On 15 September 2015 the Dutch government published its Tax Plan 2016. In this e-alert we discuss the legislative proposals in the Tax Plan which are of interest for companies.
Today, the Dutch Ministry of Finance published its Tax Plan 2016. In fact, the government sent six separate Bills to Parliament (one on 11 September and the other five on 15 September). Hereinafter we will refer to these six Bills together as the Tax Plan. In this e-alert we discuss the proposals 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 change in the course of the upcoming parliamentary discussions.
2 CORPORATE INCOME TAX
2.1 Tax rate 2016
The 2016 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 Implementation of changes in the Parent Subsidiary Directive
The European Parent Subsidiary Directive (PSD) aims to prevent double taxation of dividends distributed by European subsidiaries to their European parent company. However, the effect of the PSD can also be that such dividends are not taxed at all (double non-taxation). In line with the European Commission’s action plan to strengthen the fight against tax fraud and tax evasion and the Base Erosion and Profit Shifting (BEPS) project, the European Council adopted two changes in the PSD which have to be implemented by the EU Member States before 1 January 2016. A seperate Bill on the implementation of changes in the PSD 2015 implements these changes in the Dutch Corporate Income Tax Act and Dividend Withholding Tax Act.
2.2.1 Hybrid loans
The amended PSD seeks to prevent corporate groups from using hybrid loan arrangements to benefit from double non-taxation under the PSD, where payments are treated as deductible expense in the source Member State and as tax exempt dividend income in the recipient Member State. The recipient Member State must henceforth refrain from taxing profits from the subsidiary only to the extent that such profits are not tax deductible in the source Member State.
This is implemented in the Dutch Corporate Income Tax Act by not granting the participation exemption if the payments by the subsidiary were de jure or de facto directly or indirectly deductible. Furthermore, the participation exemption also not applies on amounts received in lieu of the payments mentioned in the previous sentence. This restriction applies to all subsidiaries irrespective of whether they are resident in the European Union (EU) or in third countries. According to the Dutch government, also other EU Member States such as the United Kingdom, Belgium, Germany and France have opted for this world wide application of the measure.
This new legislation means that companies must review structures in which, for example, profit participation loans are involved, as these can be less tax efficient as of 1 January 2016.
2.2.2 General Anti-Avoidance Rule
The PSD also obliges to introduce a general anti-abuse rule (GAAR). This GAAR aims at preventing Member States from granting the benefits of the PSD to arrangements that have been put into place for the main purpose or one of the main purposes to obtain a tax advantage and which are not genuine having regard to all relevant facts and circumstances. An arrangement or a series of arrangements is regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. Member States can apply stricter domestic rules, as long as they meet the minimum EU requirements.
This GAAR is implemented in article 17(3) of the Corporate Income Tax Act (CITA) and in article 1(7) of the Dividend Withholding Tax Act (DWTA). The Netherlands was not in favour of this GAAR, which seems to be reflected in the narrow interpretation the Dutch government gives to the proposed GAAR. The government has not opted for a GAAR in the withholding exemption of the DWTA but for a GAAR in the substantial interest provision of the CITA to prevent an overlap with existing anti-abuse measures and for simplicity reasons.
The link with the substantial interest provision means that not only dividend income, but also capital gains can be caught under the new GAAR. The scope of the substantial interest provision at first sight seems to be broadened by this measure. The current anti-abuse provision only applies if the substantial interest (in short: a shareholding of at least 5 %) in a Dutch resident entity is not part of an enterprise. As of 2016, the wording of the provision does not make a distinction between an interest which is part of an enterprise or of an investment portfolio. As of 2016 the taxable income of a non-resident will include taxable income from a substantial interest in a Dutch resident entity if the tax payer holds the interest with the main purpose or one of the main purposes to evade the levy of personal income tax or dividend withholding tax for another and if there is an artificial arrangement or set of arrangements. Such arrangements or arrangement is regarded as being artificial in so far as it is not put in place for valid commercial reasons which reflect economic reality. According to the Dutch government, commercial reasons are reflected in the substance of the company holding the substantial interest. If it carries on an enterprise and the substantial interest is a functional part of the enterprise, there will be commercial reasons. The same applies for an active top holding company. Even if the company which holds the interest does not carry on an enterprise, there are still commercial reasons if the sub holding has a linking function between the business activities or head office activities of the top holding and the subsidiary. The sub holding must meet the Dutch substance requirements for holding activities, which is a more restrictive approach than currently is the case regarding sub holdings with a linking function.
In the DWTA similar wording as in the CITA is introduced to broaden the scope of the DWTA liability for members of a Dutch cooperative. Profit distributions by cooperatives are only liable to dividend withholding tax if the GAAR applies, in other cases it is tax free. The old GAAR did not apply if the membership interest was part of an enterprise. This safe haven will no longer apply under the new wording. However, the Dutch interpretation of commercial reasons is similar to the one which applies for the CITA: if the cooperative carries on an enterprise, if the membership is part of an enterprise or if the member has a linking function and sufficient substance. It seems, therefore, that apart from the addition of the substance requirement, the Dutch government aims to implement only a minor change in comparison to the current rules.
