Large businesses in the Netherlands typically carry out their activities via a limited liability company (besloten vennootschap, or BV) or – to a lesser extent, typically in the case of a listed company – via a public limited company (naamloze vennootschap, or NV) or a no-liability co-operative (coöperatieve UA). In practice, a BV is most commonly used. A co-operative is traditionally used in certain industries (eg, the agriculture or financial industry). Each of these legal forms has legal personality so that the entity can own assets in its own name and the shareholders (membership right-holders in the case of a co-operative) as a starting point cannot be held personally liable for corporate obligations.
A BV, NV and co-operative are separate taxpayers for Dutch corporate income tax purposes.
In the Netherlands, tax transparent entities that are typically used are a limited partnership (commanditaire vennootschap, or CV), a general partnership (vennootschap onder firma, or VOF) and a fund for joint account (fonds voor gemene rekening, or FGR). Each of these legal forms lacks legal personality and should be considered as a contractual business arrangement.
As a VOF is tax transparent, it is not a taxpayer for Dutch corporate income tax purposes. Instead, the underlying participants are taxed for their participation in a VOF. Distributions by a VOF are not subject to Dutch dividend withholding tax.
With respect to a CV and an FGR, the Dutch corporate income tax treatment depends on whether it is considered open or closed. An open CV/FGR is subject to Dutch corporate income taxation as such, whereas in the case of a closed CV/FGR, the underlying participants are taxable for the income derived from their interest in the CV/FGR. A CV or FGR is closed if all limited and general/managing partners separately and upfront approve each accession, resignation or replacement of participants. Alternatively, an FGR is also considered closed if participations can exclusively be transferred to the FGR itself.
CVs and VOFs are used in practice to structure joint ventures, alternative investments and/or large projects.
For Dutch corporate income tax purposes (with the exception of certain provisions, such as the fiscal unity regime and the participation exemption), a BV, NV or co-operative is deemed to be a corporate income tax resident in the Netherlands (regardless of the place of effective management of the entity) if it is incorporated under the laws of the Netherlands. If a double tax convention is applicable that includes a tie-breaker rule and both treaty contracting states consider a company to be a resident of their state, typically the place of effective management of a company is conclusive for the place of residence for tax treaty purposes, which is the place where the strategic commercial and management decisions take place. Important elements for determining this place are, for example, the residency of board members and the location of board meetings. In several treaties, the number of which is expected to increase due to the effect of the Multilateral Instrument to implement the OECD base erosion and profit shifting project (BEPS), if both treaty contracting states consider a company a resident of their state, the residency is determined on the basis of a mutual agreement between the two states (eg, in the case of the tax treaty with the UK).
Corporate income taxpayers are subject to a corporate income tax rate of 25% (2019) with a step-up rate of 19% for the first EUR200,000 of the taxable amount. These corporate income tax rates are proposed to be reduced gradually to 21.7% and 15% respectively in 2021. The reduction will take place over a three-year period. For 2020 the rates will be 25% and 16.5% respectively.
An individual who is a personal income tax resident of the Netherlands is liable for personal income taxation on their taxable income, including business income, at the following progressive rates (brackets and rates for 2020):
The social security rate applied to individuals who are retired is 9.75%, resulting in a combined rate of 19.45%. The official retirement age in the Netherlands will remain at 66 years and four months in 2020 and 2021. From 2022, the retirement age will increase by three months and will reach 67 in 2024. After that, the retirement age will increase not by one year for every year that people live longer, but by eight months.
The business income of personal income taxpayers and corporate income taxpayers is determined on the basis of two main principles. The first is the at arm's length principle (which serves to establish the correct overall amount of profit as such, the totaalwinst) and the second is the sound business principle also known as sound business practice (goed koopmansgebruik, which serves to attribute the profit to the correct financial year, the jaarwinst), which have been shaped through extensive case law.
It should be noted that the Dutch fiscal concept of business income is, strictly speaking, independent of the statutory accounting rules. In practice, both regimes overlap to a certain extent.
