Netherlands reveals plan for new withholding tax regime, increased substance requirements

By Jian-Cheng Ku and Tim Mulder of DLA Piper, Amsterdam

The Netherlands government, in a letter published by the Dutch State Secretary of Finance on February 23, announced new measures to tackle tax avoidance as part of its plan to improve and strengthen the Dutch tax and investment climate.

The good news is that the government reiterated its intention to lower the statutory Dutch corporate income tax rate to 21% (with 16% step-up rate) by 2021 and abolish the Dutch dividend withholding tax by 2020.

However, as a part of that plan, the government also seeks to introduce new measures, including a conditional withholding tax on royalties, interest, and dividends, and an increase in the substance requirements for Dutch holding/license/financing companies.

There are currently no legislative proposals pending regarding these measures.

Conditional withholding tax on royalties, interest, and dividends

The Dutch State Secretary of Finance confirmed the government’s intention to abolish Dutch dividend withholding tax as of January 1, 2020.

Instead, a withholding tax will be levied on outbound dividend, interest, and royalty payments to low-taxed jurisdictions or in abusive situations (i.e., direct or indirect payments to jurisdictions named on the EU tax haven blacklist.

It is unclear what the withholding percentage would be and no other details are available for now.

It is indicated that the dividend withholding tax should be applicable as of 2020 (in conjunction with the general abolishment of dividend withholding tax) and the withholding tax on interest and royalties as of 2021.

Increased substance requirements

The Dutch State Secretary of Finance is looking to increase the substance requirements for holding, license, and financing companies to avoid use of “letterbox firms.”

To meet the new minimum substance requirements, businesses must incur at least EUR 100k in relevant employment expenses annually and must hold office space in the Netherlands for at least 24 months.

The increased substance requirements would be applicable to:

  1. Dutch companies that would like to obtain certainty in advance by means of a tax ruling
  2. Dutch resident holding companies
  3. Dutch finance/license companies

EU Anti-Tax Avoidance Directive update

For completeness’ sake, we note that the Netherlands will also implement measures against tax avoidance pursuant to the European Anti-Tax Avoidance Directive (ATAD). We have briefly described these measures below.

Earnings stripping rule

ATAD I requires EU Member States to implement a general interest deduction limitation rule in the form of an earnings stripping rule. This rule limits the deduction of net borrowing costs to the greater of  30% of the EBITDA or EUR 3 million.

The Netherlands has chosen to implement the earnings stripping rule more strictly than necessary. Instead of a EUR 3 million threshold, a EUR 1 million threshold will apply.

Exit taxation

The existing Dutch exit taxation rules are already largely in line with the exit taxation provisions ATAD I. However, some minor changes are necessary to bring the Dutch legislation in line with ATAD I.

General anti-abuse rule (GAAR)

The Dutch government is of the opinion that the GAAR needs no implementation in the Netherlands as the abuse of law-doctrine as developed in Dutch case law achieves the same result.

Controlled Foreign Company (CFC) rules

Pursuant to the CFC rules, the Netherlands will include undistributed ‘tainted income’ from a

controlled entity or permanent establishment in the parent company’s income.

The CFC rules will apply to CFCs that meet two specific requirements. First, the taxpayer, whether or not together with an affiliated entity or individual, must have an interest, directly or indirectly, of more than 50% of the nominal paid up capital, statutory voting rights or profit in the foreign entity. Second, the foreign entity must not be subject to a profits tax that is fair according to Dutch standards.

Broadly speaking, a tax rate of more than 12.5% on taxable profit, determined according to Dutch standards, is considered fair under the proposed rules.

Notwithstanding meeting the requirements set out above, the CFC rules should not apply if the CFC conducts substantial economic activities.

The measures implementing ATAD are proposed to enter into effect as of January 1, 2019.

 

Jian-Cheng Ku

Jian-Cheng Ku

Attorney at Law / Tax Advisor at DLA Piper Nederland N.V.

Jian-Cheng Ku advises on international tax law and transfer pricing with a particular focus on international tax planning, M&A and private equity transactions, corporate reorganisations, and planning and design of transfer pricing policies.

Jian-Cheng Ku
Tim Mulder

Tim Mulder

Associate Tax Adviser at DLA Piper Nederland N.V.
Tim Mulder advises on Dutch and international tax aspects relating to international tax planning, M&A transactions, corporate restructurings, private equity and investment fund transactions.
Tim Mulder


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