2.3 Changes in the fiscal unity requirements following European case law
Case law of the Court of Justice of the European Union (CJEU) obliges the Netherlands to make changes in its fiscal unity regime. However, the Tax Plan does not meet this obligation.
2.3.1 Fiscal unity between sister companies and sub-subsidiaries without including the non-resident parent or subsidiary
The Dutch fiscal unity regime allows the companies included in such unity to file a single corporate income tax return, to have tax free transfers of assets and services and to calculate Dutch corporate income tax on a consolidated basis. 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 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. It was expected that the Tax Plan would codify this case law, but it does not.
2.3.2 Per element approach and cross-border fiscal unity
Under the current Dutch legislation, a parent company can only form a fiscal unity with its subsidiaries if, amongst other requirements, the parent holds at least 95% of the shares of a subsidiary and both are tax resident in the Netherlands. However, in the recent French Groupe Steria case (C-386/14), for more information on this case we refer to our e-alert of 3 September 2015. the CJEU ruled that, in principle, it is an unjustifiable violation of the EU freedom of establishment if subsidiaries in the same Member State can be included and subsidiaries in a different Member State cannot be included in domestic tax grouping. The CJEU establishes per element of the grouping regime whether or not disallowing an aspect of the regime is allowed, the so called "per element approach". In X Holding (C-337/08) the Netherlands was permitted not to allow for a cross-border fiscal unity to prevent cross-border loss imports. Although the full scope of the decision is not entirely clear yet, this now merely seems to have been a justification not to allow this element of the fiscal unity regime. This case law creates access to tax advantages in EU cross-border cases which were so far limited to domestic fiscal unities, such as a full participation exemption and potentially less restrictions on interest deduction.
It is yet not clear which, if any, action the Dutch government will take in reaction on the Groupe Steria case. The Tax Plan does not include a reference to this case law. However, tax payers who want to benefit from certain aspects of the fiscal unity regime can now try to make a claim on these advantages based on this CJEU case law. It depends on the yet unclear scope of this per element approach whether or not such claims will be successful.
2.4 Country-by-country reporting
Where the BEPS project (for more information on this project we refer to our International Tax Alert of 17 September 2014) of the Organisation for Economic Co-operation and Development (OECD) is approaching its deadline for deliverance of the final reports on 8 October 2015, the Tax Plan already includes a measure related to Action 13 on transfer pricing documentation. On 8 June 2015, the OECD issued the Country-by-Country (CbC) Reporting Implementation Package as part of this Action 13. It included model legislation that countries could use to implement CbC reporting requirements for multinational enterprises (MNEs) and model competent authority agreements that countries could adopt to facilitate implementation of information exchange between tax authorities with respect to the CbC reports. The OECD aims for the first CbC reports to cover fiscal year 2016. These must be filed in the home country of a group’s parent company. The home country then shares the report with other relevant countries under government information exchange mechanisms. This model legislation has been adapted to the Dutch legal system and is as such included in the Tax Plan through adding a new chapter VIIa in the CITA. This chapter closely follows the OECD model legislation.
As of fiscal year 2016, the ultimate Dutch resident parent of a group of companies that includes two or more enterprises with tax residence in different jurisdictions, or that includes an enterprise that is tax resident in one jurisdiction and has a permanent establishment taxed in another jurisdiction (MNE Group) has to file a CbC report with the Dutch tax administration. Furthermore, certain Dutch resident separate business units of an MNE Group would 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 contain aggregate information relating to the amount of revenue, profit or loss before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash or cash equivalents with regard to each jurisdiction in which the MNE group operates. Furthermore, it must identify each entity of the group: the jurisdic-tion of tax residence, and where different from such jurisdiction, the jurisdiction under the laws of which it is organised and the nature of the main business activity or activities of such entities.
The CbC report must be filed no later than 12 months after the last day of the reporting fiscal year of the MNE Group. The Bill also addresses the use and confidentiality of CbC report information. The tax administration can use the CbC report for purposes of assessing substantial (here the Netherlands uses different wording than the OECD which uses ‘high level’) transfer pricing and other BEPS-related risks, including assessing the risk of non-compliance with transfer pricing rules and, where appropriate, for economic and statistical analysis. Transfer pricing adjustments by the tax administration are not to be based on the CbC report. The Dutch tax administration must preserve the confidentiality of the information in the CbC report at least to the same extent that would apply if such information were provided under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. If the entity does not meet its reporting obligations on time, an administrative penalty can be imposed.