Based on the at arm's length principle, a business income is adjusted as far as it is not in line with it. Thus, both income and expenses can be imputed in a group context for Dutch tax purposes regardless of the statutory or commercial accounting. For corporate income taxpayers this can result in informal capital or hidden dividends. In light of the debate on international tax planning, the Dutch government has announced that it will investigate whether downward adjustments of business income should be abolished.
Based on the sound business principle, a business income is allocated to the appropriate financial years. The sound business practice requires the income to be allocated in line with the principle of reality – encompassing realisation and matching – (realiteit), simplicity (eenvoud) and prudence (voorzichtigheid). In this respect, the realisation of income and deductibility of expenses for tax law purposes are governed by these principles. Profits are taxed on an accruals basis.
The at arm’s length principle and the sound business principle are fundamental as regards to the taxation of business profits. The tax laws however, do contain some specific rules that deviate from those principles, for example, with regard to the depreciation of assets.
In addition, numerous specific provisions are included in Dutch tax law that concern, for example, the forming of a tax group (so-called fiscal unity) and the application of the participation exemption (exempting income from qualifying shareholdings).
Two main tax incentives exist. Firstly, the innovation box that, subject to certain requirements, taxes income in relation to qualifying income from intangible assets against an effective tax rate of 7% instead of the statutory rate of 25%. The regime has been amended as of 1 January 2017 amongst others to reflect that only R&D activities that take place in the Netherlands are eligible for the beneficial tax treatment (eg, Nexus Approach). Qualifying intangible assets are R&D activities for which a so-called R&D certificate has been issued or that have been patented (or application to this effect has been filed). Software can also qualify as an intangible asset. It is proposed to increase the effective tax rate to 9% per 1 January 2021. Secondly, the wage withholding tax credit, which allows employers to reduce the amount of wage withholding tax that has to be remitted to the tax authorities with 32% up to an amount of wage expenses in relation to R&D activities of EUR350,000 and 16% for the remainder (2020).
In addition, special tax incentives apply to stimulate sustainability. For example, businesses that invest in energy-efficient assets, technologies or sustainable energy may benefit from the Energy Investment Allowance (Energie Investerinsgaftrek, EIA). As to environmentally sustainable investments, the Environment Investment Allowance (Milieu Investerinsgaftrek, MIA) and the Arbitrary Depreciation of Environmental Investments (Willekeurige afschrijving milieubedrijfsmiddelen, VAMIL) may apply.
Shipping companies can apply for the so-called tonnage tax regime, whereby essentially the income from shipping activities is determined on the basis of the tonnage of the respective vessel, which should result in a low effective corporate income tax rate. Qualifying income from shipping activities is, for example, income earned with the exploitation of the vessel in relation to the transportation of persons and goods within international traffic, the transportation of persons and goods in relation to natural resources, and pipe and cable laying.
As a starting point, taxable losses can be carried back one year and carried forward six years. Losses that are incurred in years before 2019 can be carried forward for nine years. A transitional rule to regulate the effects of the changes applies to losses incurred in the years 2017, 2018, 2019 and 2020. Specific anti-abuse rules have to be observed. Anti-abuse rules may apply in some cases due to which losses cease to exist in the case of a substantial change of the ultimate ownership of the shares in a company that suffered the tax losses. For financial years starting on or after 1 January 2019, the so-called holding and financing losses regime has been abolished. Until that date, such losses are ring-fenced and can only be offset against holding and financing income.
As a starting point, at arm’s length interest expenses should be deductible for Dutch corporate income tax purposes. A remuneration only classifies as "interest" if the financial instrument is considered "debt" for tax law purposes. In addition, a number of interest deduction limitation rules have to be observed to determine if interest expenses are deductible in the case at hand. The most important rules are detailed below.
For Dutch corporate income tax purposes, corporate taxpayers that meet certain requirements can form a so-called fiscal unity. The key benefits of forming a fiscal unity are that losses can be settled with positive results within the same year (horizontal loss compensation) and one corporate income tax return should be filed that includes the consolidated tax balance sheet and profit and loss account of the entities consolidated therein. The main requirements for forming a fiscal unity are that a parent company should own 95% of the legal and economic ownership of the shares in a given subsidiary. Furthermore, a subsidiary should have the same financial year as its parent company and should be subject to the same tax regime. Both the parent company and the subsidiary should have a certain legal form (a BV and NV qualify), and both should be resident of the Netherlands under Dutch double tax treaties. A foreign corporate taxpayer's permanent establishment can be included in the fiscal unity as a parent company as well as a subsidiary.
