On 16 September 2014 the Dutch government published its Tax Plan 2015. The impact for the business community is relatively limited in terms of taxes directly levied from corporate tax payers. However, several wage tax changes might affect businesses in their capacity of employer. In this e-alert we discuss the changes in the Tax plan and other changes as of 1 January 2015 which are of interest for businesses.
Today, the Dutch Ministry of Finance published its Tax Plan 2015 (hereinafter: Tax Plan). The Tax Plan primarily has an impact on citizens of the Netherlands, especially employees. The impact for the business community itself, in terms of taxes levied directly from businesses, is relatively limited. However, the changes in the wage tax which have already been approved by Parliament, especially the obligation to switch to the work-related costs scheme as of 2015 and changes in the tax free pension premiums, will have an impact on employers. Furthermore, there are also expected changes which are not included in this Tax Plan. It is expected that the codification of the compartmentalisation of the participation exemption will be enacted in 2015. This change was already included in a Bill sent to Parliament on 13 August 2013. However, the Second Chamber of Parliament did not seem to give much priority to this Bill as it will enter into force with retro-active effect to 14 June 2013.
In this e-alert we discuss the proposals and other changes which are of interest to the business community. Given the fact that the government does not have a majority in the First Chamber of Parliament, it is possible that the Tax Plan as currently drafted will be changed in the course of the upcoming parliamentary discussions.
2. CORPORATE INCOME TAX
2.1 Tax rate 2015
The 2015 corporate income tax rate will remain at 20% for the first EUR 200,000 of taxable profit and 25% for profit exceeding EUR 200,000.
2.2 Codification of compartmentalisation participation exemption
On 13 August 2013, the government sent a Bill to Parliament to codify the so-called compartmentalisation doctrine for income derived under the participation exemption regime in the Dutch Corporate Income Tax Act. This Bill was amended on 28 May 2014.
Provided certain requirements are met, dividends and capital gains received by a Dutch parent company from a qualifying participation (generally speaking: a subsidiary in which the parent holds at least a 5% shareholding) are exempt under the participation exemption regime. The Bill ensures that in case of a change in the application of the participation exemption, whether by a change in facts or a change of law, the regime which applied before the change, applies to capital gains and dividends which accrued before the change, but are realised after the change.
In order to obtain this result, the parent company must form a so-called compartmentalisation reserve at the time of the change of law/facts. The amount that must be added to this reserve equals the difference between the tax book value and the fair market value of the shares in the relevant subsidiary. Simultaneously, the parent must increase or reduce the tax book value of the subsidiary in its books so that it will reflect the fair market values at the time of the change. As this increase or decrease will be equal to the amount of the reserve, this will not have an immediate effect on the tax profit and loss account. In case the reserve is formed at the moment a subsidiary becomes a qualifying participation where it was previously not a qualifying participation, the reserve is a so-called taxable compartmentalisation reserve, where if the opposite is the case, the reserve is called a tax exempt compartmentalisation reserve. If a benefit from a participation is received which falls under the compartmentalisation rules (i.e. it is related to the period before the change), the book value of the participation is reduced with the lower amount of the benefit or the amount left in the compartmentalisation reserve. At the same time, the compartmentalisation reserve is released for the same amount. The release of a taxable compartmentalisation reserve will lead to a taxable profit, whereas the release of a tax exempt compartmentalisation reserve is tax free. If certain requirements are met, a roll-over facility is available in case of a legal merger or demerger.
The Bill has retroactive effect to 14 June 2013. This means that if a Dutch corporate taxpayer owns or owned a shareholding on 14 June 2013 or later to which the participation exemption did not full time apply prior to 14 June 2013, this taxpayer must form a compartmentalisation reserve immediately prior to realising income or gains in respect of the shares or the moment the shareholding no longer forms part of its business assets. The retroactive effect will result in practical complexities as tax payers will need to determine the fair market value of shareholdings at a date in the past.
2.3 Foreign fines no longer deductible
Currently, fines which are imposed by the Netherlands and the European Union are not deductible for corporate income tax purposes. These include fines for violating Dutch or EU competition law, administrative fines and penal fines. However, if such fines are imposed by other countries, these are currently deductible. This became apparent when the US imposed a large fine on a Dutch bank because of Libor manipulation. As it is deemed undesirable that such fines reduce the Dutch corporate income tax base, as of 1 January 2015 fines imposed by other countries will no longer be deductible either. Furthermore, if such fines are reimbursed to an employee, this is considered taxable wage for wage tax and income tax purposes.
