1. Introduction
On 20 September 2022, the Dutch government published its Tax Plan 2023 (Tax Plan). Most provisions of the Tax Plan are supposed to enter into force on 1 January 2023. In the case of a later entry into force date, we will specifically mention this.
The Tax Plan includes a number of measures that will have an impact on businesses and financial institutions. These measures include amongst others an increase of the first Dutch corporate income tax rate bracket and an increase of the Dutch real estate transfer tax rate. In addition to the Tax Plan, a legislative proposal is expected to enter into force on 1 January 2023 pursuant to which the taxable event for wage withholding tax purposes regarding stock option plans may be deferred until the shares under the stock option plan actually become tradable. Furthermore, changes are announced in relation to real estate investments by Dutch fiscal investment institutions (FBI) which changes are envisaged to enter into force as of 2024.
In this e-Alert, we discuss the legislative proposals that are most relevant to the business community. We will also briefly discuss the EU ‘Pillar Two’ proposal, the EU ‘ATAD 3’ proposal and certain relevant developments in relation to the tax position of board members and senior management of Dutch entities. Please note that the Tax Plan may change in the course of the upcoming Parliamentary discussions and the further legislative implementation process.
2. Corporate income tax
2.1 Tax rates
The Dutch corporate income tax (CIT) currently contains two brackets: the first EUR 395,000 of taxable profit is taxed at 15% and profits in excess of this amount are taxed at 25.8%. As of 1 January 2023, the first bracket will only apply to taxable profits up to EUR 200,000, while the tax rate of the first bracket will be increased from 15% to 19%.
2.2 Change of Dutch entity classification rules further deferred
Originally, the Dutch Ministry of Finance intended changing the Dutch entity classification rules as of 1 January 2022 to reduce mismatches with entity classification rules of foreign jurisdictions in order to reduce complexity and hybrid mismatches. The classification rules relate to 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 become tax transparent. This would have resulted in the so-called open limited partnership (open commanditaire vennootschap) no longer being subject to CIT.
This timeline was, however, abandoned following criticism from interested parties on the draft proposal. The Ministry of Finance announced in February 2022 that this legislative proposal is given less priority and will not be published prior to Q3 2023. Consequently, these changes will almost certainly not enter into force before 1 January 2024.
2.3 Real estate investments no longer under the Dutch fiscal investment institution (FBI) regime
Certain taxpayers investing in (passive) portfolio investments are eligible for the status of fiscal investment institution (fiscale beleggingsinstelling FBI) for CIT purposes (the FBI-status). An FBI is effectively exempt from CIT since it is taxed at a rate of 0%. The purpose of this tax facility is to allow the individual shareholders to invest jointly in for instance shares, bonds and real estate assets without triggering higher taxes than if they had made investments directly and individually. An FBI is however required to withhold dividend tax in respect of the annual distribution to its shareholders that it must make.
Although the Tax Plan does not include specific measures in relation to the FBI regime, the government does announce that it intends to introduce new rules in the Tax Plan 2024 based on which real estate investments can no longer benefit from the FBI regime. This also means that FBIs with a portfolio of real estate as well as other assets can no longer benefit from the FBI regime as of 2024 if they decide to keep their real estate assets.
The new regime is expected to result in existing FBIs restructuring their tax status or portfolio. For instance, pension funds that currently invest in real estate via an FBI may consider to restructure their investments to hold them directly or through a tax transparent partnership, since pension funds themselves are not subject to Dutch CIT. In this respect, the government is considering additional transitional measures, for instance to facilitate the conversion without triggering Dutch real estate transfer tax.
2.4 Mining levy
Based on the Dutch Mining Act (Mijnbouwwet), a levy (cijns) is due by oil and gas extractive companies in relation to their revenues generated in connection with the sale of oil and gas. In the Tax Plan, the government announces its intention to temporarily increase this levy in relation to gas extraction revenues to the extent that the sales price exceeds EUR 0.50 per m3. The new rate should apply in 2023 and 2024 and resembles the UK Energy Profits Levy.
3 (Conditional) withholding tax on dividends
3.1 Dividend withholding tax
The 15% Dutch withholding tax rate on profit distributions by companies and certain other entities resident in the Netherlands will not change according to the Tax Plan.
