Dutch state secretary clarifies Netherlands-Germany joint declaration on conditional withholding tax, minimum tax rate

By Jian-Cheng Ku & Rhys Bane, DLA Piper Nederland N.V.

The Netherlands State Secretary of Finance Menno Snel further clarified aspects of a March 27 Netherlands-Germany joint declaration on international tax matters during a meeting of the Dutch House Committee for Finance.

The joint declaration, signed by Snel and Germany’s Federal Minister of Finance, Olaf Scholz, refers to a Netherlands proposal for a conditional withholding tax on interest and royalty payments made to low tax jurisdictions, expected to be made public the second half of 2019, and also states that the two governments have agreed to promote international efforts to introduce a minimum tax rate.

Netherlands conditional withholding tax

At a March 28 meeting of the Dutch House Committee for Finance, called by Helma Lodders, a member of the Dutch House of Representatives for the Netherlands’ largest political party, the People’s Party for Freedom and Democracy (Volkspartij voor Vrijheid en Democratie or VVD), the State Secretary said that the proposed Netherlands conditional withholding tax would only apply to direct payments made to low tax jurisdictions.

This is different from an earlier, withdrawn, proposal for a Netherlands conditional withholding tax on dividends, where certain ‘abusive situations’ also fell within the scope of the tax.

Responding to questions asked by members of the Netherlands House of Representatives, Snel acknowledged that the introduction of the conditional withholding tax is likely to shift the interest and royalties currently flowing through the Netherlands to other jurisdictions, such as Ireland and Singapore.

It is expected that the low tax jurisdictions to which the Netherlands conditional withholding tax will apply are jurisdictions that have a statutory corporate income tax rate of less than 9% on October 1, 2020, or that are listed on the EU list of non-cooperative jurisdictions for tax purposes immediately prior to the publication of the decree naming the low tax jurisdictions.

The decree is expected to be published in December 2020.

It is likely that a transitional measure will be introduced for jurisdictions with which the Netherlands has a tax treaty but that are included on the list, based on the statutory corporate income tax rate or the fact that they are included on the EU list of non-cooperative jurisdictions.

Minimum effective tax rate versus minimum statutory tax rate

Snel also explained that the Netherlands-German declaration aims to shift the focus on minimum effective tax rates to minimum statutory tax rates, as the former is not a reliable measure of the level of taxation that applies to a company.

In the post-BEPS era, where base erosion and profit shifting are being tackled at an international (OECD) and European (EU) level, the focus has shifted from having a smaller taxable base to lowering the corporate income tax rates.

In the 2018 OECD publication ‘Tax Policy Reforms 2018’, the OECD demonstrates that the unweighted OECD average corporate income tax rates dropped from approximately 33% in the year 2000 to approximately 24% in the year 2018. However, the unweighted OECD average corporate income tax revenues have been slowly increasing since 2009 (after a drop likely caused by the 2008 financial crisis).

Countries with large domestic markets such as France and Germany have noticed this competition in corporate income tax rates and wish to introduce minimum effective tax rates for multinational companies in order to combat the ‘race to the bottom’ they perceive.

The effective tax rate of companies may be impacted by, inter alia, the pre-tax profits or losses made in any given year and tax exemptions such as the participation exemption, which intend to provide relief from double taxation.