2.4 Deductibility of additional tier 1 capital for banks and insurance companies
On 11 June 2014 a Bill was sent to Parliament which states that additional tier 1 capital is deductible for banks with retroactive effect to 1 January 2014. In the Tax Plan, a similar provision is included for insurance companies. Interest paid on additional tier 1 instruments issued by banks and insurance companies will, therefore, be fully deductible and not subject to withholding tax. However, for insurance companies the new legislation will not have retro-active effect: for insurance companies it will enter into force on 1 January 2015.
2.5 Exemption for businesses of governments abolished
As of 1 January 2016 the corporate income tax exemption for entities of which a governmental entity (for example, local, provincial and national government, but also governmental entities such as universities) holds all the shares and for certain businesses run by a governmental entity, will be abolished. The exemption must be abolished as the European Commission regards this exemption as state aid. It is not clear whether the European Commission agrees with 1 January 2016 as the date of abolishment or whether the Commission wants to impose an earlier date. Some governmental and internal activities will remain exempt and specific exemptions will apply for university hospitals, education and research and six Dutch see ports. It is doubtful whether the European Commission will agree with such exemption for see ports. This change is included in a separate Bill which was also sent to Parliament today.
On 30 October 2014 Allen & Overy will organise a seminar on the legal implications of the new tax liability for governments and their subsidiaries. Please send an email to firstname.lastname@example.org if you would like to be invited for this event.
2.6 Fiscal unity between sister companies and parents and lower tier subsidiaries
The Dutch fiscal unity regime allows the companies included in such unity to file a single tax return and to calculate Dutch corporate income tax on a consolidated basis. A parent company can form a fiscal unity with its subsidiaries if, amongst other requirements, both are tax resident in the Netherlands and the parent holds at least 95% of the shares of a subsidiary. Currently, it is not possible to form a fiscal unity between two sister companies if the parent company is not included in the fiscal unity nor is it possible to form a fiscal unity between a parent and a second or lower tier subsidiary if the intermediary subsidiary is not included. However, on 12 June 2014 the Court of Justice of the European Union (CJEU) decided that this restriction is not compatible with EU law if the parent or intermediary subsidiary which will not be included in the fiscal unity is an EU company (joined cases C-39-41/13). This means that the Dutch group companies must be allowed to form a fiscal unity even if the parent or intermediary company is left out of the fiscal unity because it is not resident in the Netherlands.
Given this decision of the CJEU, the Netherlands will have to make changes to the fiscal unity requirements. However, the Tax Plan does not include such amendments. It is, therefore still not clear how the fiscal unity requirements will be amended. Companies which would like to form a fiscal unity between the Dutch companies of their group, can file a request for such fiscal unity notwithstanding the fact that this is not possible according to the Corporate Income Tax Act. Based on the CJEU judgement such fiscal unity would be possible as long as the linking company which will not be part of the fiscal unity is resident in the EU and all other requirements to form a fiscal unity have been met.
3. DIVIDEND WITHHOLDING TAX
No substantial changes in the Dutch Dividend Withholding Tax Act have been proposed. The statutory dividend withholding tax rate will remain at 15%.
4. PERSONAL INCOME TAX AND WAGE TAX
Although most changes in the wage tax and income tax will not directly affect businesses, the changes can be important. Individual employees or groups of employees might try to partly shift their increased tax burden by demanding a higher remuneration and employers may have to make changes to their administrative systems.
4.1 Work related costs scheme
Currently, employers have the choice to apply either the old regime for tax free allowances and benefits or to apply the work-related costs scheme (werkkostenregeling). Most employers still apply the old system. As of 1 January 2015 all employers must apply the work-related costs scheme. The Tax Plan proposes some changes in this scheme. In principle, employee allowances and benefits qualify as wages under the work-related costs scheme. Only specifically defined intermediary costs, specific exempt costs and a few specific benefits are excluded. All other allowances and benefits are exempt from tax as long as the aggregate amount for all employees does not exceed the notional amount of 1.2% of the employer’s total wage bill. Any excess is taxable at a final rate of 80% and this tax is levied from the employer. Employers who form a group (which means an interest of at least 95%) can opt to be regarded as one employer for the work related costs scheme (i.e. the 1.2% benchmark). In that case, all employers will be liable for the total wage tax over allowances and benefits of the group.
