1. Introduction
On 21 September 2021, the Dutch Ministry of Finance published its Tax Plan 2022. This Tax Plan was drafted by the outgoing government, which is only allowed to act as caretaker until a new government has been formed. Forming a government is a lengthy process this time: it was initiated after elections in March 2021 and is still not close to an end. For this reason, the Tax Plan is relatively limited in scope and without any surprises.
In fact, the government sent six separate Bills to Parliament. In addition, a Bill was sent to Parliament, which will disallow the application of the arm’s length principle in the case of certain mismatches. Although the latter is not formally part of the Tax Plan, we will refer to these Bills together as the “Tax Plan”. Most provisions of the Tax Plan are supposed to enter into force on 1 January 2022. In the case of a later entry into force date, we will specifically mention this. It has been announced that, ‘in the winter of 2021-2022’, a Bill will be sent to Parliament on the qualification of foreign entities as opaque or tax transparent for Dutch tax purposes. It is expected that this Bill will not enter into force before 2023.
The Tax Plan includes some measures with an impact on businesses and financial institutions. These include a limitation to credit Dutch withholding tax with Dutch corporate income tax (CIT), the introduction of a CIT liability for reverse hybrid entities and an optional deferral of the taxable event for wage withholding tax purposes regarding stock option plans until the shares actually become tradable.
In this e-Alert, we discuss the proposals that are most relevant to the business community, including financial institutions. We will also discuss the proposed changes in the application of the arm’s length principle, the already adopted restriction in the set-off of losses for tax purposes as of 2022 and the possible changes in the classification of foreign entities. Please note that the Tax Plan may change in the course of upcoming Parliamentary discussions.
2. Corporate income tax
2.1 Tax rates
The Dutch CIT includes two brackets: the first EUR 245,000 of taxable profits is currently taxed at 15% and the remainder of taxable profits is taxed at 25%. Last year, Parliament voted in favour of an extension of the 15% bracket to the first EUR 395,000 of taxable profits as of 1 January 2022. This extension is not without controversy and several members of Parliament would like to see an increase of the CIT rate. Parliament would have to adopt an amendment to the Tax Plan to make such changes.
2.2 Temporisation of the set-off of Dutch withholding tax against Dutch CIT
Entities that are resident in the Netherlands and subject to CIT can currently fully credit Dutch dividend withholding tax irrespective whether they are in a profit-making or in a loss-making position. In the case of a loss-making position or a low tax base, this may effectively result in a tax refund. In contrast, non-resident entities that are in a similar position do not get such a refund. After the Sofina ruling of 22 November 2018 of the European Court of Justice (ECJ) relating to French dividend withholding tax, the Dutch government doubted if the Dutch difference in treatment between domestic and foreign taxpayers was in all circumstances in accordance with EU law.
Already in September 2020, the Dutch government announced that the final solution to eliminate this potential breach of EU law would be to reduce the possibility to credit Dutch dividend withholding tax for entities resident in the Netherlands. This change of law is included in the Tax Plan and will apply to financial years starting on or after 1 January 2022. If enacted in its proposed form, a taxpayer will only be allowed to credit the withholding tax incurred in that year against the CIT due in the same year. Insofar as the withholding tax exceeds the CIT due, the excess is carried forward and can be offset against a positive balance of CIT payable in future years. Withholding tax carried forward by an entity included in a CIT fiscal unity can, if such withholding tax pre-dates its inclusion in the fiscal unity, only be credited against profits allocable to that entity. Inclusion in a CIT fiscal unity will, therefore, not enlarge the possibilities to credit withholding tax that predates such inclusion. In the event of a dissolution of a CIT fiscal unity and upon request, the withholding tax that has not yet been credited and that is attributable to a subsidiary, may be assigned to that subsidiary. A similar change of law will apply to taxes withheld in respect of gambling tax (kansspelbelasting).
