Dutch government targets tax avoidance with withholding tax and substance requirements and provides useful clarification on ATAD implementation
On 23 February 2018, the Dutch State Secretary of Finance published a letter (Letter) outlining the Dutch government’s intention to further enhance the investment climate for groups with operations in the Netherlands by lowering the corporate tax rate to 21% and by abolishing the current dividend withholding tax, as agreed upon in the coalition agreement (see our Tax Flash of 10 October 2017).
At the same time, the government intends to introduce measures against tax avoidance, including:
- the introduction of a new withholding tax on intra-group payments to low-tax jurisdictions of interest and royalties (by 2021) as well as of dividends (by 2020), the latter coinciding with the abolition of the current dividend withholding tax; and
- increased substance requirements for Dutch holding companies as well as Dutch group financing and licensing companies.
Furthermore, the Letter provides useful clarifications on the Dutch implementation (by 2019 and 2020) of the EU Anti-Tax Avoidance Directives (ATAD), in particular on the CFC rules.
With this Letter the Dutch government has made a clear effort to provide clarity on its anti-tax avoidance measures, as such giving more certainty to taxpayers.
Withholding tax on dividends, interest and royalties paid to low-tax jurisdictions
As previously announced, the Dutch government wants to introduce a withholding tax on intra-group payments of dividends, interest and royalties by Dutch resident companies to entities that are resident in either a jurisdiction with no or a low statutory tax rate or in a jurisdiction that appears on the EU list of non-cooperative jurisdictions (EU Black List). The Letter does not state the rate of this new withholding tax. The current dividend withholding tax rate is 15%.
The Letter provides no guidance as to the minimum statutory tax rate that is considered acceptable. The EU Black List was adopted on 5 December 2017 (see our Tax Flash of 6 December 2017) and amended on 23 January 2018. The EU Black List currently contains only 9 jurisdictions.
The withholding tax rules will include an anti-abuse provision that appears to be aimed at artificial arrangements that divert payments of dividends, interest and royalties through a high-tax jurisdiction to ultimately end up in a low-tax or EU Black List jurisdiction.
The new withholding tax will only apply to intra-group payments. Payments of dividend and interest on, for instance, publicly held listed securities should therefore fall outside of the scope of this new withholding tax.
The new withholding tax on dividends to low-taxed jurisdictions is expected to be introduced as of 1 January 2020, coinciding with the abolition of the current, generally applicable, dividend withholding tax (see our Tax Flash of 10 October 2017). The new withholding tax on interest and royalties will be introduced as of 1 January 2021.
Increased substance requirements
The other measures include (a) stricter substance requirements for Dutch resident intra-group financing and licensing companies and (b) the introduction of the stricter substance requirements for Dutch resident holding companies. The Dutch government intends to enact these changes swiftly, but does not mention a specific date.
Since 2014, certain Dutch resident intra-group financing and licensing companies have to meet substance requirements, failure of which results in spontaneous exchange of information by the Netherlands to the relevant tax treaty partner or EU Member State (see our Quoted of March 2015). The scope of these exchange of information rules will be extended to certain Dutch companies with international holding activities. Also, these intra-group financing and licensing companies and international holding companies will have to satisfy the stricter minimum substance requirements (Increased Substance Requirements).
The Increased Substance Requirements will include, in addition to the current minimum substance requirements (e.g., at least 50% Dutch resident directors and the bookkeeping being performed in the Netherlands), the requirement that:
- the relevant Dutch company incurs annual salary costs of at least € 100,000 in relation to its holding or group financing and licensing functions; and
- the relevant Dutch company has (for at least 24 months) office space at its disposal in the Netherlands which is in fact used to carry out its holding, financing or licensing functions.
Furthermore, as of 1 January 2019, certain Dutch resident companies that seek to enter into an advance tax ruling or advance pricing agreement with the Dutch tax authorities will have to comply with the Increased Substance Requirements.
Implementation of ATAD
The Letter further gives more guidance on the proposed Dutch implementation of ATAD for rules on CFC, earnings stripping and hybrid mismatches. In particular the CFC rule clarifications provide a useful insight in the implementation of ATAD in the Netherlands (see our Tax Flash of 11 July 2017).
The Letter states that Dutch transfer pricing rules already provide for a sufficient implementation of the so-called Model B CFC rules from ATAD1.
Additionally, the Letter announces that the Netherlands wishes to introduce CFC rules on the basis of Model A for certain situations. Under Model A, specific categories of income (such as dividends, interest, financial lease income and royalties) of certain CFCs are included in the Dutch shareholder’s taxable income, unless the CFC is involved in “substantial economic activities”. The CFCs that are targeted are CFCs in either low-taxed jurisdictions or in jurisdictions that are on the EU Black List. The Letter states that the “substantial economic activity” requirement will be met if the CFC fulfils the Increased Substance Requirements. It is envisaged that the CFC rules will enter into force on 1 January 2019.
Earnings stripping rules
The Letter again confirms that the Netherlands will introduce an earnings stripping rule which will be stricter than the minimum rules prescribed by ATAD. The deduction of net borrowing costs is limited to the highest of (i) 30% of the earnings before interest, taxes, depreciation and amortization (EBITDA) and (ii) an amount of Euro 1 million (ATAD provides for a Euro 3 million threshold). The Letter furthermore confirms that the Netherlands will not implement a group escape rule and that there will be no grandfathering for existing loans. It is envisaged that the earnings stripping rules will enter into force on 1 January 2019.
Specifically with respect to banks and insurance companies, the government intends to implement a (not further defined) minimum capital rule by 2020.
The Letter does not provide details on the implementation of the ATAD hybrid mismatch rules, other than on the legislative process. Considering the complexity of the hybrid mismatch rules, the government will initiate an internet consultation procedure as soon as possible in 2018. During the consultation period interested parties may provide input. The government wishes to publish a draft bill in the beginning of 2019 and implement the rules by 1 January 2020. The Letter does not specifically say whether the government will use the possibility of delaying the implementation date for reverse hybrid entities until 1 January 2022, but it appears that it does not intend to use this possibility.
We will keep you informed of any further developments. Please contact your trusted adviser at Loyens & Loeff in case you have any queries.