Following case law of the European Court of Justice (ECJ), the fiscal unity regime has been amended to enable that a fiscal unity can in principle be formed between two or more Dutch companies that are held by a joint parent company that is not a resident of the Netherlands but a resident of another EU or European Economic Area (EEA) member state, or a Dutch parent company and its indirect subsidiaries that are held via a subsidiary that is not a resident of the Netherlands but a resident of another EU or EEA member state.
Moreover, the Dutch tax legislator has newly responded to the obligations following from further EU case law to arrive at an equal tax treatment of cross-border situations when compared to domestic situations by means of limiting the positive effects of the fiscal unity in domestic situations (instead of extending those positive effects to cross-border situations). With retroactive effect to 1 January 2018, several corporate income tax regimes (ie, various interest limitation rules, elements of the participation exemption regime and anti-abuse rules in relation to the transfer of losses) are applied to companies included in a fiscal unity (ie, a Dutch tax group) as if no fiscal unity has ever existed, mostly with retroactive effect to 1 January 2018. This emergency legislation should be followed up by a new, future-proof, Dutch tax group regime that is expected to replace the current regime in several years time.
Capital gains (as well as capital losses) realised on assets of a Dutch corporate income taxpayer are considered taxable income that is taxable at the statutory tax rate, unless it concerns a capital gain on a shareholding that meets all the requirements to apply the participation exemption. Based on the participation exemption, capital gains and dividend income from qualified shareholdings are fully exempt from the Dutch corporate income tax base. Essentially, the participation exemption applies to shareholdings that amount to at least 5% of the nominal paid-up capital of the subsidiary, whose capital is divided into shares whilst these shares are not held for portfolio investment purposes. The latter should generally be the case if a company has substantial operational activities and no group financing or group leasing activities are carried out, or a company is sufficiently taxed with a profit-based tax. The Dutch government is investigating whether the participation exemption regime should be denied in the future to Dutch companies with very limited substance in the Netherlands.
Capital gains realised at the level of a debtor due to the waiver of a debt may be tax-exempt if certain conditions are met pursuant to the debt waiver exemption.
Enterprises, be it transparent or opaque, may become subject to value added tax (VAT) when selling services or goods in the Netherlands.
Real estate transfer tax (RETT) at a rate of 6% (except for residential real estate, for which a rate of 2% applies) should, in principle, be due upon the transfer of real estate or shares in real estate companies. It is proposed to increase the standard RETT-rate from 6% to 7% from 1 January 2021.
The transfer of shares in companies that predominantly own real estate as portfolio investment may, under certain conditions, become taxable with 6% (except for residential real estate, for which a rate of 2% applies) RETT. It is proposed to increase the standard RETT-rate from 6% to 7% from 1 January 2021.
Typically, but not always, only small businesses and self-employed entrepreneurs (partially including so-called zelfstandigen zonder personeel, or ZZP) operate through non-corporate forms whilst medium and large businesses operate their activities via one or more legal entities (eg, BVs).
According to the Dutch Bureau of Statistics as per Q4 2019, 1.83 million enterprises are recorded, out of which 1.42 million operate through non-corporate legal forms and the remaining 416,875 operate through legal entities, the large majority (365,670) via a BV.
There are no particular rules that prevent individual professionals from earning business income at corporate rates. For tax purposes, an individual is free to conduct a business through a legal entity or in person. However, despite the legal and tax differences between those situations, the effective tax burden on the business income will often largely align. The combined corporate income tax rate and the personal income tax rate for substantial shareholders almost equals the personal income tax rate for individuals.
Broad Balance Between Taxation of Incorporated and Non-incorporated Business Income
Until the late 1990s, the same progressive personal income tax rates applied to individuals for earning (non-incorporated) business income and dividend income distributed to substantial shareholders (essentially shareholders holding 33% or more in a company). Thus, substantial shareholders experienced economic double taxation on such dividend income because, besides personal income taxation, the income had already been subject to corporate income taxation. To end the abuse this regime provoked, a new regime was introduced that substantially mitigated that double taxation and created a broad balance between the effective rate on dividend income received by substantial shareholders and the tax rate for individuals with (non-incorporated) business income. Since then the policy has been to maintain this broad balance.