Under circumstances, an exemption or reduction at source may be available to the 15% Dutch withholding tax rate on profit distributions. If no exemption or reduction at source is available, certain qualifying recipients may be entitled to a (full) refund of Dutch sourced dividends. Qualifying recipients include, amongst others, foreign pension schemes that are sufficiently comparable to Dutch pension schemes. The Dutch State Secretary of Finance has published a decree that provides for guidance and lists requirements to determine whether a foreign pension scheme is comparable to a Dutch pension plan and as such would be entitled to a refund of Dutch dividend withholding tax. Until recently, one of the requirements was that a pension scheme that allows self-employed persons to participate is not sufficiently comparable with a Dutch pension scheme and consequently such foreign pension scheme was not entitled to refunds of Dutch dividend withholding tax. This was in our view, however, a too stringent interpretation of the Dutch pension exemption rules, as certain Dutch self-employed persons (e.g. doctors, pharmacists, veterinarians) are also mandatorily enrolled in Dutch tax exempt pension schemes. On this basis, and considering that the rationale of the rules is to establish whether foreign pension schemes are comparable to Dutch pension schemes, in practice foreign pension schemes – in particular pension schemes for doctors - that are mandatory for certain self-employed persons were also entitled to a refund of Dutch dividend withholding tax. On 4 August 2022, the Dutch Ministry of Finance published an amended version of the decree clarifying that foreign pension schemes in which self-employed persons are mandatorily enrolled, are sufficiently comparable to Dutch pension funds and therefore entitled to a refund of Dutch dividend withholding tax.
3.2 Conditional withholding tax on dividends
As of 2021, a Dutch conditional withholding tax applies to payments of interest and royalties. The conditional withholding tax is an anti-abuse measure and currently 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 an affiliated entity or permanent establishment of such entity (i) in a low-tax or non-cooperative jurisdiction; or (ii) in cases of abuse (hereinafter: qualifying beneficiaries). An entity is affiliated if it can directly or indirectly control the decisions made by the other entity on its activities. This is the case for example if it has more than 50% of the voting rights.
In November last year, a bill was adopted that extends the scope of the conditional withholding tax to dividends and other profit distributions. The conditional withholding tax on dividend distributions will enter into force on 1 January 2024. The tax base of the conditional withholding tax on dividends is in line with the tax base for the existing Dutch dividend withholding tax. As with the conditional withholding tax on interest and royalty’s, only dividends and other (deemed) profit distributions made to affiliated entities in low-tax jurisdictions or in certain defined cases of abuse are in scope of the conditional withholding tax on dividends.
The current dividend withholding tax will continue to exist alongside the conditional withholding on dividends. If a profit distribution is subject to both the existing dividend withholding tax and the new conditional withholding tax on dividends, the existing dividend withholding tax paid can be credited against the conditional withholding tax liability.
The tax rate of the conditional withholding tax remains equal to the rate of the second bracket CIT for the relevant year.
4 European and international initiatives
The OECD and many of its member states have identified that the increasing digitalisation of the global economy requires a fundamental reform of the allocation of profits between jurisdictions. This fundamental reform was not part of the OECD’s project on Base Erosion and Profits Shifting (BEPS), but instead is laid down in the OECD ‘blueprint’ for Pillars One and Two.
4.1 Reallocation of taxing rights (Pillar One)
The Pillar One initiative reallocates taxing rights to market jurisdictions. The intention is that the new provisions will apply to multinationals with global sales over EUR 20 billion. For multinationals in scope, 25% of profits in excess of 10% of revenue (‘excess profit’) will – broadly – be reallocated to the market jurisdiction(s) in proportion to the amount of revenues that the multinational generates in those jurisdictions, and subject to certain adjustments for market jurisdictions that already have existing taxing rights over the multinational’s residual profits.
Pillar One will be effected through a multilateral instrument, and will include extensive dispute prevention and resolution mechanisms. Significantly, it is a tenet of Pillar One that all unilateral digital tax measures should be removed. France has already announced that it intends to repeal its digital tax as soon as the OECD agreement is implemented. In September 2022, the Netherlands signed a joint statement together with France, Germany, Spain and Italy stating that it fully commits to complete the work on the better reallocation of taxing rights of multinationals’ profits with the objective of signing a multilateral convention by mid-2023.
4.2 Minimum tax on profits for large multinationals (Pillar Two)
Pillar Two introduces a minimum level of taxation for multinationals with consolidated revenue of EUR 750 million. As a result, in scope multinationals will at all times pay a minimum effective tax rate of 15% on their worldwide profits, whereby their tax base is determined by reference to financial accounts income after certain tax adjustments have been applied.
The primary mechanism for implementation of Pillar Two will be an income inclusion rule (IIR) pursuant to which additional top up taxes are payable by a parent entity of a group if one or more constituent members of the group have been undertaxed. A secondary fall back is provided by an undertaxed payment rule, which denies deductions, in case the IIR has not been applied.
