Pillar Two: Dutch tax authorities publish Q&A

The Q&A outlines that for the purposes of the DMTA 2024, the term Local Financial Accounting Standard includes both the application of Book 2, Title 9 of the Dutch Civil Code (commonly referred to as ‘Dutch GAAP’) and the International Financial Reporting Standards as adopted by the European Union (commonly referred to as ‘IFRS (EU)’).

It continues by stating that IFRS (EU) may differ from the IFRS issued by the International Accounting Standards Board (IASB). While the IASB publishes IFRS and IAS standards, their application within the European Economic Area is subject to endorsement by the European Commission under Regulation (EC) No. 1606/2002. As a result, discrepancies may arise between IFRS and IFRS (EU) due to the EU’s endorsement process.

Loyens & Loeff take-away: The Dutch QDMTT requires that the calculations are in principle based on the Local Financial Accounting Standard. While it was already clear from Dutch parliamentary history to the DMTA 2024 that this includes both Dutch GAAP and IFRS, it has now been clarified that, in the view of the DTA, this only includes IFRS (EU) and not another type of IFRS. This also means that no other IFRS can qualify for purposes of the Local Financial Accounting Standard. Given the complex rules determining whether the Local Financial Accounting Standard or accounting standard used to prepare the Consolidated Financial Statements should be used for Dutch QDMTT purposes, groups with multiple sets of accounts (standalone or consolidated) for Dutch Constituent Entities should carefully consider which is relevant under the QDMTT. 

The Q&A provides an answer to the question what the applicable accounting standard is for QDMTT purposes in case one Dutch located Constituent Entity only prepares standalone financial statements based on IFRS (EU), while another Dutch located Constituent Entity forming part of the same subgroup only prepares standalone financial statements based on Dutch GAAP.

In such case, the accounting standard used to prepare the Consolidated Financial Statements of the Ultimate Parent Entity should be used and hence the Local Financial Accounting Standard is not applied for QDMTT purposes.

Loyens & Loeff take-away: While uncertainty on this point may have existed, it is in our view a welcome point that in such cases the accounting standard used to prepare the Consolidated Financial Statements should be used for QDMTT purposes. Otherwise, groups in scope of the DMTA 2024 would have been required to prepare a set of financial statements solely for QDMTT purposes. 

The Q&A includes that where Dutch Constituent Entities are liable for the Top-up Tax due but lack sufficient financial resources to meet the payment obligation, the DMTA 2024 does not provide relief - i.e., there is no mechanism to make other Constituent Entities pay the Top-up Tax. According to the DTA, it is clear that the Dutch Constituent Entities are the taxpayer under the DMTA 2024.

The Q&A makes clear that the MNE Group must ensure that the liable Constituent Entity has sufficient liquidity to pay the tax due. The tax qualification and considerations of intra-group funding arrangements or tax sharing agreements depend on the specific facts and circumstances of each case.

Loyens & Loeff take-away: While the amount of Top-up Tax under the DMTA 2024 is often linked to the profits of another Constituent Entity than the one who is subject to the tax, the DTA clarify in this answer that, in their view, there is no mechanism for the taxpayer to retrieve the amount of Top-up Tax from the Low-Taxed Constituent Entity that caused the Top-up Tax due. Any intra-group arrangement to arrange such relief should be reviewed from a tax perspective on its own merits.

The Q&A outlines that the change in value of a liability of a buyer resulting from an earn-out arrangement (e.g., a payment that needs to be made after acquisition of an Entity if certain conditions are met) – due to unmet conditions following an acquisition (e.g. EBITDA thresholds not being met) - qualifies as an Excluded Equity Gain under Article 6.2(2)(c) of the DMTA 2024, provided that:

• the applicable accounting standard requires the release to be reflected in the financial result, and
• the earn-out does not relate to a portfolio interest.

The reasoning provided refers to the treatment of gains and losses from changes in fair value of an Ownership Interest under IFRS.

Similar guidance is provided with respect to the forfeiture of an earn-out receivable at the level of a respective seller resulting in an Excluded Equity Loss.