Until this change of law enters into force, an intermediate solution is provided by the Decree of 26 November 2020. The effect of this temporary solution is completely opposite to the carry forward solution proposed in the Tax Plan. Based on the Decree, non-resident entities that meet certain requirements can request a refund of Dutch dividend tax withheld in respect of portfolio investments insofar as this tax exceeds the CIT that would have been due had these entities been resident in the Netherlands. This includes entities in a loss-making position and with a low tax base. The request must be made within three years after the end of the book year in which the dividend (or prize money) became payable and the relevant taxpayer needs to meet certain conditions.
The change of law proposed in the Tax Plan implies that the November 2020 Decree is not applicable to tax withheld as of 2022, meaning that qualifying non-resident entities will no longer be able to apply for a refund for those future years.
2.3 Reverse hybrids subject to corporate income tax
On 1 January 2020, the Netherlands introduced anti-hybrid mismatch rules to implement the EU Anti-Tax Avoidance Directive 2 (ATAD2). Based on these rules and subject to certain other requirements, deduction of a payment is denied for CIT purposes if and to the extent that such payment is not taxed in the country of the recipient or results in a double deduction. The Tax Plan widens the scope of the affiliated parties to which the existing anti-hybrid mismatch provisions apply. Currently, this only includes entities affiliated to the taxpayer. As of 2022, this will also include affiliated individuals.
On 1 January 2022, the Netherlands will implement the rules for reverse hybrids. These rules were already adopted in the Tax Plan 2020. The Tax Plan 2022 includes some additional changes thereto as of 1 January 2022. For the proposed reverse hybrids provisions, only affiliated entities are of relevance.
Reverse hybrid entities are defined in the Tax Plan as partnerships that meet certain requirements. First of all, such partnerships must be entered into under Dutch law or be established in the Netherlands. Next, they must currently qualify as tax transparent for Dutch CIT purposes and, therefore, under the current rules, not be subject to CIT. Furthermore, an affiliated entity that is or affiliated entities that are resident in a country that qualifies the reverse hybrid entity as opaque for tax purposes must hold an interest (voting rights, capital interests or profit rights) of at least 50% in the reverse hybrid entity.
Because of the difference in qualification of the reverse hybrid entity by the resident state and the investor state, the income of the reverse hybrid entity is neither subject to CIT in the Netherlands nor in the investor state. An example is the Dutch CV/BV structure in which a Dutch tax transparent limited partnership (commanditaire vennootschap CV) held by a US investor elected to be treated as opaque under the US check-the-box regulations, resulting in deferral of US taxation until the moment the CV would distribute its profits to the US investor. These structures were already less attractive following the Global Intangible Low-taxed Income (GILTI) regulations that were introduced with the 2017 US tax reforms and the Dutch anti-hybrid mismatch rules that entered into force on 1 January 2020.
As of 2022, reverse hybrid entities will be fully subject to CIT in the Netherlands and will be regarded as resident of the Netherlands for tax treaty purposes. This means that the other Dutch anti-hybrid mismatch rules will no longer apply. In addition, the Dutch participation exemption (deelnemingsvrijstelling) applies to dividends and capital gains a reverse hybrid entity receives if it meets the applicable requirements. Furthermore, an entity participating in a reverse hybrid and that has a right to at least 5% of its profits, can apply the participation exemption if all other applicable requirements are met.
The part of the profits of a reverse hybrid entity attributable to investors that are resident in a country that does not regard the reverse hybrid entity as subject to profit tax but as tax transparent can be deducted from the profits of the reverse hybrid entity for Dutch CIT purposes. However, this is only the case if, at the level of the investors, these profits are included in the taxable base for profit tax purposes. Furthermore, the reverse hybrid entity may not credit dividend withholding tax related to this deductible part of its profits.
Undertakings for collective investment in transferable securities (as defined in the EU UCITS Directive) and alternative investment funds (as defined in the EU AIFM Directive) are excluded from these new rules, provided that they invest in securities and have a diversified portfolio.