Under the current substantial shareholding regime (that roughly applies to individuals holding an interest in a company of at least 5% of the share capital), dividend income (as well as capital gains) is subject to 25% personal income taxation. The corporate income taxation on the underlying profit currently amounts to 19% for the first EUR200,000 and 25% beyond that. This leads to a combined effective tax rate of approximately 43.75%. It has been proposed to increase gradually the personal income tax rate for income in relation to a 'substantial shareholding' to 26.25% in 2020 and to 26.9% in 2021 (in view of the corresponding gradual reduction of the corporate income tax rates as discussed above).
The top personal income tax rate amounted to 51.75% at the time of writing in 2019 and the rate for 2020 is 49.50% (and applying to a taxable income exceeding EUR68,507). Due to the application of several exemptions for individuals earning non-incorporated business income, the effective tax rate is substantially lower.
It is mandatory for substantial shareholders to earn a minimal salary from the BV of which they are a substantial shareholder to avoid all earnings remaining undistributed and due to which the substantial shareholder may unintendedly benefit from social security benefits. In principle, the mandatory minimum salary amounts to the highest of 75% of the salary of the most comparable job, the highest salary earned by an employee of a company or a related entity, or EUR45,000. If it can be demonstrated that the highest amount exceeds 75% of the salary of the most comparable job, the minimum salary is set to 75% of the salary of the most comparable job, with a minimum of EUR45,000.
Typically, individuals can conduct business activities in person or as a substantial shareholder of a legal entity (eg, a BV). In the case of business activities that are carried out in person (either alone or as a participant in a tax transparent partnership), the net result of the enterprise is taxed with Dutch personal income taxation at a top rate of 51.75% in 2019 and 49.50% in 2020, to the extent the amount of taxable profits exceeds EUR 68,507. Note, however, that a base-exemption of 12% applies, which lowers the effective tax rate. The gain upon the transfer of the enterprise (eg, the transfer of the assets, liabilities and goodwill) is also taxable at the same rates as regular profits.
Where business activities are carried out via a BV, the shares of which are owned by substantial shareholders, the business income is subject to corporate income taxation. To the extent that the profit after tax is distributed to a substantial shareholder in the Netherlands, 25% personal income taxation is due. A capital gain realised by a substantial shareholder is also taxable at the rate of 25% in 2019 and 26.25% in 2020. It has been proposed to increase the rate to 26.9% in 2021.
Dividend income that is not considered part of business income and is received by individuals that do not qualify as a substantial shareholder (essentially being a shareholder not being an entrepreneur and that holds at least 5% of the shares in a company) is not taxed as such. Rather, the income from portfolio investments (including portfolio dividend) is deemed to be in the range of effectively, 1.935% to 5.60% in 2019 and 1.80% to 5.33% in 2020 of the fair market value of the underlying shares (and other investments held by the taxpayer) minus debts owed by it. This deemed income is taxable income at a rate of 30% to the extent net value of the underlying shares exceeds the exempt amount of EUR30,360 (2019) (this amount is EUR30,846 for 2020).
The Netherlands currently has no withholding tax on interest and royalties. It does have a withholding tax on dividends that, in principle, taxes dividends at a rate of 15%. Based on the EU Parent-Subsidiary Directive, a full exemption should be applicable for shareholders (entities) with a shareholding of at least 5%, subject to certain requirements. If all requirements are met, under Dutch domestic law, a full exemption should also be available if the shareholder is a resident of a state with which the Netherlands has concluded a double tax treaty, even in cases where the double tax treaty would still allow the Netherlands to levy dividend withholding tax. An exemption is only available if the structure or transaction is not abusive and is entered into for valid commercial business reasons.