Loyens & Loeff take-away: The input is a welcome clarification for taxpayers that realize a gain on earn-out liabilities (which are generally exempt for Dutch CIT purposes) as qualifying it as Excluded Equity Gain would avoid adverse impact on the ETR. The Q&A reasoning is based on the IFRS treatment and concludes that – in the specific case - the gain related to the change in value of an earn-out liability is an Excluded Equity Gain because it relates to a change in value of the Ownership Interest. The question arises if such earn-out gain would always qualify as an Excluded Equity Gain for DMTA 2024 purposes.

When determining the GloBE Income or Loss of a Constituent Entity, intra-group transactions between Constituent Entities located in different jurisdictions must be adjusted if they are either:

• not recorded at the same amount in the financial accounts of the respective Constituent Entity, or
• not consistent with the GloBE Arm’s Length Principle.

As a result, all TP adjustments must be taken into account when calculating the ETR - regardless of their materiality.

However, according to the guidance on the GloBE Information Return (GIR), TP adjustments related to intra-group transactions with an aggregate value below EUR 35 million during the Fiscal Year cannot be included in Table 3.2.4.1 of the GIR.

Loyens & Loeff take-away: The OECD's guidance on the GIR includes an EUR 35 million threshold that does not follow from the DMTA 2024 or the GloBE MR. According to this answer of the DTA, the fact that the TP adjustment does not need to be specified in the GIR, does not impact how it affects the ETR calculation. The question arises if this could – nevertheless – trigger issues when completing the GIR.

The Q&A also includes a question regarding the impact on the application of the realisation principle election if an entity is disposed. This realisation principle election allows an MNE Group to align the GloBE book value of certain assets with their original carrying value for Constituent Entities in a specific jurisdiction and only realise gains and losses when realized. This election generally remains valid for five years.

However, when a Constituent Entity for which such election is made is transferred to another in-scope MNE Group, uncertainty arises as to whether the election is still applicable or not at the level of the acquiring MNE Group. The DTA acknowledges this issue but does not provide a definitive answer and refers to upcoming OECD guidance that will clarify whether the acquiring group must honour the election made by the transferring group.

Loyens & Loeff take-away: This position makes clear that the DTA is not able to provide an answer on all questions raised by taxpayers and can at this stage only refer to further guidance that should be developed at OECD level. We additionally note that the impact of other elections in merger & acquisition transactions (also) currently remains uncertain, with the exception of the impact of the GloBE Loss DTA election.

The Q&A includes information regarding the impact of a tax benefit (i.e., a negative tax expense) that arises from a reassessment of the tax position originating in a Fiscal Year during which the GloBE Rules did not yet apply. Specifically, the DTA addresses whether such benefit reduces the amount of Adjusted Covered Taxes in the Fiscal Year in which the benefit is recognised.

Although the Q&A outlines that the DMTA 2024 does not explicitly allow taxpayers to exclude such a benefit from the Adjusted Covered Taxes in GloBE years, the DTA emphasises that including a tax benefit originating from a year during which the GloBE Rules did not apply, conflicts with the purpose and intent of the Pillar Two framework.

Therefore, according to the Q&A, taxpayers may exclude the tax benefit related to such a year from the amount of Adjusted Covered Taxes.

Loyens & Loeff take-away: This answer in the Q&A is a welcome clarification for many taxpayers, as adjustments to the tax provision for years during which the GloBE Rules did not yet apply are in practice often included and could impact the ETR calculation in GloBE years if included in the Adjusted Covered Taxes. However, the fact that this is solely based on aim and purpose, raises the question on whether other tax authorities could challenge a taxpayer taking this position and additionally raises the question how to consider this adjustment in the GIR. We also understand that other tax authorities take different positions regarding such prior-year adjustments, for example by referring to specific provisions included in the GloBE MR. Although not covered by the Q&A, the question arises if this intent and purpose approach also applies in the reverse situation (i.e,, when a positive tax expense is booked in a GloBE year that relates to a year during which the GloBE Rules did not yet apply). 

The Q&A addresses the question of whether adjustments to Covered Taxes relating to a prior reporting year - made before filing of the GIR for that year - can still be reflected in the GIR for that current year.

