These amendments to the Tax Plan 2022 were already announced on Budget Day 2021. Furthermore, it has been communicated that the announced increase of the corporate income tax rate as well as the tightening of the earnings stripping rules will be included in a separate bill of amendment to the Tax Plan 2022, scheduled to be submitted to parliament on 15 October 2021.
Reparation Dutch Supreme Court case regarding utilisation of ring-fenced holding losses
Until 1 January 2019, the Dutch Corporate Income Tax Act (CITA) contained specific rules on the utilisation of so-called holding and financing losses. These ring-fenced losses could only be offset against profits from holding and financing activities. Albeit that these rules have been abolished, transitional law provisions remained applicable meaning that outstanding pre-2019 ring-fenced losses are still subject to the aforementioned restrictive loss settlement rules.
If structured well, these ring-fenced losses can be used more easily within a Dutch tax consolidated group by offsetting such losses against ‘ordinary’ profits of other companies of such group. This was specifically confirmed by the Dutch Supreme Court earlier this year. The Ministry of Finance now responses with an amendment to the Tax Plan 2022 aiming to repair this potential budgetary leak. Since the Dutch tax administration does not have the impression that corporate taxpayers are actively taking advantage of this Supreme Court case, no retroactive effect is introduced. Hence, these changes, if adopted, will be effective as of 1 January 2022.
Proposed changes to the Withholding Tax Act 2021
As from 1 January 2021, the Netherlands levies a 25% withholding tax on intra-group interest and royalty payments to entities in certain low taxed or blacklisted jurisdictions, to certain hybrid entities or in cases of abuse. First and for completeness’s sake, please note that the earlier mentioned increase of the headline rate of the corporate income tax to 25.8% means that the withholding tax rate of the WTA 2021 increases accordingly. Further to this, two changes of a technical nature are proposed in the amendment to the Tax Plan 2022.
Payments by Dutch resident entities can be subject to this withholding tax, but also payments by non-resident entities in case the payment is allocable to a Dutch permanent establishment. The first amendment relates to the definition of a permanent establishment within the meaning of the WTA 2021. The current definition refers to the general description of a permanent establishment in the CITA, but not to certain specific provisions which broaden the general scope, including Dutch real estate investments. In the proposed amendment the permanent establishment definition for purposes of the WTA 2021 will be brought in line with the wider scope of the CITA. If adopted, these changes will be effective as of 1 January 2022. This means that structures in which Dutch real estate is held by a non-resident company need to be reassessed from a Dutch withholding tax perspective.
A second change is proposed with respect to the rules applicable to payments made to hybrid entities. Payments to such hybrid entities should not be subject to the withholding tax in case all participants in that hybrid entity (i) qualify the hybrid entity as tax transparent, and (ii) would not be confronted with withholding tax under the WTA 2021 in case of a direct payment. To apply this exception, the Ministry of Finance holds the view that the current wording requires that at least one participant needs to be a related person to the hybrid entity. A second exception is now proposed meaning that if it can be demonstrated that none of the participants is a related person to the hybrid entity, payments to hybrid entity are not subject to the WTA 2021. Please note that this new exception applies regardless of the tax treatment of the hybrid entity by the participants. If adopted, this relaxation will have retroactive effect to 1 January 2021.
We will keep you updated on further developments on the Tax Plan 2022. Should you have queries, please contact your trusted adviser at Loyens & Loeff.