Even though Dutch left wing political parties and certain NGO’s strive for these CbC reports to be made public, based on the current Bill this will not be the case. The Dutch government waits for the outcome of the impact assessment of the European Commission before coming to a conclusion on whether or not the CbC reports should be made public.
2.5 Implementation Common Reporting Standard for financial institutions
On 11 September 2015 the government sent the Implementation Bill on the Common Reporting Standard (CRS) to Parliament. As of 2016 Dutch resident financial institutions (which includes certain insurance companies) must report certain information on their account holders and their accounts to the Dutch tax authorities. The scope is rather broad, as financial accounts do not only include depository accounts and custodial accounts, but also certain equity or debt interests in a financial institution and cash value insurance contracts and annuity insurance contracts. The information which must be provided on the accounts includes information on the amount on the account or its value and the interest, dividends and other income which were received in relation to the account.
The Netherlands will exchange this information with the tax authorities of the residence country of the account holders. The first exchange of information will be in 2017 regarding information on 2016. This Bill implements EU Directive 2014/107/EU and the OESO CRS in the Dutch Act on international assistance in the levy of taxes. As this Bill has to be implemented on 1 January 2016, it will probably follow the same time table in Parliament as the Tax Plan.
2.6 Integration of R&D deduction and the R&D wage withholding tax reduction
The Netherlands applies various research and development (R&D) incentives, including the R&D deduction of 60% of recognized R&D costs and the R&D wage withholding tax reduction for wages paid to employees performing R&D activities: 35% (40% for start-ups) of the first EUR 250,000 of R&D labour costs and 14% of any excess. These two incentives will be integrated by abolishing the R&D reduction and increasing the R&D wage withholding tax reduction both in percentage and base as of 1 January 2016. Under the integrated incentive, the wage tax to be paid to the tax authorities will be reduced as follows: 30% (40% for start-ups) over the first 300,000 of all R&D costs (labour costs and other costs and expenditures) and 15% over the remainder. The innovation box in the corporate income tax will remain unchanged.
3 DIVIDEND WITHHOLDING TAX
3.1 Tax rate
The statutory dividend withholding tax rate will remain at 15%.
3.2 Step up for cross border mergers and demerger
In case of a cross-border share merger (aandelenfusie) the Netherlands provides for a step up of the share capital for dividend withholding tax purposes. As share capital can be paid out to shareholders without triggering dividend withholding tax, obtaining such step up is advantageous for the company and its shareholders. The idea behind this step up is that the Netherlands should not tax value which was accumulated outside the scope of Dutch dividend withholding taxation.
However, the legislation did not provide for such step up in case of a cross-border legal merger (juridische fusie) or demerger (juridische splitsing). The reason for this was probably that when the step up for the cross-border share merger was introduced, a cross-border legal merger or demerger was not provided for in Dutch private law. A cross-border legal demerger is still not possible in the Netherlands. The Tax Plan introduces a step up both for cross-border legal mergers and demergers.
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 tax burden by demanding a higher remuneration.
4.1 Tax rates
The Tax Plan decreases the rate of the second and third tax bracket from 42% to 40.15 %. These brackets apply to income between EUR 19,922 and EUR 66,421. The maximum rate of 52% will be due insofar as the taxable income exceeds EUR 66,421. In 2015 this maximum rate was already due over an income exceeding EUR 57,585. The general tax credit and the labour tax credit will be reduced for higher and middle income groups.
If the Tax Plan is enacted in its current form, as of 1 January 2017 the deemed income from savings and investments ("box 3") will change. This deemed income is calculated over the difference between assets and liabilities of the individual insofar as these exceed the threshold. As of 2017 this threshold, which is EUR 21,330 in 2015, will be increased to EUR 25,000 per person. Currently, the deemed income is calculated at 4%. As of 2017 this will be calculated using a rather complicated system, roughly resulting in 2.9% for the first EUR 75,000, 4.7% for the amount between EUR 75,000 and EUR 975,000 and 5.5% for the remainder. Roughly speaking, this will increase the tax burden for tax payers with net assets over EUR 300,000. The rate which is applied over this deemed income will remain 30%.
5 REAL ESTATE TRANSFER TAX
The Tax Plan puts so called "ground lease structures" (erfpachtstructuren), which typically are aimed at reducing the taxable base for Dutch real estate transfer tax (overdrachtsbelasting) purposes, to an end. The current reduction of the taxable base in case ownership of Dutch real estate property is acquired which is subject to a (often temporary) ground lease, will be denied as from 1 January 2016. The legislative proposal relates to cases where either the ground lease is established upon the transfer of the property or, on a tax exempt basis, in a three year period preceding the acquisition.
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.
7 MORE INFORMATION
We are happy to share our views on the developments with you, so please do not hesitate to contact us if you have any questions. Furthermore, we invite you to attend our seminar on 6 October 2015 in the Amsterdam office on the way forward in this era of BEPS. For more information we refer to our website.