As per 1 January 2021, a conditional withholding tax will apply on interest and royalty payments made to related entities in so-called "low tax jurisdictions" and in abusive situations. The tax rate will be equal to the corporate income tax rate at that time, which is expected to be 21,7%. The payer and payee of the interest and royalties are considered to be related in case of a "qualifying interest" (a qualifying interest generally being an interest that provides a controlling influence on the decision-making and activities). A jurisdiction is considered "low taxed" if it does not levy a profit tax or levies a profit tax lower than 9% (the statutory rate should be at least 9%) or if it is included in the EU list of non-co-operative jurisdictions for tax purposes. Based on both criteria, a list including low tax jurisdictions is annually published.
The largest foreign investor in the Netherlands is the United States, respectively followed by the Luxembourg, the United Kingdom, Switzerland and Ireland. The Netherlands has concluded double tax treaties with all these countries.
So far the Dutch tax authorities have not in general challenged the use of treaty country entities by non-treaty country residents. Only in the case, for example, where specific anti-conduit rules are breached will the tax authorities challenge such a structure.
It should be noted, though, that in light of the ongoing international public debate on aggressive international tax planning in the context of the G20/OECD, the Inclusive Framework on BEPS and recent case law of the ECJ, the Dutch tax authorities are increasingly more closely monitoring structures and investments and will target those that are perceived as constituting "abuse". In this respect, the importance of business motives, commercially and economic considerations and justification and relevant substance seems to be rapidly increasing. From 1 January 2020, the presence of substance will only play a role in the division of the burden of proof between the taxpayer and the tax authorities. If the substance requirements are met, this will lead to the presumption of "non-abuse"' which is respected, unless the tax authorities provide evidence to the contrary. If the substance requirements are not met, the taxpayer is allowed to provide proof otherwise that the structure at hand is not abusive. See also 6.6 Rules Related to the Substance of Non-local Affiliates.
Furthermore, the Netherlands, a member of the Inclusive Framework and a party to the Multilateral Instrument, agrees to the minimum standards included in Articles 6 and 7 of the Multilateral Instrument, that amongst others prohibit the use of a tax treaty by – effectively - residents of third states.
The Dutch government aims to discourage the use of so-called letterbox companies (ie, companies with no or very limited activities that add no real value to the real economy). As part of this policy, amongst others, Dutch tax authorities are increasingly more closely monitoring that companies that claim to be a resident of the Netherlands can indeed be considered as such based on their substance. That is to say, that the place of effective management of such companies is indeed located in the Netherlands. For completenesses sake, we note that it is proposed to introduce a conditional withholding tax on interest and royalty payments to so-called low taxed jurisdictions from 1 January 2021. See 4.1 Withholding Taxes.
The Dutch tax authorities strictly apply the at arm's length principle as included in Dutch tax law, in Article 9 of most double tax treaties and elaborated on in the Organisation for Economic Co-operation and Development's Transfer Pricing Guidelines, as amended under BEPS. Therefore, transactions between affiliated companies should be at arm's length, whilst proper documentation should be available to substantiate the at arm's length nature of the transactions. It depends on the type of industry as to which transfer pricing aspects are the biggest issues.
Typically, in an industrial/manufacturing setting, the Dutch tax authorities pay attention to the fact that the remuneration is aligned with the role a manufacturing entity has (eg, a limited risk distributor should run the risks and be remunerated as such). In industries in which IP is important (eg, pharmaceutical industry, fast-moving consumer goods industry), the valuation of IP and the at arm's length character of royalty payments is important. Furthermore, the charging of head office expenses and other intra-group services should be at arm's length.
The Dutch tax authorities scrutinise that, where a remuneration is based on a certain (limited risk) profile (eg, limited risk distributor), the services and risks of that company indeed match the remuneration. For example, if a limited risk distributor has in fact a stock risk, the remuneration should be increased to reflect a remuneration for that risk.
The Netherlands generally follows the Organisation for Economic Co-operation and Development's Transfer Pricing Guidelines.
Generally speaking, if a transfer pricing claim is settled, the Dutch tax authorities act in accordance with the settlement. Hence, if a downward adjustment of the Dutch income has been agreed, it will be allowed (although it has been announced that it will be investigated whether downward adjustments of business income should be abolished).
