Dutch Tax Plan 2021 and other tax proposals

On 15 September 2020, the Dutch state secretaries for Finance published the 2021 Tax Plan and related legislative tax proposals or Tax Bills. This article discusses the proposals we consider most relevant for international business. Measures specifically aimed at banks will not be discussed.

Corporate income tax

General corporate income tax rate and step-up rate

The previously agreed upon and announced reduction in the general corporate income tax rate from 25% to 21.7% will not take place. Under the current plans, the general tax rate will remain at 25%.

In order to grant tax relief to small and medium sized businesses, the threshold amount for the reduced step-up tax rate of 15% will increase from EUR 200,000 to EUR 245,000 in 2021 and to EUR 395,000 in 2022. The general 25% rate will apply to those taxable profits that are in excess of the respective threshold amount.

The effective tax rate for income qualifying for the Dutch innovation box regime will increase from 7% to 9%.

Limitation to the tax deductibility of interest costs and related measures

Through the implementation of the 2nd EU Directive against tax avoidance, the tax deductibility of interest (and other) payments by Dutch taxpayers to hybrid entities – among others – is restricted under certain circumstances. In these cases, hybrid mismatch rules may coincide with the restrictions that follow from earning stripping rules, which were enacted pursuant to the 1st EU Directive against tax avoidance.

Under the proposed new rules, the restrictions following from the hybrid mismatch rules take priority. If these hybrid mismatch rules do not restrict the tax deductibility of certain interest costs, the impact of earning stripping rules will need to be considered. In this respect, the definition of 'interest' in the meaning of earning stripping rules has been broadened.

As a further measure, the scope of anti-base erosion rules is to be narrowed. Currently, the non-deductibility of costs in respect to loans obtained from (or deemed to be obtained from) affiliated parties in connection with tainted transactions may cause positive income (e.g. currency exchange gains and negative interest costs) not to be taxable. It is now proposed that the application of anti-base erosion rules may never result in a lower taxable profit, meaning that positive income elements will become taxable.

Limitation to the tax deductibility of liquidation losses

Under the current liquidation loss regime, foreign losses on investments in foreign subsidiaries and permanent establishments may be tax-deductible in the Netherlands in the event of the qualifying termination of foreign activities.

It is proposed that from 2021, the tax-deductibility of such foreign losses will be limited to (i) losses in respect of qualifying interests exceeding 50% of the ownership (or voting rights) or permanent establishments (ii) in EU/EEA jurisdictions, where (iii) the liquidation of the qualifying participation is completed within a period of three years following to the termination of the activities or a respective decision to do so.

This restriction does not apply to foreign losses below EUR 5 million. These remain deductible in any case.

Corona tax reserve

As part of COVID-19 measures, taxpayers are allowed to report a deductible corona reserve in the 2019 corporate income tax return. The amount of the corona reserve is limited to the lowest of the 2019 taxable profits or the expected taxable losses in fiscal year 2020 if and to the extent such tax losses are caused by the COVID-19 crisis.

If created, then the corona reserve will be fully released for 2020 taxable profits. Through the creation of a corona reserve, taxpayers are able to achieve a cash flow benefit at an earlier stage.

Loss carry forward and measures against arm's length principle mismatches

In the accompanying letter to the tax proposals or Tax Bills, the state secretaries for Finance announced two further measures that will take effect on 1 January 2021 and 1 January 2022. These measures are not yet included in the Tax Bills, but will be introduced through a memorandum of amendment during the parliamentary process.

The first measure concerns a further limitation to the offsetting of tax losses. Currently, taxpayers can offset tax losses against profits from the previous year (i.e. carry back) and profits from the following six years (i.e. carry forward). Those losses may now be set off in full. It is proposed that from 2022 onwards, the use of tax losses in a certain year to offset against that year's taxable profits will be restricted. Under the proposals, losses of a previous year carried forward to a future year can be offset up to EUR 1 million of the year's taxable profits. If the available tax losses are in excess of EUR 1 million, these losses can only be set off against the first EUR 1 million in taxable profits in the relevant year and 50% of the taxable profits in excess of the first EUR 1 million.

The current time limit of six years for the carry forward of tax losses will be abolished. Under the new rules, losses can be carried forward indefinitely.

