Dutch 2022 budget plan includes tax proposals on transfer pricing, hybrids

By Jian-Cheng Ku, Gabriël van Gelder, and Rhys Bane, DLA Piper Nederland N.V.

On 21 September, the Dutch government published its tax proposals for 2022 and onwards, including several direct tax measures that may be relevant for multinational enterprises.

Notably, the proposals would limit unilateral downward transfer pricing adjustments, implement the last leg of hybrid mismatch rules prescribed by the EU Anti-Tax Avoidance Directive II, limit utilization of dividend withholding tax credits, and change employee stock option rules to improve the liquidity of private companies.

New rules regarding the legal entity qualification for tax purposes were previously announced. However, these were not included in the 2022 Dutch budget plan package.

This article reviews the main proposed rules, although they are potentially subject to change before the final rules are published. The tax proposals are currently subject to discussion in the Dutch House of Representatives (Tweede Kamer der Staten Generaal).

On 23 September, a motion was passed in parliament that called on the government to increase spending in the area of, among other things, education and healthcare. If the government decides to execute the motion, it would likely mean a slight increase in the Dutch corporate income tax rates and a change in the Dutch earnings stripping rule.

Limitation of unilateral downward transfer pricing adjustments

The Dutch government proposed to disallow unilateral downward transfer pricing adjustments (downward adjustments) in the Netherlands in cases where there is no corresponding taxable adjustment (corresponding adjustment) at the level of the related party (generally referred to as “informal capital”).

Compared to a version of the proposal circulated earlier, an additional rule was introduced under which a step-up is denied if a taxpayer acquires a business asset by a capital contribution, profit distribution, repayment of paid-up capital, liquidation distribution or similar (legal) action, if the step-up is higher than the amount taken into account for tax purposes at the related party that transfers the business asset (the transferor), the same applies mutatis mutandis to the transfer of debt.

Under the proposal, a corresponding taxable adjustment or step-up will only be allowed if there is a corresponding adjustment subject to corporate income tax. The rate at which the corresponding adjustment is included in taxation is not relevant. The burden of proof regarding the taxation of a corresponding adjustment lies with the taxpayer.

The new rules should take effect for fiscal years starting on or after 1 January 2022 and shall have no retroactive effect. However, in effect, a partial retroactive effect will apply to business assets acquired in the financial years starting on or after 1 July 2019 and before the financial year starting on or after 1 January 2022 under two conditions. These conditions are, first, that at the start of the financial year on or after 1 January 2022 amortization or depreciation on the asset is still possible and, second, that the asset would have a lower book value if the proposal would have been in force at the time of the arm’s length adjustment.

Assets transferred in financial years that started before 1 July 2019 should fall out of scope for this measure.

Implementation of last leg of hybrid mismatch rules prescribed by the EU Anti-Tax Avoidance Directive II

Based on the obligation to fully implement the EU Anti-Tax Avoidance Directive II, the Dutch government proposes the introduction of tax liability for reverse hybrid entities.

For these rules, reverse hybrid entities are incorporated under Dutch law or resident for tax purposes of the Netherlands and are qualified as transparent for Dutch tax purposes (not taking into account the reverse hybrid taxpayer rule). However, they are treated by the jurisdiction of a participant which holds at least 50% of the capital, voting rights or profit rights as being opaque. If an entity qualifies as such a reverse hybrid entity, it will be considered opaque for Dutch tax purposes and be liable for corporate income tax in the Netherlands. Profits that are taxed at the level of the participants should be deductible from the Dutch taxable base.

Limitation on utilization of dividend withholding tax credits

Following the Court of Justice of the European Union (CJEU) judgment in case C-575/17 Sofina SA and Others, the Dutch government initially published a decree, allowing non-resident taxpayers to obtain a refund of Dutch dividend withholding tax.

The Dutch government intended to change the rules to put Dutch resident taxpayers in the same position as non-resident taxpayers prior to the publication of the decree but could not do this in time.

The Dutch government has therefore now proposed a limitation on the possibility to obtain a refund due to the crediting of dividend withholding tax against the corporate income tax.

The dividend withholding tax due can be credited against the amount of corporate income tax due in that year but cannot result in a refund to the taxpayer. This is because this is not possible for certain non-resident taxpayers which, according to the Dutch government, could be considered discriminatory. Dividend withholding tax that cannot be credited due to this rule can be used in following years.

Change of employee stock option rules to improve the liquidity of private companies

The Dutch government has also proposed a change to the moment when gains from the exercising of employee stock options are taxed to provide more flexibility, mainly to startups and scale-ups. Currently a more flexible regime is already in place, specifically for start-ups and scale-ups that have a so-called “R&D declaration”. The new rules aim to widen the scope to ensure effectiveness of the rules.

Under the new rules, employee stock options will be taxed at the moment of exercising the option right (if the shares are tradeable), when the shares received by exercising the stock option are considered tradable (if they were initially not tradeable), or in the event of a sale of the stock option. The taxable amount is still determined by the fair market value at the moment of taxation.

If the shares received by exercising the stock option are not tradeable due to a contractual agreement between the granter of the option and the employee (e.g., a lock-up period), this contractual agreement is respected for a maximum of five years after the initial public offering. After five years, the shares are considered tradeable and the contractual arrangement is no longer respected. Only if the shares are not tradeable by law, the shares are not considered tradeable after five years.

Announced measures on legal entity qualification, mutual funds, open CVs

Under the Dutch qualification rules published for public consultation, the general rule – under which certain characteristics of foreign legal forms should be compared to the same characteristics of Dutch legal forms – remains. If no Dutch legal form can be found that is similar to the relevant legal entity, one of two approaches apply depending on the circumstances.

A fixed approach will apply if such foreign legal entity is a resident for tax purposes of the Netherlands. This means that the foreign legal entity will always be treated as a taxpayer (in other words, as opaque for Dutch tax purposes).

A symmetrical approach will apply to entities that are not a resident for tax purposes of the Netherlands. This means that the foreign legal entity will be treated the same as in their state of residence.

The qualification (i.e., opaque or transparent for Dutch tax purposes) of a mutual fund is currently determined by whether all participants have to agree to accession or replacement of fund participants (transparent) or not (opaque). Under the rules published for public consultation, the tax transparency of a mutual fund is determined on the basis of it being admitted to a regulated market or similar trading platform or the fund having a legal obligation (in the fund conditions) to repurchase participations in the fund. The exception to this rule is the family-owned mutual fund, these funds are always transparent.

Under the Dutch qualification rules published for public consultation, open CVs (Dutch limited partnerships that are treated as a taxpayer) will cease to exist as of 1 January 2022. Any open CV in existence immediately prior to that moment will be deemed to have transferred its assets at fair market value to the partners, where the partners are deemed to have transferred their partnership interests and receivables on the open CV at fair market value.

This transfer results in an “exit tax” for existing open CVs. There are several transitional measures that mitigate the effects of this exit tax. For open CVs where all partners are companies (i.e., legal entities subject to corporate income tax), there will be a rollover relief mechanism, subject to certain conditions. For open CVs where the partner is an individual, there will be a share-for-share merger facility. If the two abovementioned facilities cannot be applied, it is possible to pay the tax in ten equal annual installments. Finally, for individuals that make available assets to such an open CV, there is also a rollover relief mechanism.

The qualification rules published for public consultation may be significantly changed, given the large number of (generally negative) responses to the public consultation.

Our observations

As the Dutch government is currently in a caretaker status, the 2022 tax plan package is less extensive and contains considerably fewer policy proposals than in previous years. It is expected that the proposed measures will be adopted swiftly by Parliament due to their generally non-controversial nature.