Local branches (permanent establishments in fiscal terms) are generally taxed on the basis of the same rules and principles as subsidiaries of non-local corporations. However, due to the fundamental difference between a permanent establishment and a legal entity, in practice differences may occur. Due to the nature of a permanent establishment that typically has no legal personality, a functional analysis is required to determine which assets it "owns" (eg, should be allocated to it). For a subsidiary, of course, it is clear which assets it owns. This difference in practice can lead to other differences. Furthermore, also due to the nature, certain transactions between the head office and its permanent establishment are typically ignored (eg, interest and royalty payments). As a rule, this is still the case, but recently there seems to be a development whereby such "internal payments" are recognised sooner for tax purposes.
Dutch tax law includes so-called substantial shareholding rules that enable taxation of capital gains on shareholdings realised by non-residents of the Netherlands in the case of abuse. Based on the current domestic tax rules, capital gains are taxable if a shareholder holds an interest of at least 5% of the capital in a Dutch BV with the main purpose, or one of the main purposes, being to avoid personal income taxation and the structure should be considered artificial, not being created for legitimate business reasons that reflect economic reality.
In the case where the shareholder is a resident in a country with which the Netherlands has concluded a double tax treaty, depending on the content of the specific treaty, the Netherlands may be prohibited from levying capital gains taxation.
The change of control due to the disposal of shares by a holding company at a tier higher in the corporate chain (eg, above the Netherlands) as such should not trigger corporate income taxation. However, Dutch tax law includes anti-abuse rules that lead to the cancellation of tax losses in the case of the change of control of certain companies (that broadly speaking have or are going to have limited activities). See also 5.3 Capital Gains of Non-residents in relation to capital gains realised on the (indirect) sale of shares in a related Dutch entity.
The Netherlands typically does not determine the income of (foreign-owned) Dutch taxpayers based on formulary apportionment. Instead, the remuneration of the rendering of services or the sale of goods between related companies is governed by the at arm's length principle.
As to the deduction of cross charges by foreign group companies to the Netherlands, the at arm's length principle is leading. For example, head office charges should be deductible by a Dutch corporate income taxpayer, provided the expenses are at arm's length. It should be noted that in some cases a mark-up is allowed. Cross-charged shareholder costs are not deductible.
Other than the interest deduction limitations discussed in 2.5 Imposed Limits on Deduction of Interest, there are no other/specific rules that particularly constrain borrowings of a Dutch subsidiary from a foreign subsidiary as such.
As discussed in 4.1 Withholding Taxes, a conditional withholding tax should apply on interest and royalty payments to related entities in low tax jurisdictions and in abusive situations from 1 January 2021.
If a permanent establishment (PE) is recognised to which the assets, risks and functions that generate the foreign income can be allocated, the foreign income should in principle be fully exempt from the Dutch corporate income tax base. It should be noted that currency translation results between the head office and the PE are not exempt.
If certain conditions are met, a loss that a PE on balance has suffered may be deductible, provided (amongst others) that the losses are not utilised in any way in the PE state by the taxpayer (eg, the head office) or a related entity of the taxpayer. The Dutch government envisages limiting the scope of this "cessation loss-regime" from 1 January 2021 to EU/EEA situations with a threshold of EUR5 million; the legislative proposal is currently being prepared.
As a starting point, the income that is allocated to a PE is determined based on a functional analysis, taking into account the assets, risks and functions carried out by the PE. On the basis of the outcome of the functional analysis, expenses are allocated to the PE and are as such exempt (eg, non-deductible) from the Dutch corporate income tax base. Furthermore, in some cases expenses charged by the PE to the head office in consideration for services provided to the head office by the PE may be ignored. Other than that, there are no specific rules due to which local expenses are treated as non-deductible.
Dividend income distributed to a Dutch company is fully exempt if the participation exemption is applicable. The participation exemption should, broadly speaking, be applicable to shareholdings of 5% of the paid-up capital, divided into shares, that are not held as a portfolio investment company. A shareholding should essentially not be held as a portfolio investment if the company has operational activities and has no substantial group financing or group leasing activities, or the company is taxed at an effective tax rate of at least 10% based on Dutch standards.
The Dutch government is further investigating whether the participation exemption regime should be denied to Dutch companies with very limited substance in the Netherlands.
