Traditionally on the third Tuesday of September, the Dutch government proposes its Tax Plan for the coming year to Parliament. On September 17, 2019, the Dutch government released the Tax Plan for 2020, which includes quite significant amendments to existing legislation.
The plan mainly aims to implement several measures influenced partially due to recent developments in the EU. The following article summaries key Corporate Income tax changes in the Dutch Tax Plan, which are as follows:
- Corporate Income Tax Rate Cuts
- Conditional Withholding tax on Interest and Royalty Payments
- Anti-abuse rules for Dividend withholding tax (DWT) & Corporate income tax (CIT) exemptions
- Amendments to the Dutch domestic definition of a ‘Permanent Establishment’
- Introduction to interest deductibility limitation (minimum capital) for banks and insurance companies
- Changes to Innovation box regime and R&D wage tax reduction
- Increased substance requirements for Financial Service Companies
- Real Estate transfer tax rate
- Amendment of the liquidation loss regime
- Labor Cost Scheme
- Proposals which will enter into force, or have effect from Jan 1, 2020
1.Corporate Income Tax Rate Cuts:
The Tax Plan 2020 has partly followed the earlier corporate income tax cuts, which was announced during the 2019 Budget Day proposals. For 2020, the corporate income tax rate on profits up to EUR 200,000 will be reduced from the current 19% to 16.5%. On the other hand, the corporate income tax rate on profits exceeding EUR 200,000 remains 25% (as opposed to a tax rate of 22.55% that was initially proposed). For 2021, the lower tax bracket will be reduced to 15%, whereas the higher bracket will be reduced to 21.7% (and no longer to the earlier announced 20.5%)
2. Conditional withholding tax on Interest and Royalty Payments:
A withholding tax (WHT) will be introduced as of January 1, 2021, on intragroup interest and royalty payments in the following situations:
- Payments to low-tax jurisdictions with a statutory profit tax rate or less than 9% or to jurisdictions that are EU blacklisted.
- The WHT on interest and royalty payments will furthermore apply in certain abusive situations and certain situations involving hybrid entities or permanent establishments.
The WHT targets interest and royalty payments to related entities control (in short,> 50% voting rights) are the relevant criteria. The WHT rate will be equivalent to the main corporate income tax rate, which will be 21.7% in 2021.
The new WHT rules are conditional because the tax treaty with a low-tax jurisdiction or EU blacklisted country restricts the WHT from being alive and the Netherlands will approach such a treaty partner to amend the tax treaty.
3. Anti-abuse rules for Dividend withholding tax (DWT) & Corporate income tax (CIT) exemptions :
Following the decision of the Court of Justice of the European Union in the so-called « Danish Cases » current minimum substance requirements currently embedded in domestic anti-abuse rules as part of the Dividend Withholding Tax Act and the Corporate Income Tax Act will no longer function as a safe harbor rule. Even if the safe harbor test is with, the Dutch tax authorities may challenge the structure on the basis that it is artificial.
These new requirements will supplement the already existing minimum substance requirements for the following situations:
- Claiming Dutch dividend withholding tax exemption,
- Claiming non-resident corporate income tax exemption
- Minimum substance tests for Dutch CFC
4. Amendments to the Dutch domestic definition of a ‘Permanent Establishment.’
The domestic definition of « Permanent Establishment » will be amended to align with choices made by the Netherlands in relation to the MLI (Multilateral Instrument). Definition will be in alignment with the definition provided under the relevant tax treaty, in the case of a jurisdiction with which the Netherlands has a tax treaty. In the case of a jurisdiction with which the Netherlands does not have a tax treaty, the definition is in line with the recommendations of the OECD BEPS Action 7 Final Report.
5. Introduction to interest deductibility limitation (minimum capital) for banks and insurance companies
The Dutch government proposes to implement a minimum capital rule for banks and insurers. This way the rule will limit the interest deduction for Dutch corporate income tax purposes for banks and insurers to the extent they have excessive debt. In general, this rule will apply to banks and insurance companies with debt-financing exceeding 92% of the balance sheet total.
The minimum capital rule will apply to banks and insurers that have a license for the business of banking or insurance issued under the Dutch Financial Supervision Act.
6. Changes to Innovation box regime and R&D wage tax reduction:
The proposed plans include an increase in the effective tax rate of the innovation box regime from 7% to 9% as of 2021.
In order to ease the application process and make it more user-friendly the proposal provides for the simple and short application process for the R&D wage tax reduction
7. Increased substance requirements for Financial Service Companies
A company qualifying as a financial service company must currently indicate on its annual corporate income tax return with certain minimum substance requirements are with. Non-compliance with increased substance requirements with lead to the exchange of information with other jurisdictions.
8. Real Estate transfer tax rate:
Real estate transfer tax for commercial real estate will increase from 6% to 7% as from 2021.
9. Amendment of the liquidation loss regime
The Tax Plan has proposed to limit the liquidation loss regime to subsidiaries that are resident for tax purposes or EU / EEA Member States (geographical restriction), in which the Dutch resident taxpayer has a qualifying interest (more than 25%; substantive restriction), where the liquidation must be completed within three years (temporal restriction).
The discontinuation loss regime, which applies to a permanent establishment of a Dutch resident taxpayer, will be limited to EU / EEA Member States, except insofar the permanent establishment owns investment real estate or a limited partnership interest in a non-EU / EEA Member State.
The expected effective date of this expected proposal is January 1, 2021.
10. Labor Cost Scheme
The government proposes the threshold of the Labor Cost Scheme. As of 2020, the tax-free Budget will be increased from 1.2% to 1.7% or the fiscal wage sum up to EUR 400,000. The tax-free Budget is increased by 1.2% or the wage sum exceeding the amount mentioned above.
11. Proposals which will enter into force, or have effect from Jan 1, 2020:
The following measures were already proposed before Budget Day, and therefore are not part of the Budget, but will enter into force or have effect as from January 1, 2020:
- Implementation of rules to counter hybrid mismatches, as required by the amended EU Anti-Tax Avoidance Directive (ATAD2)
- Implementation of the Mandatory disclosure rules for intermediaries, as required by the EU Mandatory Disclosure Directive
- Changes to certain tax treaties that are affected by the Multilateral Instrument.
- Entry into force of rules denying carry forward of interest deduction under the earnings-stripping rules (case came into force on January 1, 2019) in case of change of ownership
The proposals under the Tax Plan are likely to have a significant impact on maintaining a competitive business climate while combining tax abuse and aligning Dutch tax rules with EU case law and EU Directives. Currently, the Tax Plan is subject to discussion in the Dutch House of Representatives, which may propose (and adopt) amendments to the legislative proposals published by the Dutch government. Upon approval by the Dutch House of Representatives, the Dutch Senate will vote on the proposal in December (probably the last session of 2019), after which the measures will take effect on January 1, 2020, except for the proposed conditional withholding tax on interest and royalty payments to low tax jurisdictions and in certain abusive situations, which will take effect on January 1, 2021.