2.4 Use of tax losses
Losses may currently be offset against the taxable profit of the preceding financial year (carry back) and the taxable profits of the following six financial years (carry forward). Last year, a change of law was adopted which as of 1 January 2022 will result in a restriction of the ability to set off losses for tax purposes. In a given tax year, the first EUR 1 million of taxable profit realised in a certain year may be set off in full against available losses. Losses exceeding EUR 1 million may only be set off to a maximum of 50% of the taxable profits in that year insofar as these profits exceed EUR 1 million. In addition, losses may be carried forward indefinitely as of 2022, instead of the current restriction of six years. The carry back period of one year will not change.
In anticipation of this change, it may be beneficial to accelerate the realisation of profits to 2021 in order to make use of the current loss compensation rules that allow a full set-off of loss carry forwards against the taxable profits. This might, for example, be achieved by transferring assets to an affiliated entity to realise a capital gain.
2.5 No downward arm’s length pricing adjustments without a corresponding upward adjustment
The Dutch CIT Act applies the arm’s length principle to transactions (which is a broad term including, amongst others, sales, services and loans) between related entities. If the pricing of such a transaction differs from the pricing agreed by unrelated parties and thus is not at arm’s length, the price is adjusted accordingly. Such adjustment can be both upwards or downwards. Currently, in relation to at arm’s length adjustments in the Netherlands, it is not relevant whether the counterparty makes a corresponding adjustment in the opposite direction. In Dutch domestic transactions, such adjustment will have to be made based on the statutory arm’s length principle, but in cross-border situations this might not always be the case. In practice, a downward adjustment in the Netherlands resulting in a lower Dutch tax base was often not matched by an upward (taxable) adjustment abroad, thus creating a mismatch.
As a result of the changing views on international tax avoidance, the Dutch government wants to end this type of mismatches. This change was inspired by the critique on the former Dutch ‘informal capital ruling’ practice and the fact that although it was no longer possible to obtain a ruling, taxpayers could still benefit from mismatches resulting from informal capital contributions. The same applied to deemed dividends. It is now proposed to change the applicability of the arm’s length principle for tax book years starting on or after 1 January 2022.
As of that date, downward profit adjustments will not be taken into account for Dutch CIT purposes if the taxpayer does not provide sufficient proof that the related entity takes a corresponding upward profit adjustment into account for profit tax purposes. A downward profit adjustment can either be taking into account higher costs or lower benefits. This means, for example, that if an at arm’s length interest for an interest-free loan would actually be 5%, but at the level of the related party no interest is included in the taxable base, the Dutch taxpayer may not deduct the at arm’s length interest of 5%. The relevant issue is whether the adjustment is included in the taxable base, not whether it is effectively taxed. For that reason, the new rules will not apply if the jurisdiction of the related entity taxes the adjustment at a very low statutory or effective tax rate, or a rate of 0%, exempts it or does in effect not tax it because of loss compensation or application of group relief rules. However, if there is no profit tax in the jurisdiction of the related entity or if the related entity is exempt from profit tax, the new rules will apply.
The provision will also not apply insofar as the taxpayer provides sufficient proof that (i) the related entity is not treated as the beneficiary for tax purposes in the state where it is incorporated because that state does not regard it as a tax resident and the entity is also not tax resident in another state; and (ii) an entity or individual that has an interest in the related entity is treated as the beneficiary in its state of residence and makes a corresponding upward adjustment that is taken into account for profit tax purposes or income tax purposes.
For transfer pricing adjustments of assets and liabilities acquired by the taxpayer from a related entity, similar rules are introduced. As of 2022, such assets may not be included in the tax balance sheet for their higher fair market value if the taxpayer does not provide sufficient proof that the related entity takes into account a corresponding upward adjustment to fair market value for purposes of a profit tax. Liabilities acquired at a higher price than the at arm’s length price, may only be included in the tax balance sheet at the at arm’s length price insofar as the taxpayer provides sufficient proof that at the level of the related entity the corresponding adjustment is taken into account for profit tax purposes. A similar rule applies for assets and liabilities acquired in the form of, for example, a capital contribution or a dividend.
