The Netherlands has implemented quite a few priorities from the government’s fiscal agenda, which are combined into the 2021 Tax Plan. This includes several legislative taxation proposals, as well as the main Netherlands’ 2021 Budget. The measures are aimed at the reduction of taxation of employment income, to actively combat tax avoidance, to support a more clean and green economy and also to generally improve the Dutch investment climate for foreign entrepreneurs.
Next to the 2021 Budget, some other proposals went into effect last year. This concerns the EU Mandatory Disclosure Directive (DAC6) and the Anti-Tax Avoidance Directive 2 (ATAD2). Both the 2021 Budget and ATAD2 were implemented on the 1st of January 2021, whilst DAC6 was implemented on the 1st of July last year. Please keep in mind that DAC6 also has a retroactive effect from the 25th of June 2018. This might have implications for your already existing business in the Netherlands. If you would like to know more about this, you can always contact Intercompany Solutions for in-depth information and advice. All these taxation proposals and measures have a financial impact on foreign multinationals that own or have a subsidiary, branch office or royalty company in the Netherlands.
More information about DAC6
DAC6 is a ECOFIN Council Directive, which will amend Directive 2011/16/EU regarding administrative cooperation. This entails a mandatory and automatic exchange or information, about reportable cross-border arrangements which will enable the disclosure of potentially aggressive tax arrangements. Thus, this directive will impose an obligation to report certain cross-border arrangements with the main benefit to obtain a substantial tax advantage, by intermediaries such as tax advisers and lawyers. Other goals that are often aimed at with cross-border arrangements are satisfying hallmarks or meeting other specific hallmarks, other than obtaining a tax advantage.
DAC6 has already been implemented in 2021. If a company has made a first step towards a cross-border arrangement between the 25th of June 2018 and the 1st of July 2020, this should have been reported to the Dutch Tax Authorities before the 31st of August 2020. After that date, every attempt or first step of implementation of a cross-border arrangement needs to be reported to said authorities within 30 days.
More information about ATAD2
The implementation of ATAD2 was proposed to the Dutch Parliament in July 2019. This tax avoidance directive restores so-called hybrid mismatches, which exist due to usage of hybrid financial entities and instruments. This results in confusion, as some payments might be deductible in one jurisdiction, whilst the income that corresponds with the payment might not be taxable in another jurisdiction. This falls under Deduction/No Income – D/NI. There is also a possibility of payments being tax deductible in multiple jurisdictions, this is called Double Deduction – DD.
These new rules will go into effect for reverse hybrid entities on the 1st of January 2022. The directive will introduce a documentation obligation, which will be aimed at all corporate taxpayers. It doesn’t matter whether and/or why the hybrid mismatch provisions apply or not. If any taxpayer fails to meet this documentation obligation, this corporate taxpayer will need to prove that the hybrid mismatch provisions do not apply.
Proposals that have been adopted the 1st of January 2021
Amendment of dividend withholding tax and anti-abuse rules regarding statutory corporate income tax (CIT)
The Dutch 2021 Budget is partly implemented due to the fact, that the former anti-abuse rules were not considered completely in line with EU law and regulations. Therefore, the 2021 Budget proposed to amend these rules regarding topics such as dividend withholding tax and CIT purposes. This also relates to the Dutch exemption on dividend withholding tax which are made to any corporate shareholder resident that resides within the EU, in a double tax treaty country or the European Economic Area (EEA).
The only way this exemption does not apply, is when the subjective and objective test are not met. Previously, the objective test was already met when the corporate shareholder would meet the Dutch substance requirements. The objective test basically proves that there is no artificial structure. With the new proposal containing the anti-abuse rules, meeting these so-called substance requirements will no longer provide a loophole.
This provides room for two separate possibilities. When the structure is proved to be artificial, the Dutch Tax Authorities can challenge this structure and, thus, deny the dividend withholding tax exemption. The other option is not meeting the substance requirements. In this case, the company owner needs to prove that the structure is not artificial and will then fall under the dividend withholding tax exemption.
You also need to take into account the controlled foreign corporation rules (CPC), meaning that a subsidiary does not necessarily qualify as a CFC when the substance requirements apply to this subsidiary. Additionally, if a foreign taxpayer meets the substance requirements under the objective test, the foreign taxpayer rules do not apply either and it cannot be seen as a safe harbor. This is applicable for foreign shareholders who derive income like capital gains from a shareholding, that is larger than 5% in a Dutch company.
So this essentially means, that the Dutch Tax Authorities can challenge the structure from foreign taxpayers when the structure proves to be artificial and thus, can levy income taxes. This is possible even if the substance requirements are met. Alternatively, the foreign taxpayer can also prove that the structure is not artificial, even when the substance requirements are not met, which will result in no levying of income tax over income from the substantial interest.
