includes three main recommendations for the Dutch government:
I. Take a leading role in international cooperation initiatives aimed at a well-functioning and harmonised multi-jurisdictional corporate income tax system, including minimising tax competition among countries.
II. Consistently gather more detailed information on the amount of taxes paid by multinationals as well as on the impact of recent measures taken following the OECD BEPS project.
III. Take a number of unilateral tax measures based on two main objectives:
- preserve a minimum taxable basis for profitable Dutch companies; and
- eliminate tax mismatches with other countries.
The Committee suggests to implement these recommendations among others by introducing the following measures.
Recommended unilateral tax measures
- Limitation of loss compensation to 50% of taxable profit
The Committee recommends to introduce an indefinite loss carry forward term and to limit loss compensation simultaneously for taxable profit in excess of EUR one million in a given year to a maximum of 50% of such excess.
- Limitation of the deduction of certain headquarter expenses
This measure recommends to limit the deduction of certain headquarter expenses. This concerns so-called shareholder expenses, which are headquarter expenses that are not attributable to other related entities (e.g. expenses relating to the consolidated financial statements and share issuances). This limitation should be based on a still to be determined percentage of the taxable profit of the taxpayer.
Dutch transfer pricing policy currently allows to on-charge headquarter expenses that can be allocated to group companies without any mark-up. The Committee recommends to change this policy to a fixed markup of 5% on the expenses, in line with OECD transfer pricing guidelines.
- Explore a limitation on the deduction of excess intragroup royalty expenses
The Committee advises to conduct a research on the amount of royalties paid by Dutch taxpayers and suggests considering to introduce a limitation on the deduction of ‘excess’ royalty payments, for example along the lines of an earnings stripping rule.
- Limitation on the deduction of interest, shareholder expenses and possibly royalties
This suggested measure limits the total amount of interest expenses, shareholder expenses and possibly royalties to a percentage of the taxable profit (50% is given as an example). This measure would apply in addition to the measures no. 1-3 described above. Whether royalties would also be included will depend on the outcome of the research mentioned under measure no. 3.
- Amendment of the current CFC rules
The Committee recommends several amendments to the Dutch Controlled Foreign Company (CFC) rules that include (i) extending the scope of the CFC rules to interim distributions of profits, (ii) not taking downward arm’s length corrections into account for determining the profit at the level of the CFC, and (iii) basing the CFC qualification on the effective tax rate rather than the statutory tax rate. The Committee also advises increasing the threshold of the ‘real economic activities-exception’ to the CFC rules. The Committee notes that more effective CFC rules justify the introduction of additional measures to avoid double taxation.
- Not applying downward arm’s length pricing adjustments in certain situations
The Netherlands has a long standing tradition of applying both up- and downward transfer pricing adjustments. The Committee recommends to no longer allow a downward profit adjustment if no corresponding upward profit adjustment is recognised at the level of the group entity with which the transaction is concluded.
- Limitation of depreciation on certain assets
The last proposed measure aims to limit the depreciation on an asset received via an intra-group transfer, if hidden reserves sheltered in that asset upon transfer will not be sufficiently taxed at the level of the transferring company. The Committee suggests that grandfathering rules for existing situations could be taken into account.
It is expected that the Dutch Government will provide an official response with their views on the report and proposed measures in due course. It is difficult to assess how the recommendations made will be received by the Dutch government, also taking into consideration the current uncertainty surrounding COVID-19.