On 10 October 2017, the four parties that will form the new Dutch government released the coalition agreement. The coalition agreed to a comprehensive tax reform in the next few years. The most important measures include a reduction of corporate income tax, the abolishment of dividend tax and the introduction of withholding tax on outbound interests and royalties to low-tax jurisdictions. At the same time, the new government intends to fight tax evasion and the use of tax havens, increase the lower VAT rate and reduce the tax burden on labor.
Competitive Business Climate
The new Dutch government intends to maintain and further improve the competitive investment climate. The policy of the government will be focused on the promotion of businesses with real substance and employees. The use of letter-box company will be discouraged and restricted.
The government intends to curb the use of letter-box companies that are solely set up in the Netherlands to facilitate international flow of funds without taxation. It is committed to international measures against tax havens and it will introduce a withholding tax on royalty and interest payments to low-tax jurisdictions.
The government intends to promote doing business with equity and restrict tax advantages of debt financing.
Corporate income tax rate will be reduced and the dividend tax will be abolished to attract foreign equity and reduce vulnerability to hostile takeovers. This will be financed with the restrictions on interest deductions (earnings stripping rule under ATAD I) and by reducing the period of loss carry forward. In addition, tax benefits for expats (30% allowance) will be further limited in time.
Highlights of the proposed Tax Reform
The following measures have been announced (with detailed legislation to follow in the next few years):
1. Corporate income tax rate will be gradually reduced from 20% (for profits less than EUR 200,000) and 25%, to 16% and 21%. The previously announced extension of the lower bracket from EUR 200,000 to EUR 350,000 will not be implemented.
2. In order to maintain the balance between income taxation of companies and entrepreneurs, the "Box 2" income tax rate for substantial shareholdings will be increased from 25% to 27.3% in 2020 and to 28.5% in 2021.
3. Dividend tax will be abolished. However, a withholding tax will apply in respect of dividend distributions to low-tax jurisdictions and in certain abusive situations. At the same time, a withholding tax will be introduced on outbound interest and royalty payments to low-tax jurisdictions.
4. Financing by equity will be made more attractive by restricting the deductibility of debt. The 30% ATAD earnings stripping rule will be implemented with a threshold of EUR 1 million of interest. No "group escape" rule will be introduced and certain interest deduction limitation rules will be abolished (but likely not the Article 10a CIT anti-base erosion rule).
5. The loss carry forward period will be reduced from nine years to six.
6. The effective tax rate for the innovation box will increase from 5% to 7%.
7. The duration of the attractive 30% allowance for expatriates will be reduced from eight years to five.
8. Immovable property in use by the taxpayer can be amortized to 100% of the WOZ value (currently 50%).
9. For income tax, a two-bracket system will be introduced with a lower rate of 36.93% and a higher rate of 49.5%, and the general tax allowance and labor allowance will increase for the benefit of the working population.
10. The income tax reduction is facilitated by the increase of the lower VAT rate from 6% to 9%, the introduction of more 'green' taxation and the reduction of certain tax allowances (mortgage allowance and independent professional allowance).
It is anticipated that the new government ("Rutte III") will be installed by the King in the week of October 23. Thus, it is likely that the plenary debate in parliament to discuss the coalition agreement with the new government will take place in the week of October 30.
More details on the tax reform can be expected when the new government releases more information over the next year on the legislative proposals to implement the plans.
Author: Wouter Paardekooper