Reduction of the CIT Rate
The current CIT rates in the Netherlands are 15% and 25%. The 25% rate is applicable to profits exceeding 245.000 euros per annum, whereas all profits below that amount are taxed by using the low 15% rate. In 2022 the maximum amount will be increased to 395.000 euros, meaning you will only have to pay 15% corporate income tax until you reach this amount. This provides for a very competitive fiscal climate, which is why the Netherlands is so popular amongst foreign investors and multinationals. Furthermore, the reduction of the CIT rate provides a budget that will be used to reduce the tax rate of employment income as well.
Restrictions for banks and insurance companies
The 2021 Budget also contains a restriction for insurance companies and banks to deduct their interest payments, but only if the debt exceeds 92% of the total of the balance sheet. In effect, banks and insurance companies need to maintain a minimum equity level of 8%. If this is not the case, these companies will be affected by the new thin capitalization rules for banks and insurance companies. On the 31st of December of the preceding book year, all equity and leverage ratios are determined for the tax payer.
The leverage ratio for banks is determined by the EU Regulation 575/2013 on prudential requirements for credit institutions and investment firms. The EU Solvency II Directive serves as a basis for the equity ration to be determined for insurance companies. If a bank or insurance company has a physical seat in the Netherlands, these capitalization rules apply automatically. This is the same for foreign insurance companies and banks with a branch office or subsidiary in the Netherlands. If you would like advice on this subject, Intercompany Solutions can aid you.
The definition of a permanent establishment has been amended
The 2021 Tax Plan follows the ratification of the multilateral instrument (MLI) in 2021, by proposing to change the way a permanent establishment (PE) is defined for CIT purposes in the Netherlands. This also includes tax wage and personal income purposes, the main reason is alignment with certain choices the Dutch have made under the MLI. So if a double tax treaty applies, the new PA definition of the applicable tax treaty will apply. If there is no double tax treaty to apply in a certain case, the 2017 OECD Model Tax Convention PE definition always applies. If taxpayers artificially try to avoid having a PE, an exception might be made.
The Dutch tonnage tax has been amended
In order to comply with current EU state aid rules, the 2021 Tax Plan also aims to amend the current tonnage tax for travel and time charters, the flag requirement and also activities that exclude the carrying of persons or goods in international traffic. This includes three separate measures, namely a reduced tonnage tax for vessels that exceed 50.000 net tons, for ship management companies and also applying the tonnage tax regime to cable-laying vessels, research vessels, pipeline laying vessels and crane vessels.
Changes in Dutch personal income tax
The way Dutch citizens are being treated by the national tax authorities largely depends on the type of income they generate. In the yearly tax declaration, the income of any tax payer is sorted in three separate ‘boxes’:
- Box 1 is every type of income that is related to employment activities, trading and home ownership
- Box 2 entail income from a substantial interest in a company
- Box 3 applies to income derived from investment and savings
The previous statutory personal income tax rate of 51.75% has been reduced to 49.5%, this will apply to all income exceeding the amount of 68.507 euros. This concerns income derived from box 1; income, a house or trading. For an income which is 68.507 euros or less, a base rate of 37.10% applies since the 1st of January 2021. Consequently, the Dutch possibility of the deduction of the payment of mortgage interest is also reduced in steps. The rate was reduced to 46% in 2020, further to 43% in 2021, 40% in 2022 and 37,05% in 2023. The 2021 Budget already contained these changes.
Other changes include the increase of the statutory personal income tax rate of 25% to 26.9% in 2021, which entails the income from box 2; income from substantial (5% or more) interest in a company. The increase in this rate is directly linked to the decrease in the CIT for profits that Dutch companies make; meaning it levels it out. Amendments of taxation of box 3, savings and investments, have also been announced by the Dutch government. This should go into effect in 2022. Assets exceeding 30.000 euros are expected to be taxed at a deemed yield of 0.09%. Also, there shall be a deduction of a deemed interest rate of 3.03%. The statutory personal income tax rate will also be increased to 33%. All these amendments and new regulations will generally have a positive effect for tax payers that also own savings. For tax payers with other types of assets, such as a vacation home and other securities, these amendments might have a more negative effect. In particular, if these assets have been financed with debt.
Reduction of the wage tax
The Dutch ‘werkkostenregeling’ or WKR, which can be translated to the work-relaxed expenses provision, has also be amended. The previous budget for provision of work-relaxed costs and tax free reimbursements has been increased to 1.7%, from 1.2%. This concerns the total wage cost of any Dutch employer, up to 400.000 euros. If the total wage costs exceed the amount of 400.000 euros, the previous percentage of 1.2% will still apply. Certain products or services from a company of an employer will be valued at market value for this exact purpose.
Proposals that have been adopted the 1st of January 2021
An increase of the CIT rate for innovation box income & the abolition of the payment discount for provisional CIT assessments
The Dutch government increases the effective statutory corporate tax rate of 7% for innovation box income to 9% in 2021. The government also announced that the discount that is currently available to corporate tax payers, who pay income tax due on a provisional CIT assessment, will be abolished.
