Dutch Government Announces Implementation of the ATAD, Conditional Withholding Taxes and an Update on Substance Requirements
On 23 February, the Dutch Secretary of Finance published a policy letter stating the government’s intentions to tackle tax evasion and tax avoidance. In this alert, we will highlight the most important announcements. These announcements still need to go through the legislative process, which is expected to happen in 2018 and beyond, depending on the specific proposal.
Most of the measures announced are the result of the obligatory implementation of the EU Anti-Tax Avoidance Directive (ATAD) and the recently published list of nine non-cooperative tax jurisdictions by the EU (non-cooperative jurisdictions). EU Commissioner Moscovici strongly recommended that EU Member States introduce (unilateral) sanctions against latter jurisdictions.
The Netherlands is trying to balance a firm intention to tackle tax evasion and avoidance by implementing new anti-abuse legislation on the one hand, and maintaining an attractive investment climate in the Netherlands, on the other hand, with a decrease of the corporate income tax rate from 25% to 21% and the conditional abolishment of Dutch dividend withholding tax as of 2020.
No withholding taxes, except for payments to “low tax jurisdictions” and non-cooperative jurisdictions
Dutch dividend withholding tax will generally be abolished as of 1 January 2020. A dividend withholding tax will only apply to dividend payments to low-tax jurisdictions and non-cooperative jurisdictions. In addition, from 2021 it is proposed to introduce a withholding tax on intragroup interest and royalty payments to low-tax jurisdictions and non-cooperative jurisdictions.
Although there is no definition yet of low-tax, the withholding taxes referred to above will most likely apply to payments to countries with no or a very low statutory corporate income tax rate. The withholding tax rates that will be introduced for these specific payments are also not clear at this point in time.
Implementing the ATAD
All EU Member States must introduce the anti-abuse rules adopted through the ATAD in their domestic laws ultimately by the dates set out in the ATAD. The policy letter provides more insights into the implementation of the ATAD into Dutch tax laws. The most important comments in the announcement were made in relation to the following measures:
Earning stripping rule
From 1 January 2019, the ATAD-based earning stripping rule will be introduced. The earning stripping rule is a general limitation of the deduction of the balance of interest paid and interest received, whereby the deduction will be limited to 30% of the EBITDA. As the Netherlands aims to have equal treatment of both equity and debt, it was decided to take a stricter approach than that prescribed by the ATAD, which resulted in the following decisions:
- The earning stripping rule will not contain a group escape.
- The threshold for deductible interest has been set at EUR 1 million.
- No grandfathering will be available for existing loans.
Controlled foreign companies (CFC) rule
The ATAD included two alternative “models” for including a CFC rule into domestic law. Under Model A, specific categories of passive non-distributed income of a CFC will — under certain circumstances — be included in the taxable base of the parent company. Under Model B, income of a CFC that should have been allocated to the parent company based on the arm’s-length principle will be included in the taxable base of the parent company. The Secretary of Finance announced that the Netherlands wishes to implement a CFC rule as of 1 January 2019, on the basis of Model A, with some important deviations.
Under the Dutch proposal, a foreign company will qualify as a CFC if (i) a Dutch taxpayer has an interest of more than 50% in that foreign company and (ii) the taxation in the CFC’s country of residence is lower than 50% of the taxation that would occur in the Netherlands if this CFC were a Dutch resident. Should this be the case, the non-distributed profit of the CFC should be included in the Dutch tax base on a pro rata basis. The income to be included in the Dutch tax base will consist of specific categories of passive income (ie, dividends, interest, financial lease, royalties, etc.).
As an exception, the Dutch CFC rule would not apply under the proposal if the CFC has “substantial economic activities.” A CFC is considered to have substantial economic activities if the CFC satisfies the increased Dutch minimum substance requirements. This exception may significantly reduce the impact of the CFC rule. The increased Dutch minimum substance requirements consist of the Dutch minimum substance requirements already in place, upplemented by a salary cost requirement and an office space requirement:
- The salary costs of the relevant company must at least amount to EUR 100,000 annually; and
- An office space must be at the disposal of the relevant company for a period of at least 24 months.
On 1 January 2020, anti-abuse rules targeting hybrid mismatches will be introduced into Dutch tax law. These rules seek to neutralize the effect of hybrid mismatches that are due to differences in the qualification of tax systems where at least one of the parties involved is a corporate taxpayer within the EU. These rules will impact hybrid entity mismatches, hybrid permanent establishment mismatches, hybrid financial instruments and dual resident mismatches, among others. This legislation will either result in denial of the deduction of payments that are not taxed due to the hybrid mismatch, or the inclusion of income that was otherwise not taxed due to the hybrid mismatch.
Increased substance requirements
The Secretary of Finance announced that the increased Dutch minimum substance requirements will also become relevant for Dutch holding companies, in addition to the existing application to “financial services companies” (ie, companies performing at least 70% of group financing, licensing, leasing or rental activities). The substance requirements need to be met in order to avoid spontaneous exchange of information on the lack of substance with relevant source countries.
In addition, the increased Dutch minimum substance requirements will need to be satisfied by companies that wish to get advance certainty in the form of a ruling from the Dutch tax authorities starting from 1 January 2019.
As a result of the above-mentioned proposals to introduce anti-abuse legislation in the Netherlands in the coming years, various legislative proposals are expected in the upcoming period. In terms of next steps, it was announced that:
- An internet consultation will be initiated as soon as possible in 2018 on the hybrid mismatch rule, whereby it is planned to publish draft legislation at the beginning of 2019.
- Legislation will be published within 2018 on the introduction of the earning stripping rule and the CFC rule
- A draft bill introducing withholding tax on interest and royalties for payments to low-tax jurisdictions will be submitted to the Dutch Parliament in 2019.
Although no timing has been mentioned yet, a draft bill is expected in the upcoming period related to the abolishment of dividend withholding tax with the exception of payments to low-tax jurisdictions, as implementation has been announced from 1 January 2020.
This Tax Alert has been prepared for general information purposes only. The information presented is not legal advice, is not to be acted on as such, and may be subject to change without notice.