The 2019 Dutch budget and tax plan: key takeaways for multinational enterprises

September 26, 2018 Europe, Featured News, The Netherlands
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By Jian-Cheng Ku, Tim Mulder, & Rhys Bane, DLA Piper, Amsterdam

The Dutch government, on September 18, presented the 2019 Dutch budget and tax plan, proposing significant modifications to the taxation of multinational firms.

The proposal aims to encourage foreign investment, abolishing the withholding tax on dividends and replacing it with new source tax.

The government also proposes to reduce corporate tax rates, implement aspects of the EU Anti-Tax Avoidance Directive (ATAD), and abolish two existing limitations on the deductibility of interest by multinationals.

Dividend withholding tax repeal

The most anticipated proposal, the abolishment of the Dutch Dividend Withholding Tax Act of 2020, was published in the tax plan.

The proposal is primarily designed to improve the Dutch investment climate as it would be easier to attract foreign capital with no taxation of outgoing dividends.

Under the legislative proposal, called the Source Tax 2020 Act, the current dividend withholding tax would be abolished while a new source tax would be introduced on dividends (as of 2020) and on interest and royalties (as of 2021) paid to group companies in ‘low-tax jurisdictions’ or in ‘abusive situations.’

Source tax

 Low-tax jurisdictions are defined in as jurisdictions that levy zero corporate income tax, that impose a statutory rate of less than 7%, or that are included on the EU list of non-cooperative jurisdictions for tax purposes. The most recent EU non-cooperative jurisdiction list, issued June 5, is composed of American Samoa, Guam, Namibia, Palau, Samoa, Trinidad and Tobago, and the US Virgin Islands.

The Dutch Ministry of Finance will publish a list of the jurisdictions that qualify as low-tax jurisdictions every October.

 

 

 

 

 

 

Dividend payment to low-tax jurisdictions covered by the Source Tax 2020 Act

Abusive situations

The Source Tax 2020 Act defines two abusive situations. The first covers structures in which an intermediate holding company is interposed between the Netherlands and a low-tax jurisdiction.

The second abusive situation covers hybrid structures, such as where a Dutch closed limited partnership (CV) is a non-transparent taxpayer from the perspective of the investor’s country (for example the US) but is transparent from a Dutch tax perspective where the CV is not taxed in its country of residence (for example Bermuda).

Concerning structures involving CVs and Dutch operating companies (BVs), the so-called CV/BV structure, we note, that an amendment to the ATAD which must be implemented by January 1, 2022, requires EU Member States to treat reverse hybrids as resident taxpayers.

Depending on the Dutch implementation of this amendment to ATAD, it is possible the source tax would not be due from CV/BV structures starting in 2022.

This would also lead to the potential application of the ATAD’s earnings stripping rules concerning the CV.

 

 

 

 

 

 

 

Abusive situations covered by the Source Tax 2020 Act

Corporate tax rates

Under the 2019 Dutch budget and tax plan, corporate tax rates would be gradually reduced.

By 2021, corporate rates would reach 16% for the first EUR 200,000 (USD 235,000) in taxable profits and 22.25% for taxable profits in excess of that amount.

ATAD implementation

The Dutch government also published a proposal to implement the ATAD as the ATAD must be implemented in EU Member States by January 1, 2019.

The ATAD requires EU Member States to introduce an earnings stripping rule, an exit tax, a general anti-abuse rule (GAAR) controlled foreign company (CFC) rules.

The Dutch implementation proposal only covers the earnings stripping rule and CFC rules, as the Dutch Corporate Income Tax Act already contains rules on exit tax and the Netherlands already has a GAAR (in the form of the so-called fraus legis doctrine).

As ATAD prescribes a deferral period of 5 years for corporate taxpayers on exit tax due (whereas Dutch tax law currently prescribes a deferral period of 10 years), the Dutch Collection of State Taxes Act will be modified to conform with EU standards.

Earnings stripping rule

The introduction of an earnings stripping rule (a general limitation on the deductibility of interest) in the 2019 Dutch budget and tax plan is accompanied by the abolishment of two Dutch specific limitations on the deductibility of interest.