As a second measure, the Dutch government will put an end to informal capital structures in cases where a non-resident party is involved that is paying insufficient tax on the financial benefit that – from a Dutch tax perspective – is to be recognised at the other party's level.

Pursuant to the arm's length principle, intra-group business transactions must be recognised for Dutch tax purposes on a basis, which could have been agreed upon by independent parties acting under similar circumstances. The fact that countries apply this arm's length principle differently, or do not apply it at all, can lead to differences (i.e. mismatches) in international situations. Currently, the existence of a mismatch in the application of the arm's length principle does not influence Dutch tax treatment. This leads to tax avoidance because a Dutch taxpayer can deduct costs, even if the affiliated counterparty does not pay taxes in the other country on the corresponding revenue. Under the proposals, costs can no longer be deducted from taxable profits in the Netherlands if the other party abroad pays too little tax on the associated financial benefit. This measure is to take effect on 1 January 2022.

Credit of Dutch pidend withholding tax

In the accompanying letter to the Tax Bills, a proposed amendment was announced in the method for crediting a Dutch pidend withholding tax that would take effect from 1 January 2022.

Currently, Dutch corporate income tax rules provide for a full credit of Dutch pidend withholding tax. Dutch taxpayers can credit in full Dutch pidend withholding taxes withheld at their account against their Dutch corporate income tax liability. If the creditable withholding tax exceeds the Dutch corporate income tax liability, which is the case when the taxpayer finds itself in a loss-making situation, the Dutch pidend withholding tax will effectively be refunded.

This refund procedure is not available for foreign shareholders for Dutch pidend withholding taxes withheld on pidends paid to such shareholders. This different treatment may not be compliant with EU law (ECJ case Sofina C-575/17).

The proposed new rules will limit the amount of the credit for Dutch taxpayers up to the amount of the actual Dutch corporate income tax liability. This means that any excess amount of Dutch pidend withholding taxes will not be refunded. Any non-credited Dutch pidend withholding taxes may be carried forward indefinitely.

It is also announced that for the transition period up to 1 January 2022, the Dutch state secretaries for Finance will issue a decree setting out the conditions that need to be satisfied by non-resident shareholders to be eligible for a refund of the Dutch pidend withholding tax in a situation as described above.

Real estate transfer tax (RETT)

In principle, the acquisition of real estate situated in the Netherlands triggers RETT in the buyer's hands. Under the proposals, the current general rate increases from 6% to 8% as of 1 January 2021. The general rate applies to both the direct acquisition of Dutch immovable property and the acquisition of a substantial interest in property-rich companies.

Under the new proposals, a reduced rate of 2% will only apply to the direct acquisition of residential real estate by private inpiduals, provided that the immovable property will serve as the buyer’s non-temporary principal residence. The reduced 2% RETT rate no longer applies for the acquisition of residential investment property including second homes.

Carbon taxation

The Tax Bills include a legislative proposal encouraging industrial companies to invest in order to achieve a reduction in CO2 emissions. A carbon levy will fall due if and to the extent that a company's emission is considered excessive.

Based on the proposals, this tax will amount to EUR 30 per excess tonne as from 1 January 2021. It is proposed that this tax will gradually increase over the coming years by EUR 10.56 per annum. With effect from 2030, industrial companies that do not achieve the agreed reduction in CO2 may become subject to a levy of up to EUR 125 per tonne of excess CO2. In case the measure does not achieve the intended climate objectives, the tax rate may be further increased.

The proposal includes a number of dispensation rights (effectively exempting certain emission amounts), which will gradually become smaller. 2024 is expected to be the first year in which industrial companies will effectively pay a CO2 tax.

Interest rates

As part of the COVID-19 measures, the proposal has been made that interest charged on overdue taxes will remain at 0.01%.

The interest charged on underpaid tax will increase from 0.01% to 4% if a corporate income tax return is submitted after 1 June following the relevant tax year and the tax amount payable is in excess of the amounts already paid on preliminary assessments. This will come into force in 1 October 2020 until at least 31 December 2021. Before the COVID-19 crisis, the rate stood at 8%.

Way forward

Over the coming months, the 2021 Tax Plan will be discussed in both chambers of the Dutch parliament. This means that the proposed measures are subject to changes, on which we will keep you updated.

If you have any questions on this tax plan and how it could affect your investments, contact your regular CMS advisor or local CMS experts.