Group transactions in the Netherlands adhere to the at arm's length principle (including the amendments to the transfer pricing guidelines under the BEPS project, such as in relation to hard-to-value intangibles), so the use of locally developed intangibles by non-local subsidiaries should trigger Dutch corporate income taxation. If intangibles are transferred, the capital gain (eg, the fair market value less the fiscal book value) is taxable at the Dutch statutory income tax rate of 25% (19% for the first EUR200,000). Alternatively, if the intangibles would be licensed to non-local subsidiaries, an at arm's length fee should be charged by the Dutch company.
If the intangibles would be developed under the innovation box, the qualifying income (a capital gain or a licence fee) may be taxable against an effective tax rate of 7%.
As part of the implementation of the EU Anti-Tax Avoidance Directive, the Netherlands introduced a controlled foreign companies (CFC) regime as per 1 January 2019. Under these CFC rules, certain categories of undistributed passive income of controlled foreign companies are included in the Dutch corporate income tax base. A controlled foreign company is, in short, a company in which the taxpayer has an interest of more than 50%, provided that the company is a tax resident in a low tax jurisdiction (less than 9% rate) or a state included on the EU list of non-cooperative jurisdictions. Based on both criteria a list including low tax jurisdictions is annually published. A permanent establishment can also qualify as a CFC for this regime. An exception may be applied in case of "substantial business activities".
Under a somewhat CFC-like rule, in the case of shareholdings of at least 25% in foreign companies that are not taxed reasonably according to Dutch standards and in which the assets of the company are portfolio investments or assets that are not related to the operational activities of the company, the shareholding should be revalued at fair market value annually. The gain recognised as a result thereof is subject to corporate income tax at the standard rates. See also 9.1 Recommended Changes.
Assuming that passive activities lead to the recognition of a PE, the income that can be allocated to that PE should not be exempt as the object exemption is not applicable to low-taxed passive investments.
In general, no specific substance requirements apply to non-local affiliates (except for the CFC rules). In a broader sense, low substance of non-local affiliates could trigger anti-abuse rules (eg, non-application of the participation exemption due to which inbound dividend income may be taxable, annual mandatory revaluation of low-substance participations against fair market value).
Furthermore, under certain corporate income tax and dividend withholding tax anti-abuse rules, shareholders of Dutch intermediary holding companies, subject to certain requirements, should have so-called relevant substance, including that shareholders must use an office space for at least 24 months that is properly equipped to perform holding activities and wage expenses of at least EUR100,000 should be incurred by the shareholder.
We emphasise that following the CJEU cases of 26 February 2019 on the EU Parent-Subsidiary Directive (PSD, joined cases C-116/16 and C-117/16) and on the Interest and Royalties Directive (IRD, joined cases C-115/16, C-118/16, C-119/16 and C-299/16), the Netherlands, being an EU Member State, is obligated to target "abuse of EU law". The assessment whether a structure or investment must be considered "abusive" is made based on an analysis of all relevant facts and circumstances. There are no legal safe harbour or irrefutable presumptions. Consequently, from 1 January 2020, the presence of substance will only play a role in the division of the burden of proof between the taxpayer and the tax authorities. If the substance requirements are met, this will lead to the presumption of "non-abuse" which is respected, unless the tax authorities provide evidence to the contrary. If the substance requirements are not met, the taxpayer is allowed to provide proof otherwise that the structure at hand is not abusive.
Capital gains derived from the alienation of a qualifying shareholding in a foreign company by a Dutch company are fully exempt from Dutch corporate income tax if the participation exemption is applicable. The participation exemption should, broadly speaking, be applicable to shareholdings of 5% of the paid-up capital, divided into shares, that are not held as a portfolio investment company. A shareholding should essentially not be held as a portfolio investment if the company has operational activities and has no substantial group financing or group leasing activities, or the company is taxed at an effective tax rate of at least 10% based on Dutch standards.
