17 september 2019

2020 Dutch Budget: Main changes for corporate taxpayers

Today the Dutch Ministry of Finance submitted the 2020 Dutch Budget (the Budget) to parliament. The Budget includes a.o. a proposal to introduce a conditional withholding tax on interest and royalty payments to related entities in low-tax or EU blacklisted jurisdictions and in cases of abuse, as of 1 January 2021.

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Other relevant proposed changes (entering into force on 1 January 2020 unless indicated otherwise) in the Budget are:

  • Changes to the anticipated reduction of the main corporate income tax rate: the main corporate income tax rate will remain at 25% in 2020 and will be lowered to 21.7% in 2021.
  • An amendment to the conditions to apply an exemption for dividend withholding tax on distributions to shareholders in EU Member States and in treaty countries.
  • Introduction of a minimum capital rule to limit interest deduction for banks and insurers.

Moreover, changes are announced to the innovation box regime (effective rate to be increased from 7% to 9%), to the loss deduction rules regarding participations and permanent establishments and the abolishment of the early payment discount (betalingskorting) for corporate income tax assessments, all as from 2021. Furthermore, real estate transfer tax for commercial real estate will increase from 6% to 7% as from 2021.

Introduction of a conditional withholding tax on certain intragroup interest and royalty payments

A withholding tax (WHT) will be introduced as of 1 January 2021 on intragroup interest and royalty payments to jurisdictions with a statutory profit tax rate of less than 9% or to jurisdictions that are EU blacklisted. The WHT on interest and royalty payments will furthermore apply in certain abusive situations and certain situations involving hybrid entities or permanent establishments.

The WHT rate will be equal to the main corporate income tax rate, which will be 21.7% in 2021.

The WHT on interest and royalty payments will apply to payments by Dutch resident entities (entities incorporated under Dutch law are regarded Dutch resident by fiction), but also to payments by permanent establishments in the Netherlands of non-resident entities. The WHT targets interest and royalty payments to related entities whereby control (in short, >50% voting rights) is the relevant criterion.

The artificial interposition of a non-low taxed intermediate conduit company between the low taxed jurisdiction and the Dutch paying entity can qualify as an abusive situation (for instance if that conduit company is not the beneficial owner of the interest and royalty payments). In ‘business enterprise’ structures, in principle no WHT applies if such an intermediate conduit 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) or if such an intermediate conduit company can demonstrate valid economic reasons. However, meeting the substance requirements will not be a safe harbour as the Dutch Tax Authorities (DTA) have the possibility of counterproof to demonstrate that a structure is abusive, even if these substance requirements are satisfied.

Transitional rules are proposed in case a tax treaty with a low-tax jurisdiction or EU blacklisted country restricts the WHT from being levied and the Netherlands will approach such treaty partner to amend the tax treaty.

Changes to the anticipated reduction of the main corporate income tax rate

Based on the enacted 2019 Budget the corporate income tax rates would be reduced as follows:

 

2020

2021

For profits up to EUR 200,000

16.5%

15%

For profits exceeding EUR 200,000

22.55%

20.5%

It is now proposed to maintain the main corporate income tax rate of 25% in 2020 and to lower the rate to 21.7% in 2021, resulting in the below overview for the following years:

 

2020

2021

For profits up to EUR 200,000

16.5%

15%

For profits exceeding EUR 200,000

25 %

21.7%

Amendment to the conditions to apply an exemption for dividend withholding tax

The Dutch provisions to qualify for the Dutch dividend withholding tax (DWT) exemption (or to disqualify as a non-resident corporate taxpayer) will be amended as from 1 January 2020. The amendment is based on the decision of the Court of Justice of the European Union in the so-called ‘Danish Cases’ (see our tax flash of 26 February 2019).

Currently, satisfying the ‘relevant substance’ criteria functions as a safe harbour for certain foreign intermediate companies located in EU Member States and treaty countries, implying that no abuse will be regarded present. Under the proposed amendment, the DTA will have the possibility of counterproof to demonstrate that a structure is abusive, even if the relevant substance criteria are satisfied.

Introduction of a minimum capital rule to limit interest deduction for banks and insurers

The minimum capital rule limits the interest deduction for Dutch corporate income tax purposes for banks and insurers to the extent they have excessive debt. The minimum capital rule will apply to banks and insurers that have a license or notice for business of banking or insurance issued under the Dutch Financial Supervision Act (Wet op het financieel toezicht). Entities with such license or notice could be banks and insurers established in the Netherlands, foreign banks and insurers with Dutch subsidiaries or foreign banks and insurers with Dutch branch offices. The minimum capital rule will apply to the entity that has the license or notice.

Other relevant proposed changes

  • The Dutch Controlled Foreign Company (CFC) legislation has a safe harbour exception for CFCs if they meet the so-called relevant substance requirements. If so, they are regarded to perform a substantive economic activity. Similar to the changes to the DWT exemption (see before) it is now proposed to provide the possibility of counterproof for the DTA to establish that a CFC does not have a substantive economic activity, even if all the relevant substance requirements are met.
  • In the Dutch Corporate Income Tax Act, a definition of permanent establishment will be introduced. It will align the Dutch definition of permanent establishment with the definition of a relevant tax treaty.
  • Dutch resident service companies may need to comply with increased substance requirements to avoid exchange of information with other jurisdictions.

Other (already enacted) legislation entering into force or having effect as from 1 January 2020

The following measures were already proposed before Budget Day, and are therefore not part of the Budget, but will enter into force or have effect as from 1 January 2020:

  • Implementation of rules to counter hybrid mismatches, as required by the amended EU Anti-Tax Avoidance Directive (ATAD2) (see our Tax Flash of 2 July 2019).
  • Implementation of the Mandatory disclosure rules for intermediaries, as required by the EU Mandatory Disclosure Directive (see our Tax Flash of 15 July 2019).
  • Changes to certain tax treaties that are affected by the Multilateral Instrument (see our MLI webpage).
  • Entry into force of rules denying carry forward of interest deduction under the earnings-stripping rules (that entered into force on 1 January 2019) in case of change of ownership (see our Tax Flash of 18 September 2018).

Contact

We will keep you updated on further developments. Should you have queries, please contact your trusted adviser at Loyens & Loeff.