An increase of the real estate transfer tax
If someone wants to invest in non-residential property, they need to be mindful about the fact that the real estate transfer tax rate will be increased from 6% to 7% in 2021. This only applies to non-residential property, as the rate for residential real estate remains unchanged at 2%. Nonetheless, the Dutch government did announce that the real estate transfer tax rate for residential buildings might also be increased in the near future, when the property is rented to third parties, as this implies gaining income.
Amendments to the conditional withholding tax on royalty payments and interests
The 2021 Tax Plan includes a Withholding tax law, that proposes to introduce a conditional withholding tax on interest and royalty payments. These payments concern payments made by either a Dutch tax resident entity, or a non-Dutch resident entity with a Dutch PE, made to other so-called related parties that reside in a low-tax tax jurisdiction and/or in case of abuse. This withholding tax rate is expected to be 21.7% in 2021. The main reason for installing this conditional withholding tax, is to discourage the use of a Dutch subsidiary or resident entity as a funnel for both interests and royalty payments to jurisdictions with very low to 0 tax rates. In this case, a low tax jurisdiction means a jurisdiction with a statutory profit tax rate below 9%, and/or inclusion in the EU list of non-cooperative jurisdictions.
Any entity can be seen as related for this purpose, if:
- The paying entity has a qualifying interest in the recipient entity
- The recipient entity has a qualifying interest in the paying entity
- A third party has a qualifying interest in both the paying entity as well as the recipient entity
An interest that represents at least 50% of the statutory voting rights is considered a qualifying interest. It can also be called a direct or indirect controlling interest. Furthermore, take into account that corporate entities can be related as well. This happens, when they are acting as a cooperative group that holds a qualifying interest in a corporate entity, either directly, indirectly or jointly. In certain abusive situations, the conditional withholding tax will also apply. This entails situations such as via indirect payments to recipients in certain low-tax jurisdictions, mostly funneled through a so-called conduit entity.
New restrictions concerning liquidation loss and cessation loss deduction
The Dutch government decided to limit the deduction of liquidation and cessation losses per the 1st of January 2021. This is due to an earlier proposal with the intention to deduct liquidation losses regarding foreign participation, next to cessation losses on foreign PE’s. Such liquidation losses should only be tax deductible, if the corporate tax payer in the Netherlands holds a minimum interest of 25%, opposed to the current low 5%, in the foreign participation. This also accounts for any foreign participation being resident of either the EU or the EEA. The liquidation of a foreign participation is completed within three years following the discontinuation of the participation. The limitation of the deduction of both liquidation losses and cessation losses will be roughly the same. In both cases, the limitations do not apply to losses lower than 1 million euros, since these will remain tax deductible.
Advice for both foreign and international Dutch companies and investors
Since all these measures entail a lot of changes, both Dutch and foreign entrepreneurs should monitor these closely. If you run an international business in Holland, these changes might very well apply to you too. In any case, we have prepared a few points of advice if you are currently doing business in the Netherlands.
If you are considered as a foreign tax payer that invests in shareholdings in companies in the Netherlands, you should monitor whether your income and capital gains continue to be exempt from dividend withholding tax and capital gains tax, since the instalment of the amended CIT anti-abuse rules and dividend withholding tax purposes. This is due to the fact, that meeting the substance requirements is not longer considered as a safe harbor. Next to that, if you own a subsidiary or branch office of a foreign bank or insurance company in the Netherlands, you will need to find out whether the thin capitalization rules apply to your business. If this is the case, you might face a serious disadvantage compared to other similar institutions that are not affected by these rules within their home jurisdictions.
If you happen to own an international business that has set up structures with so-called hybrid entities or instruments solely to reduce your tax costs, then you will closely need to monitor these entities and also possibly amend them. This is necessary in order to work around tax inefficiencies, that might exist after the implementation of ATAD2. Furthermore, certain multinational corporations that provide funding to debt platforms like financing companies, need to assess and monitor whether possible royalty and interest payments made by these companies would become subject to the Dutch conditional withholding tax. If this is the case, these multinational companies need to restructure if they want to mitigate any tax inefficiencies that follow after the implementation of the Dutch conditional withholding tax.
Furthermore, both Dutch holding companies and foreign multinational holding companies with a Dutch subsidiary or branch offices that are relying on an unlimited deduction of liquidation losses on foreign participation, need to be watchful regarding the tax deduction of such losses. It would be wise to assess how this might possibly affect them adversely. Last but not least; all international businesses should find out whether they have any new reporting obligation under DAC6, regarding tax optimization schemes which were implemented or changed after the 25th of June 2018.
Intercompany Solutions can clear up all your fiscal difficulties
These changes imply a lot of new ways to work and structure your business. If you are in any way uncertain about how these fiscal regulations are going to influence your business in the Netherlands, please always feel free to contact our professional team. We can sort out any financial and fiscal problems you might encounter along the way, as well as provide you with advice withing the fields of company registration in the Netherlands, accountancy services for foreign multinationals and solid business advice.