Additional restrictions are proposed for assets acquired by the taxpayer from a related entity in the period from 1 July 2019 until 1 January 2022. As such, the proposal provides for a certain retroactive effect. These rules only apply if the asset may still be depreciated at the beginning of the tax book year starting on or after 1 January 2022 or a subsequent year. Furthermore, the rules only apply if the taxpayer fails to provide sufficient proof that the asset would not have been included at a lower value in the balance sheet had the new rules on transfer pricing adjustments been applicable in the year the taxpayer acquired the assets. In these cases, the depreciation base of such assets is set at the lowest of (i) the value taken into account had the new rules been applicable when the asset was acquired; or (ii) the value the asset has at the moment immediately preceding the book year starting on or after 1 January 2022. It is important to note that the new rules only affect the depreciation costs taken into account for tax purposes, not the tax book value of these assets. There is no revaluation obligation in respect of the assets.
2.6 Reparation of Supreme Court ruling on pre-consolidation holding company losses announced
In the cover letter that accompanied the Tax Plan, the State Secretary of Finance announced that he intends to propose a change in the loss compensation rules for fiscal unities. The reason for this change is a Supreme Court ruling of 11 June 2021.
The Supreme Court ruled that a pre-consolidation holding company loss within a CIT fiscal unity can be set off against the regular profit of a subsidiary that has been consolidated from the moment of its establishment. This was the case notwithstanding the fact that until 2019, holding company losses could only be set off against profits made in a year in which the relevant entity qualified as a holding company. This rule still applies to holding company losses incurred before 2019. The Supreme Court held that even though the concurrence of the provision on holding company losses and a specific provision in the Fiscal Unity Decree lead to an outcome at odds with the aim and purpose of these provisions individually, this does not justify an outcome contrary to the clear wording of these provisions.
According to the cover letter, a change of law will be proposed to repair this Supreme Court ruling in such a way that also in case of a fiscal unity with newly established subsidiaries, holding company losses incurred before 2019 may not be set off against other (regular) profits. The details of this legislative change have not yet been made public. It will become part of the Tax Plan and would thus, under normal circumstances, take effect as of 1 January 2022. However, it is not yet clear whether this change will have some sort of retroactive effect.
2.7 Change of Dutch entity classification rules deferred
Originally, the Dutch Ministry of Finance intended changing the Dutch entity classification rules as of 1 January 2022 to reduce mismatches with foreign entity classification rules. This regarded both the classification of Dutch and foreign entities as either tax transparent or opaque. An important change would have been that all Dutch limited partnerships would be treated as tax transparent. This would have resulted in the so-called open limited partnership (open commanditaire vennootschap) no longer being subject to CIT itself. Dutch resident entities, incorporated or entered into under foreign law having a legal form that is not comparable to a Dutch legal form, would be treated as taxable entities (and thus as opaque for Dutch CIT purposes) in the Netherlands, notwithstanding the qualification in their jurisdiction of incorporation. Such entities included the German Kommanditgesellschaft auf Aktien (KGaA). The Netherlands would follow the classification made by the foreign jurisdiction for non-resident entities incorporated or entered into under foreign law that are not comparable to a Dutch legal form and that hold an interest in a Dutch entity or in which a Dutch entity holds an interest.
However, such legislative proposal is not included in the Tax Plan. The reason is that the draft proposal, published for consultation in March of this year, was not well received. Therefore, the Ministry of Finance announced that the legislative proposal will now be sent to Parliament in ‘winter 2021/2022’. This means that changes will probably not enter into force before 1 January 2023.
Furthermore, it was already announced that this revised proposal will not include changes in the classification rules for Dutch funds for joint account (Fondsen voor Gemene Rekening or FGRs). The classification rules for FGRs will be reviewed as part of next year’s evaluation of the regime for fiscal investment institutions (Fiscale BeleggingsInstellingen or FBIs) and the regime for exempt investment institutions (Vrijgestelde BeleggingsInstellingen or VBIs).
