Dutch Budget Day: main changes for corporate taxpayers

On 4 March 2021 a draft law proposal that aims to eliminate double non-taxation through transfer pricing mismatches as from 1 January 2022 was published for consultation. See our Tax Flash of 5 March 2021 for a more detailed technical explanation. That consultation document is now followed by the publication of the legislative proposal. If approved in its current form, this legislation may also impact certain existing situations.

Based on long-standing case law in the Netherlands, non-arm’s length conditions of transactions between related parties are adjusted as if the conditions were made between independent parties. This may result in a downward adjustment of profits for Dutch corporate income tax purposes, irrespective of whether the country of the related party to the transaction applies a corresponding upward adjustment. This has been identified as an undesired source of (potential) tax avoidance.

The legislative proposal includes three main elements:

1. The arm’s length principle will not be applied if this leads to a reduction of the Dutch taxable profit (e.g. through an “informal capital contribution” or “deemed dividend”) to the extent that the related party to the transaction does not include a corresponding upward adjustment in its profit tax base.
2. No adjustment in tax basis to the arm’s length value for assets and liabilities that are transferred by a related party to a Dutch taxpayer for which the agreed or imposed price is at a value below (for assets) or above (for liabilities) the arm’s length value to the extent that no corresponding adjustment for the arm’s length value is taken into account in the transferor’s profit tax base.
3. The amount of depreciation to be taken into account (going forward) by a Dutch taxpayer on assets acquired from a related party before 1 January 2022 may be limited in respect of assets that were transferred in tax book years starting on or after 1 July 2019 and which would – at the time of transfer – be targeted by the legislative proposal, had the legislation been in force at the time.

The legislative proposal includes specific provisions to secure that profit tax levied in respect of hybrid entities will qualify as corresponding taxable adjustment. It also proposes specific rules for capital contributions and distributions. The new rules would apply for all Corporate Income Tax Act provisions (including the CFC-rules) but not to any other legislation, most importantly not for purposes of Dutch withholding taxes on dividends, interest and royalties.

On 4 March 2021 a draft law proposal to change already enacted rules applying to so-called reverse hybrid entities was published for consultation. That consultation document is now followed by the publication of the legislative proposal.

A reverse hybrid entity is an entity that is tax transparent in its resident state but regarded as opaque in the state of a participant in such entity. Due to the different treatment of such reverse hybrid entity by the resident state and the investor state, income of the reverse hybrid entity is not subject to corporate income tax.

A typical example of a reverse hybrid structure is the so-called CV/BV structure in which payments are made to a Dutch limited partnership (CV), transparent for Dutch tax purposes but checked as opaque for US tax purposes, that is held by a US investor. Such a CV will become subject to Dutch corporate income tax under the now proposed rules.

The legislative proposal is largely in line with the consultation document of 4 March 2021. See our Tax Flash of 5 March 2021 for a more detailed technical explanation.

There are some technical differences, mainly affecting certain participants in reverse hybrid entities that generate Dutch source income (like income from Dutch real estate or a Dutch enterprise). The proposal as published for consultation would have resulted in tax planning opportunities that are no longer available under the law proposal.

The proposal will enter into force on 1 January 2022. All structures with reverse hybrid entities – if still existing – should be revisited before year-end 2021.

Hybrid mismatch rules already entered into force in line with EU ATAD2 on 1 January 2020. For a further explanation of these rules see our Tax Flash of 2 July 2019.

Until now, these hybrid mismatch rules only apply to hybrid mismatches resulting in a double deduction or deduction without inclusion between a Dutch tax resident entity and a related entity in another state.

It is now proposed to also apply these hybrid mismatch rules to situations between Dutch tax resident entities and foreign related individuals. This can be structures involving a hybrid element in which:

• Costs are deducted twice, once by a Dutch entity and once by a related foreign individual.
• Costs are deducted by a Dutch entity but the corresponding income is not taxed in the hands of the recipient being a related foreign individual.

This broadens the scope of the hybrid mismatch rules and can lead to a denial of deductions or inclusion of income for Dutch entities involved and implies that structures where foreign individuals are involved, need to be revisited. This change will also enter into force on 1 January 2022.