While Article 7.6 DMTA 2024 specifically deals with corrections to Covered Taxes after the GIR has already been submitted, it does not explicitly address the treatment of adjustments made before the submission of the GIR (but after the finalization of the relevant financial statements used for DMTA 2024 purposes). The DTA notes that this issue has been raised with the OECD, and additional guidance is expected on how such pre-submission corrections should be treated under the Pillar Two framework.

Loyens & Loeff take-away: This answer shows once again that in very common cases that MNE Groups encounter, there are items which are not yet clear under the GloBE Rules. The DTA is unable to provide an answer without additional guidance from the OECD. For taxpayers, this means that uncertainty unfortunately remains until further clarification is provided. Hopefully, the referred to guidance is published before the first GIR needs to be filed at the end of June 30, 2026.

The Q&A clarifies how the ‘once-out, always-out’ rule relating to the Transitional Country-by-Country Reporting (CbCR) Safe Harbour applies if in-scope MNE Group A acquires in-scope MNE Group B and specific circumstances occur.

The Q&A outlines that even if in-scope MNE Group B could not apply the Transitional CbCR Safe Harbour for a jurisdiction in a certain year, such jurisdiction is nevertheless (again) eligible for the Transitional CbCR Safe Harbour if the in-scope MNE Group is acquired by in-scope MNE Group A, in case MNE Group A did not have presence in such jurisdiction before.

Loyens & Loeff take-away: this answer confirms that the ‘once-out, always-out’ rule should be tested on an MNE group basis. This answer – in our view – equally applies to the situation that MNE Group A acquires an entity (A Co) forming part of MNE Group B whereby the latter could not apply the Transitional CbCR Safe Harbour with respect to the jurisdiction where A Co is located. This should not preclude MNE Group A to apply the Transitional CbCR Safe Harbour with respect to the jurisdiction where A Co is located.

The Q&A clarifies how reflected and disclosed deferred tax assets (or: deferred tax liabilities) from pre-GloBE Fiscal Years can be recognised under the DMTA 2024.

Pursuant to Article 14.1 DMTA 2024, when determining the ETR for a jurisdiction in a Transition Year (i.e., the first Fiscal Year that the MNE Group comes within the scope of the GloBE Rules in respect of that jurisdiction), and for each subsequent years, the MNE Group shall take into account all of the deferred tax assets reflected or disclosed in the financial accounts of all of the Constituent Entities in a jurisdiction for the Transition Year.

Some accounting standards, such as IFRS, allow entities to disclose deferred tax assets in the notes to the financial statements even if they are not recognized on the balance sheet. These disclosures – such as schedules of non-recognized deferred tax assets – qualify within the meaning of Article 14.1(1) DMTA 2024.

The DTA clarifies in their answer that an MNE Group must be able to demonstrate the existence of these deferred tax assets immediately before the Transition Year. If the Consolidated Financial Statements for the Fiscal Year preceding the Transitional Year disclose these deferred tax assets, the requirement is met.

MNE Groups may also recognise deferred tax assets that are first disclosed in the Consolidated Financial Statements of the Transition Year, if they can substantiate that the deferred tax assets existed prior to that year. Supporting evidence may include standalone financial statements for the Transition Year or the preceding Fiscal Year, or other documentation used in preparing the consolidated accounts, as referenced in Article 1.2(1) DMTA 2024.

In addition, MNE Groups may recognise non-reflected DTAs that arise during or after the Transition Year, in accordance with Articles 7.3(4) DMTA and 7.3(5)(c) DMTA 2024.

Loyens & Loeff take-away: Given the reliance of the GloBE ETR calculations on deferred tax accounting, being properly able to take all existing deferred tax attributes from before the application of the DMTA 2024 into account is important to avoid unexpected ETR distortions. This answer reiterates the importance of recognizing or disclosing the existing deferred tax assets in the Consolidated Financial Statements. However, it also gives room to taxpayers to substantiate the existence of deferred tax assets with other supporting documentation underlying the Consolidated Financial Statements, making it clear that there is some flexibility if no full specification of the deferred tax assets has been included in the Consolidated Financial Statements themselves.