3. Dividend withholding tax
3.1 Tax rate
Companies and certain other entities resident in the Netherlands have to withhold 15% Dutch dividend withholding tax on profit distributions unless a withholding exemption applies or a reduction at source is available under tax treaties. This 15% rate will not change according to the Tax Plan.
3.2 Withholding obligation for reverse hybrid entities
In addition to the CIT changes described in section 2.3 above, the Tax Plan proposes to include an obligation for reverse hybrid entities entered into under Dutch law or established in the Netherlands to withhold dividend withholding tax on their profit distributions as of 1 January 2022. This includes profit distributions to participants that are resident in the Netherlands.
In addition, a reverse hybrid entity is deemed to be entitled to profit distributions for dividend withholding tax purposes on dividends it receives. This means that the participants in the reverse hybrid entity are not regarded as being entitled to these dividends. The Tax Plan proposes that the reverse hybrid entity may not apply the withholding exemption for participations in case this exemption would not apply if the participants, resident in a jurisdiction that does not deem the reverse hybrid entity as subject to a profit tax (and, therefore as tax transparent), had been entitled to the dividends directly.
4. Conditional withholding tax on interest and royalties
4.1 Withholding obligation for reverse hybrid entities
As of 2021, if certain requirements are met, a conditional withholding tax applies to payments of interest and royalties. The conditional withholding tax is an anti-abuse measure and applies to interest and royalty payments made (or deemed to be made) by a Dutch entity (broadly defined) directly, or – if certain requirements are met – indirectly, to a related entity or permanent establishment of such entity (i) in a low-tax jurisdiction; or (ii) in cases of abuse (hereinafter: qualifying beneficiaries). The government intends to introduce a similar conditional withholding tax for dividends as of 2024. This will be in addition to the already existing regular dividend withholding tax. A Bill for this extension of the scope of the conditional withholding tax was sent to Parliament earlier this year.
In addition to the changes in the CIT and dividend withholding tax described in sections 2.3 and 3.2 above, the Tax Plan proposes to include as of 1 January 2022 an obligation for reverse hybrid entities, entered into under Dutch law or established in the Netherlands, to withhold the tax on their interest and royalty payments to qualifying beneficiaries in a jurisdiction that deems the reverse hybrid entity to be opaque and, therefore, subject to profit tax.
Furthermore, a reverse hybrid entity is deemed to be the beneficiary of the interest and royalty payments for purposes of this conditional withholding tax. This means that the participants in the reverse hybrid entity are not regarded as the beneficiaries. If an interest or royalty payment is not made directly to an entity in a low tax jurisdiction, but through a reverse hybrid entity, the latter may be subject to the conditional withholding tax. This is the case if the reverse hybrid entity is not regarded as being subject to a profit tax (and, therefore, transparent) by the resident jurisdiction of the recipient and that recipient would have been subject to the conditional withholding tax had it received the interest or royalties directly.
4.2 Announced changes in definition of permanent establishment and on hybrid entities
In the cover letter that accompanied the Tax Plan, the State Secretary of Finance announced that he intends to broaden the definition of permanent establishment (PE) in the conditional withholding tax. This will align this PE definition with the definition for CIT purposes, which includes, amongst others, real estate located in the Netherlands. This change would apply as of 1 January 2022.
The State Secretary of Finance also announced that hybrid entities will no longer be subject to the Dutch conditional withholding tax if none of the beneficiaries has a qualifying interest in the hybrid entity. This change would, if enacted, have retroactive effect to 1 January 2021.
No further details of both changes have been made public in the cover letter. The legislative proposals that will become part of the Tax Plan will probably be sent to Parliament in October.
5. Wage Tax
5.1 New rules for certain employee stock options
Currently, if an employer grants stock options to an employee, wage tax must be withheld at the moment the employee exercises or sells the stock option based on the corresponding value at that moment. However, if the shares received upon exercise are not tradable, which may, for example, be the case if the employer is a scale-up, the tax liability may result in cash-flow issues. The Dutch government fears that this has a negative effect on the attractiveness of the Netherlands as place of establishment for start-ups and scale-ups. We refer to our blog on this topic of 18 November 2020 (in Dutch).
