In this letter the State Secretary outlines the roadmap and attention points for the taxation of corporates in the (near) future. We see a clear intention to remain an attractive jurisdiction for foreign investors, but with a clear intention to avoid the use of the Dutch system by mere flow through companies without economic substance. The letter also gives a preview on how the Netherlands will implement the ATAD 1 and ATAD 2.
A competitive investment climate
The State Secretary emphasizes that he wants to maintain the Netherlands as an attractive jurisdiction for foreign investors. The intentions of the Dutch coalition to reduce the corporate income tax rates and to abolish the dividend withholding tax in its current form therefore still apply.
ATAD 1 – Controlled foreign companies
Following ATAD 1, the Netherlands has to implement controlled foreign company (“CFC”) legislation for subsidiaries in which a shareholding of 50% or more is held. After the earlier public consultation of the draft legislative proposal last year, the Netherlands still has a preference for model A. Under model A, the income is determined by a number of specific passive income categories (financing, royalties, leasing, etc.). Further to these specific types of income, a CFC needs to be a ‘low taxed company’. For this purpose the Netherlands will focus at countries with a low statutory tax rate or countries included on the EU list of non-cooperative countries.
In order to remain outside the scope of CFC legislation, it needs to be assessed whether the CFC conducts a genuine business activity (safe-harbour rule). The latter will be the case if the CFC, amongst others, has an own office space at its disposal for at least 24 months and incurs EUR 100,000 of personnel expenses.
ATAD 1 – Earnings stripping
Next to the CFC legislation the Netherlands has to introduce the so-called earnings stripping rules. Under the earnings stripping rules, net interest costs will be deductible up to 30% of the fiscal EBITDA. In the letter of 23 February it is confirmed that:
- the Netherlands will not include a group escape;
- the threshold will be EUR 1 million; and
- there will be no grandfathering for existing loans.
In view of the Ministry of Finance this should reduce the different treatment between equity and debt financing.
Further a minimal capital for banks and insurance companies will be introduced.
ATAD 2 – Hybrid mismatches
Under ATAD 2 the Netherlands has to combat hybrid mismatches to third-countries, for instance the CV/BV structures. The government acknowledges that the implementation of ATAD 2 will be complex. It is expected that a public consultation will be launched on a short term notice. A formal legislative proposal is expected early 2019.
Conditional withholding taxes (dividends, interest, royalties)
The State Secretary further announces his clear intention to avoid that the Netherlands will be used for mere tax driven structures to low tax or non-cooperative jurisdictions. Among others by introducing withholding taxes in specific circumstances that are considered abusive.
The government intends to maintain a withholding tax on dividends to low tax jurisdictions, to countries that are included on the EU list of non-cooperative jurisdictions or in abusive situations. This ‘conditional’ withholding will be introduced as of 2020, at the same time when the dividend withholding tax will be abolished.
Interest and royalties
It is further intended to introduce a withholding on interest and royalties payments to low tax or non-cooperative jurisdictions. The withholding tax will only apply to interest and royalty payments to related parties which are resident of countries with a low statutory rate or that are included in the EU list of non-cooperative jurisdictions. Anti-abuse law will be introduced to avoid re-routing of interest or royalty payments. This ‘conditional’ withholding tax will be introduced as of 2021. A legislative proposals is expected during 2019.
With the implementation of the Multilateral instrument (“MLI”) a substantial part of the Dutch treaty network will be updated. The measures to be introduced by the MLI focus on combatting the abusive of tax treaties. One of the measures is the introduction of the principal purpose test (“PPT”). The PPT should prevent abuse of tax treaties if one of the principal purposes of the transaction is to obtain a treaty benefit. This will clearly reduce the attractiveness of flow through structures.
Another effect of the MLI will be that treaty benefits will only be granted to hybrid entities if the income is taxed at the level of the participants.
In accordance with these MLI measures, the Netherlands will update its treaty policy.
Holding, financing and licensing companies
Currently the Netherlands has substance requirements for so-called ‘financial service companies’, i.e. companies that provide financing, licensing or leasing activities to related companies. It is now suggested that these substance requirements will be extended to mere holding companies.
Furthermore, it is suggested that the current substance requirements will be extended with the following two requirements:
- The company must have an own office space at its disposal for at least 24 months; and
- The company must incur EUR 100,000 in personnel expenses (either own personnel or hired).
Not complying with these substance requirements will automatically result in spontaneous exchange of information with the source country.
Substance to apply for an ATR or APA
The current substance requirements to apply for an Advance Tax Ruling or an Advance Pricing Agreement, which are almost similar to the current substance requirements for financial service companies, will be amended in a similar fashion as referred above (i.e. an office space and EUR 100,000 of personnel expenses).
Currently there are no substance requirements to apply the participation exemption. The government now implies to investigate whether to amend the participation exemption in such manner that the participation exemption will only apply to companies with sufficient economic substance in the Netherlands. This research is expected to be conducted during 2020.
In light of the BEPS project, the OECD has amended its transfer pricing guidelines aiming avoid that profits will be shifted to countries in which no or limited value is created. The State Secretary indicates he intends to amend the Dutch transfer pricing rules during 2018 to align them with the new OECD guidelines.
Further, under the Dutch arm’s length principle, profits can for tax purposes be adjusted upwards or downwards. In the view of the State Secretary the latter may be perceived harmful. He announces a survey to investigate whether the arm’s length principle needs to be adjusted.
In the letter the State Secretary also expresses his support for the EU’s initiative for mandatory disclosure of (potential) aggressive cross-border tax planning. Under this initiative the financial intermediaries are required to report information on such structures to the Dutch tax authorities