The European Commission published a directive proposal along the lines of the OECD Pillar 2 proposal. Adoption of the directive proposal requires a unanimous decision from all Member States. To date no political agreement has been reached since Hungary objects to the adoption. In September 2022 and in response to Hungary’s objection, the Netherlands signed a joint statement with France, Germany, Spain and Italy that reaffirms their strong commitment to swiftly implement these new rules. According to the joint statement, should unanimity not be reached within the short term, the Netherlands stand ready to implement the global minimum effective taxation by any possible legal means in 2023.
4.3 Preventing misuse of shell companies
On 22 December 2021 the European Commission published another directive proposal targeting aggressive tax planning techniques linked to the use of shell companies. This directive proposal is being referred to as the “unshell directive” or ATAD 3.
The proposed directive should be implemented into domestic law before 30 June 2023 and applied by EU member states as from 1 January 2024. The Directive proposal introduces reporting obligations for entities having mainly passive income and outsourcing certain operations and functions, establishes minimum substance requirements for these entities, and imposes sanctions, in particular the denial of tax benefits under tax treaties and EU Tax directives, on entities not meeting these requirements. The reporting obligations will be assessed based on the operational set up of the entity during the two years preceding the year of reporting. Click here for our previous blog on this topic.
4.4 Public Country-by-Country reporting
As of fiscal year 2016, the ultimate Dutch resident parent of a qualifying multinational group has to file a Country-by-Country (CbC) report with the Dutch tax administration. Furthermore, certain Dutch resident separate business units of a qualifying multinational group have an obligation to file a CbC report with the Dutch tax administration if the ultimate parent entity is not obliged to file a CbC report in its tax residence jurisdiction or if this report is or cannot be exchanged. A group, which, based on its consolidated financial statements, has a total consolidated group revenue of less than EUR 750 million during the preceding fiscal year, is exempt from the CbC reporting obligation.
The CbC report must be filed no later than 12 months after the last day of the reporting fiscal year of the multinational group. Until now, CbC reports remain largely confidential. This changes with the entering into force of the public CbC reporting directive that was published on 2 December 2021. The CbC directive should ultimately be implemented by June 2023. When implemented, companies in scope of the CbC reporting obligation must publicly disclose the taxes paid and other tax-related information such as a breakdown of revenues, profits, and employees per EU jurisdiction and per jurisdiction included on the so-called EU black list and EU grey list.
A legislative proposal to implement the CbC directive is currently pending in the Netherlands and should ultimately enter into force on 22 June 2023, with the first reporting obligation for financial years starting on or after 22 June 2024.
5. Real Estate Transfer Tax
Currently, Dutch real estate transfer tax is levied at a base rate of 8% in respect of the acquisition of real estate situated in the Netherlands, or certain rights concerning such property (including qualifying shareholdings in real estate rich companies). For owner occupied residential real estate the tax rate is 2%. The Tax Plan proposes to increase the base rate from 8% to 10.4% as of 1 January 2023.
6. Employment taxes and management incentives
6.1 Taxation of 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 liability to tax may result in liquidity/cash-flow issues. The Dutch government aims at avoiding a negative impact on the attractiveness of the Netherlands as place of establishment for start-ups and scale-ups.
Therefore, the Tax Plan 2022 already contained a proposal to defer the taxable moment for stock options on non-tradable shares to the moment the shares become tradable, but following criticism the government asked parliament to postpone voting on the legislative proposal one day before it was scheduled to take place. After having further considered the proposal, the legislative process was reassumed with no amendments to the proposal being made. The Second Chamber of Parliament (Tweede Kamer) recently adopted the proposal with the result that this proposal is now discussed within the First Chamber of Parliament (Eerste Kamer). It is envisaged to enter into force on 1 January 2023.
Under the proposal, the taxable moment for wage tax purposes of stock options on non-tradable shares is deferred until the moment the shares become tradable. Such deferral will be the default case 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 wages. The drawback is that later decreases in value will not result in a reduction or refund of part of the wage taxes withheld at the time of exercise.
If after exercise of the option, the employee is not allowed to trade 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 of 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 blocking period after exercise of the stock option, can also apply the new rule.
6.2 Limitation of the 30%-facility foreign employees
Under the 30% facility, a tax-free allowance of 30% of the employee’s Dutch-sourced remuneration can be granted to qualifying incoming expatriates employed by a Dutch employer instead of reimbursing this employee for the real additional costs and expenses caused by the expat assignment. The regime is currently available for a maximum period of five years with no financial cap, but based on the Tax Plan the facility will be capped at the maximum wage as included in the Standards for Remuneration Act (Wet normering topinkomens), which is EUR 216,000 (in 2022). As of 2024, the new cap will apply, but for expatriates that already applied the facility in 2022 the cap enters into force as of 2026.