For that reason, the Tax Plan introduces, as of 1 January 2022, the possibility for a deferral of the taxable moment for wage tax regarding exercised stock options on non-tradable shares to the moment the shares become tradable. All benefits from the shares, such as dividends, that are realised during this deferral period, are regarded taxable wage. During this period, the shares are disregarded for the calculation of the income from savings and investments in the personal income tax (‘box 3’).
Deferral will be the default unless the employee elects to be taxed upon exercise of the stock option. The advantage of the latter is that any increases in value after that moment will not be subject to wage tax and that benefits, such as dividends, will not be taxable as wage. The drawback is that later decreases in value will not reduce the wage tax that is payable at the time of exercise.
If the employee is not allowed to trade in the shares based on a contractual obligation, the shares are deemed to have become tradable at the latest five years after the shares became listed on a stock exchange or, if the shares are already listed, at the latest five years after exercise of the stock options, unless tradability is disallowed by a provision in law. The new rule will apply to all companies, not just to start-ups and scale-ups. This means that companies whose shares are already traded on a stock exchange, but that impose a retention period after exercise in their stock option plans, can also apply these new rules.
This legislative proposal is included in a separate Bill, which means that Parliament can delay discussions on this proposal or reject it without repercussions for the remainder of the Tax Plan.
5.2 Exemption for the reimbursement of working-from-home costs
The Tax Plan introduces a specific wage tax exemption for the reimbursement of costs that employees incur because they work from home. Employers may reimburse tax free at most EUR 2 per (part of) a day that an employee works from home. If an employee gives a fixed compensation to an employee who works at least 128 days per calendar year from home, this compensation may be calculated as if the employee works at most 214 days per calendar year from home. If on one day an employee works from home and travels to the office, either a compensation for travel costs or for working from home can be paid out tax free, not both. This exemption is not limited to the Covid-19 period as it is expected that more employees will work from home on a regular basis also after the pandemic has withered down.
6. Personal income tax
The top rate of the personal income tax will remain at 49.5% in 2022. The basic rate for income up to EUR 69,398 will be slightly reduced from 37.1% to 37.07%.
The tax rate for individuals with a substantial interest in a company (in short: an interest of at least 5%) will remain at 26.9%.
Notwithstanding the debate about the fairness of the taxation of income from savings and investments (‘box 3’) in the Netherlands, the system will not change in 2022. The deemed return on savings will decrease to minus 0.01% (0.03% in 2021), the deemed return on investments will decrease to 5.53% (5.69% in 2021). The tax-free amount that is taken into account to establish the tax base for box 3 will be increased from EUR 50,000 to EUR 50,650 in 2022 (doubled for partners). A reform of the box 3 levy will not be initiated by the current caretaker government, but this government is researching alternatives for the future.
7. Parliament can make changes to the Tax Plan
It is possible that the Tax Plan as it is currently drafted will be amended in the course of Parliamentary discussions. New elements may be added to the Tax Plan. It is envisaged that the Second Chamber of Parliament will vote on the amendments and the final contents of the Tax Plan on 11 November 2021. The First Chamber of Parliament, which has no right of amendment and can only adopt or reject a Bill, is expected to vote on the Tax Plan on 14 December 2021.
8. Breakfast seminar 23 September 2021
On Thursday 23 September 2021, we will organise a live webinar in which we will discuss the Tax Plan. You are very welcome to join us virtually. The webinar will be from 9.00 am CET to 10.00 am CET with the possibility for further discussions after the webinar. The webinar will be in English, click here for the invitation with more details. You can register via the invitation or by clicking here.
If you are not available on 23 September, you can also register for the on-demand webinar, using the same link or by sending an email to events.amsterdam@allenovery.com to get access. The (on-demand) webinar will qualify you for 1 NOB training point and 1 PO/PE- point.