The interest deduction limitation on excessive participation interest (Art. 13l CITA) and the interest deduction limitation on acquisition interest (Art. 15ad CITA) will be abolished as of January 1, 2019.

The earnings stripping rule would allow Dutch taxpayers to deduct interest up to the highest of 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) or EUR 1,000,000.

CFC rules

ATAD allows EU Member States to pick from two ‘models’ for CFC rules. The first one, the so-called ‘Model A’ CFC rules, allocate specific types of non-distributed (passive) income (e.g. dividend, interest. and royalty income) to the EU taxpayer. The second one, the so-called ‘Model B’ CFC rules, follow an approach based on the arm’s length principle.

The Dutch government is of the opinion that, as the arm’s length principle is already a part of the Dutch corporate income tax, no further implementation is required for the Model B CFC rules.

However, to fully comply with the ATAD, the Dutch government proposes to implement Model A CFC rules for CFCs in low-tax jurisdictions, as defined in the Source Tax 2020 Act.

A company qualifies as a CFC under these new provisions if the Dutch taxpayer, by itself or together with its associated enterprises, holds a direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly more than 50% of the capital or is entitled to receive more than 50% of the profits of the company.

An entity is not treated as CFC if it performs ‘substantial economic activities,’ which means that the CFC meets the Dutch minimum substance requirements. In case of a CFC, the undistributed “tainted” income of the CFC such as dividends, interest and royalties, will be picked up by the Dutch taxpayer and subject to Dutch corporate income tax.

Assessment

The proposed abolishment of the current Dutch dividend withholding tax is beneficial to the Dutch investment climate for internationally operating companies with a company in the Netherlands.

The future source tax is limited in scope and only targets payments made to (very) low-tax jurisdictions and abusive situations.

The introduction of the ATAD’s earnings stripping rule and the abolishment of the two specific limitations on the deductibility of interest, the limitation on the deductibility of excessive participation interest and the limitation on the deductibility of acquisition interest, simplify compliance for taxpayers.

By implementing the arm’s length principle-based CFC rules prescribed by ATAD in the vast majority of cases, Dutch tax law is in line with EU standards on the implementation of a number of measures targeting tax avoidance.

The Dutch application of the ‘substantial economic activities’ exception for Model A CFC rules is simple in nature and, in principle, does not require extensive discussion

–Jian-Cheng Ku is a Tax Adviser with DLA Piper, Amsterdam. He 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.

-Tim Mulder is a Tax Adviser with DLA Piper, Amsterdam. Tim advises on Dutch and international tax aspects relating to international tax planning, M&A transactions, corporate restructurings, private equity and investment fund transactions.

–Rhys Bane is a Tax Adviser with DLA Piper, Amsterdam. Rhys advises on Dutch corporate taxation and international tax law, with a focus on international tax planning, corporate restructurings and Dutch, European and international tax policy & legislation.

 

 

Jian-Cheng Ku

Jian-Cheng Ku

Partner 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

Jian-Cheng Ku
Partner


T +31205419911
F +31 20 541 9999
M +31613384683
E [email protected]

DLA Piper Nederland N.V.
Amstelveenseweg 638
1081 JJ Amsterdam
P.O. Box 75258
1070 AG Amsterdam
The Netherlands

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
Rhys Bane

Rhys Bane

Associate at DLA Piper Nederland N.V.

Rhys Bane advises clients on Dutch and international tax aspects of international (tax) structuring and corporate reorganizations, Dutch, European and international tax policy matters and on tax controversy matters.

Rhys Bane is also a PhD candidate at Leiden University. His doctoral research focuses on international tax arbitration.

Rhys Bane

Rhys Bane
Tax Advisor


T +31 20 541 9392
F +31 20 541 9999
M +31 6 1562 3924
E [email protected]

DLA Piper Nederland N.V.
Amstelveenseweg 638
1081 JJ Amsterdam
P.O. Box 75258
1070 AG Amsterdam
The Netherlands
www.dlapiper.nl

 

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