6.3 Credit system instead of exemption for non-Dutch director’s remuneration
A Dutch resident that is a (statutory) director or board member of a non-Dutch company, is subject to Dutch income tax on his or her worldwide income. Tax treaties however generally allocate the right to levy tax on the director’s income to the state in which the company is resident for tax purposes. In addition, the treaty then generally obliges the Netherlands to provide for a relief for double taxation. In this respect, the Netherlands applies two methods for providing relief for double taxation, being the credit and the exemption method. Pursuant to the credit method, the non-Dutch tax can be credited against the Dutch income tax due on the director’s remuneration. In contrast, under the exemption method, the foreign income is fully exempt from tax in the Netherlands. In relation to director’s remunerations, tax treaties generally provide for the credit method, but in the Netherlands, based on a decree of the Ministry of Finance and subject to certain conditions, it was allowed to apply the exemption method which is often more beneficial for a Dutch tax resident director.
In July 2022 however, the Dutch government announced that as of 1 January 2023, the credit method will be applied in relation to the remuneration of Dutch tax resident directors in case the relevant tax treaty prescribes this method.
7. Personal income tax
7.1 Rates and system changes for ‘Box 1’, ‘Box 2’ and ‘Box 3’
The progressive income tax rates in box 1 will marginally change in that the first bracket will decrease from 37.07% to 36.93% on the first EUR 73,031 of income (EUR 69,398 in 2022). The top rate of 49.5% will remain unchanged.
The tax rate for individuals with a substantial interest in a company (‘Box 2’) (in short: a share interest of at least 5%) will remain at 26.9% in 2023. As of 2024, a progressive tax rate will be introduced: the first EUR 67,000 of income from a substantial interest will be taxed at 24.5% and the excess will be taxed at 31%.
On 24 December 2022, the Dutch Supreme Court ruled that in relation to income from savings and investments (‘Box 3’), the current system of taxation based on a progressive deemed return on all assets (less debts) that are taxed in Box 3 (the so-called “yield basis”) may under specific circumstances contravene with Section 1 of the First Protocol to the European Convention on Human Rights in combination with Section 14 of the European Convention on Human Rights.
In reaction to this case law, the Dutch State Secretary of Finance published a policy decree (beleidsbesluit) on 28 June 2022 (Besluit rechtsherstel box 3, no. 2022-176296) which (amongst other things) provides that if the deemed return based on the actual composition of the yield basis (with separate deemed return percentages for (i) savings, (ii) debts and (iii) investments) in 2017-2022 is lower than the deemed return based on current legislation as described above, the lower deemed return based on the actual composition of the yield basis will be used to determine taxable income from savings and investments. The Tax Plan contains a proposal to codify this decree into the law.
For the period 2023 up to and including 2025, the taxable income will be based on the deemed return percentages for (i) savings, (ii) debts and (iii) investments and on the taxpayer’s actual composition of its yield basis.
The tax rate on the Box 3-income (i.e. the deemed return) increases annually with 1% from currently 31% (2022) to 34% in 2025. It is the intention of the Dutch government to introduce a new system regarding the taxation of income from savings and investments as of 2026. Instead of a deemed return on Box 3 assets as in the current system, the new system will be based on the actual returns realised, such as interest, dividends, rental income actually received as well as increases (or decreases) of the value of Box 3 assets.
7.2 Excessive Borrowing from Own Company Act
On 13 September 2022, the Second Chamber adopted the Excessive Borrowing from Own Company Act (Wet excessief lenen bij eigen vennootschap). The proposal aims to prevent tax avoidance or deferral of tax by substantial interest holders by discouraging them from borrowing from the company in which they hold a substantial interest.
Under the legislative proposal, if outstanding borrowing amounts exceed EUR 700,000, the excess is considered taxable income in Box 2. The new legislation is expected to enter into force on 1 January 2023.
8. 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 (Tweede Kamer) will vote on the amendments and the final contents of the Tax Plan on 10 November 2022. The First Chamber of Parliament (Eerste Kamer), which has no right of amendment and can only adopt or reject a Bill, is expected to vote on the Tax Plan on 20 December 2022.
Breakfast seminar 22 September 2022
On Thursday 22 September 2022, 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 held in English from 9.00 am CET to 10.30 am CET. You can register via the invitation or by clicking here.
If you are not available on 22 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.