The milieu-investeringsaftrek or MIA offers an additional investment deduction possibility for investments in certain eco-friendly and innovative business assets. This additional investment deduction reduces the taxable profit and thus the corporate income tax due. In the Tax Plan 2022 it is proposed to increase the additional investment deduction percentages of the MIA per 1 January 2022 from 13.5%, 27% and 36% to respectively 27%, 36% and 45%, in order to give companies an extra incentive to invest in these eco-friendly and innovative business assets.

Currently employee stock options are taxed as wage at the moment the options are exercised. If, upon exercise of the options, shares are acquired that are not freely transferable – for instance as a result of a vesting scheme or lock-up clauses – employees might not have sufficient cash to pay the tax due. In the Tax Plan 2022 it is proposed to shift the moment of taxation to – in principle – the moment the shares acquired upon exercise become transferrable. The value of shares at that moment will determine the taxable wage component. Nevertheless, under the current proposal, the employee will have the right to deviate from this new main rule and opt for taxation at the moment of exercise of the options. This proposal intends to make it more attractive to award employees with stock options as part of their remuneration package.

Following EU case law, the credit of Dutch dividend withholding tax from portfolio investments will be limited. The annual credit can no longer exceed the corporate income tax due over that year. Hence, a refund of Dutch dividend withholding tax for Dutch corporate income taxpayers will no longer be available. The same applies for game tax levied from Dutch corporate income taxpayers. Excess credits can be carried forward indefinitely. 

So-called holding and financing losses incurred prior to 1 January 2019 can only be offset against profits from holding and financing activities (ring-fenced losses). If structured well, ring-fenced losses can be used more easily within a tax consolidated group by offsetting such losses against ‘ordinary’ profits of other companies of a tax consolidated group. This was confirmed by the Dutch Supreme Court earlier this year.

It is now announced that further restrictions will be introduced to limit the compensation within a tax consolidated group of pre-2019 ring-fenced holding and financing losses.

As from 1 January 2021, the Netherlands levies a 25% withholding tax on intra-group interest and royalty payments to entities in certain low taxed or blacklisted jurisdictions, to certain hybrid entities or in cases of abuse (see our Quoted of 21 December 2020). Payments by Dutch resident entities can be subject to such withholding tax, but also payments by non-resident entities in case such payment is allocable to a Dutch permanent establishment. Changes effective as of 1 January 2022 will be proposed for payments allocable to Dutch real estate investments – that do not necessarily qualify as a permanent establishment – to become subject to the withholding tax as well.

Furthermore, a technical change is announced in rules applying to payments to hybrid entities. Payments to such hybrids should not be subject to the withholding tax in case all participants in that hybrid entity see the hybrid entity as tax transparent and would not be confronted with withholding tax in case of a direct payment. Apparently, the wording of that exception is unclear and will thus be amended with retroactive effect to 1 January 2021.

Both announced changes will be included in an amendment to the Tax Plan 2022.

• Annual loss compensation for Dutch corporate taxpayers will be limited to 50% of their taxable profit to the extent such profit exceeds a threshold of EUR 1 million. This applies to both carry back and carry forward of losses. In addition, losses can be carried forward indefinitely.
• The main corporate income tax rate will remain at 25%. The bracket for the SME-rate of 15% will be extended from EUR 245,000 profits to EUR 395,000 profits.

• On Budget Day 2020 it was announced that per 1 January 2022 substance requirements would be introduced for certain Dutch flow-through holding companies that apply the participation exemption to dividends from foreign subsidiaries. Non-compliance with these substance requirements would lead to an exchange of information with the source states. This measure could be introduced without a legislative proposal but through amendment of an existing Decree. Before end 2021 it should be clearer how and when substance requirements will be introduced for certain holding companies.
• The Ministry of Finance recently published a research paper on a more equal tax treatment of debt and equity. See our Website post of 15 September 2021 for more background information. No specific actions are taken nor announced in this regard in the Tax Plan 2022. It is mentioned however that the caretaker government is considering the options to reach a more equal tax treatment.