The obligation to implement the work related costs scheme can lead to a significant increase in wage costs for employers who provide for high allowances and benefits relative to the average wage. Furthermore, it means that employers must ascertain that their payroll department can cope with this change.
4.2 Temporal employer’s levy of 16% not extended
In 2012 a temporary employer’s levy of 16% was introduced on employees' 2012 wages insofar as these exceeded EUR 150,000. This tax was due in March 2013. Currently, many court cases are pending on the question of whether this tax is allowed under Dutch law and international human rights treaties. Notwithstanding this fact, the government extended this 16% employer’s levy in 2013. The tax was due in March 2014 on the portion of the employees' 2013 wages exceeding EUR 150,000. The Tax Plan does not provide for an extension of this 16% tax. For that reason, based on the current legislative proposals no 16% levy will be due in March 2015.
4.3 Changes in tax free pension premiums
Parliament has already approved that as of 1 January 2015 pension premiums are only tax free insofar as these relate to a ‘pensionable income’ of at most EUR 100,000 on a full time basis. Wage tax must be withheld over pension premiums the employer pays with regard to a higher pensionable income and premiums paid by the employee in relation to this higher pensionable income are no longer tax deductible. For employers who have contracted employees on a net basis, this can increase wage costs. It will be possible to use after-tax wages to build up a voluntary pension on the pensionable income over EUR 100,000. Premiums for this pension are neither deductible nor are these tax free if paid by the employer. As a consequence thereof, the future annuity pension payments will not be taxed. Furthermore, the right to this pension will not be regarded an asset for the income tax over savings and investments (‘box 3’). Furthermore, amongst other changes, as of 1 January 2015 the maximum pension accrual rates will be amended and the age as of which the state pension (AOW) will be granted, will increase further.
4.4 Tax rates
The Tax Plan does not substantially change the existing personal income tax and wage tax rates. The maximum rate of 52% will be due insofar as the taxable income exceeds EUR 57,585. Unlike last year, the length of the tax brackets is corrected for inflation. The general tax credit and the labour tax credit will be reduced for higher and middle income groups.
4.5 Deemed wages of substantial interest holders
Individuals who work for an entity in which they hold a substantial interest (in short: a shareholding of at least 5%) are taxed over deemed wages at the progressive tax rate of at most 52%. As of 2015 these deemed wages will be the highest amount of:
75% of the wage of the most comparable employment contract (an employment contract in which there is no substantial interest, which is known by the employee and the tax inspector, of which the wage is known or can be estimated and of which the wage is not set at another amount than would be market practise);
The highest wage of employees of the entity or a related entity;
If the entity can prove that the highest amount is more than 75% of the most comparable employment, the deemed wage will be set at the latter amount. However the wage will be set at least at EUR 44,000 or, if that is a lower amount, 100% of the most comparable wage. Furthermore, no deemed wage will be taken into account if the deemed wage in the calendar year would not be higher than EUR 5,000. For individuals with a substantial interest in a company without many activities (such as a private pension entity), this will lessen the administrative burden. However, for substantial interest holders who work for an active company, the administrative burden and in several cases the wage tax basis, will increase. For 2015 a transitional measure applies. Please, do not hesitate to contact us if you would like to know what this change will mean for you.
5. VALUE ADDED TAX
5.1 Place of supply of telecommunications, broadcasting and electronic services
From 1 January 2015, telecommunications, broadcasting and electronic services will always be taxed in the country of the customer. It is neither relevant whether the customer is a business or consumer nor whether the supplier is based in the EU or outside. This means that it is no longer possible to make use of the differences in VAT rates as the VAT rate of the country of the consumer will always apply. All EU Member States must implement this change in their legislation with effect from 1 January 2015.
6. 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 the parliamentary discussions. New elements may be added to the Tax Plan to compensate for amendments. In mid-November, the Second Chamber of Parliament will vote on the amendments and the final content of the Tax Plan. In December, the First Chamber of Parliament will decide to adopt or to reject the Bills which are part of the Tax Plan.