Apart from specific anti-abuse rules, the Dutch Supreme Court has developed the doctrine of abuse of law (fraus legis) as a general anti-abuse rule. Under this rule, transactions can be ignored or recharacterised for tax purposes if the transaction is predominantly tax-driven and not driven by commercial considerations whilst the object and purpose of the law are being breached. So far, the Supreme Court has been reluctant to apply the doctrine in cases where a tax treaty is applicable.
As part of the implementation of the EU Anti-Tax Avoidance Directive, the legislator states that the doctrine of abuse of law (fraus legis) is very similar to the general anti-abuse rule included in the directive so that effectively no additional provision has to be included in Dutch law in this respect. As a consequence, the fraus legis doctrine must be interpreted in conformity with EU law in certain cases.
The Dutch government has selected most double tax treaties concluded by the Netherlands as covered tax agreements under the Multilateral Instrument for the implementation of BEPS and – as with most other parties to the instrument - it has elected the principal purpose test to be included in Dutch double tax treaties.
The Netherlands, as an EU Member State, is obligated to target "abuse of EU law". This follows from the CJEU cases of 26 February 2019 on the EU Parent-Subsidiary Directive (PSD, joined cases C-116/16 and C-117/16) and on the Interest and Royalties Directive (IRD, joined cases C-115/16, C-118/16, C-119/16 and C-299/16). The assessment whether there is "abuse of law" is made based on an analysis of all relevant facts and circumstances. Any legal safe harbour or irrefutable presumptions are disallowed. According to the CJEU the “proof of an abusive practice requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of those rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down for obtaining it”. See also 6.6 Rules Related to the Substance of Non-local Affiliates and 9.1 Recommended Changes.
The Netherlands has no periodic routine audit cycle. Tax audits are typically carried out at the discretion of the tax authorities. Tax audits are extraordinary in the sense that the Dutch tax inspector, upon the filing of the corporate tax return, has the opportunity to scrutinise the filed tax return, raise questions, ask for additional information and, if necessary, make an adjustment upon issuing a final assessment.
It should be noted that against a background of public disapproval of – alleged – aggressive tax planning by multinational corporations (MNCs) and the perceived "abuse" or "tax avoidance", following, for example, Lux Leaks and the Panama Papers, several plans have been introduced that coincide (most obviously the Organisation for Economic Co-operation and Development's BEPS project and the EU anti-tax avoidance package) and have resulted in the Dutch government taking a range of measures that, broadly speaking, relate to BEPS.
We discuss some of the developments that have taken place since the outcomes of the BEPS Project, in chronological order:
In a letter from June 2015, the Dutch government set out its (updated) international tax policy. As a starting point, domestic and cross-border entrepreneurial activities should be treated equally for tax purposes. Thus, foreign-sourced (business) income in principle is exempt from the Dutch tax base, whilst the Netherlands currently has no source taxation on interest or royalty payments (ie, application of conditional withholding tax. See 4.1 Withholding Taxes). At the same time, the government is aware of international corporations increasingly eroding domestic tax bases and shifting profits. It is therefore seeking to find a balance between, on one hand, mitigating the risk of abuse by international taxpayers whilst, on the other hand, avoiding unnecessary hindrance of real corporate activities. This has led to the formulation of three central pillars of the Dutch international tax policy:
In light of these pillars, currently the following measures have been taken:
Furthermore, the government has announced that it will investigate:
The central attitude of the Dutch government is to find a balance between, on one hand, ending international aggressive tax planning by promoting transparency and making rules abuse-proof, and, on the other hand, not harming the Dutch economy and thus seeking to take measures on an international level to avoid unilateral measures that would disproportionately harm Dutch corporations and favourable Dutch tax regimes to safeguard the attractive business and investment climate.
International taxation, especially over the last decade, has gained a high public profile due to extensive coverage of – alleged – aggressive tax planning in leading Dutch newspapers and other media, as well as the exposure generated by NGOs such as Oxfam Novib and Tax Justice. Over the last decade, on a regular basis Members of Parliament have raised their concerns regarding the attitude of MNCs and their supposed unwillingness to contribute their fair share. This is, for example, also reflected in the notifications made by the Dutch government for the application of the Multilateral Instrument, that reflect the Dutch position to apply nearly all anti-abuse measures included in the Multilateral Instrument.
The Netherlands has a competitive tax policy, driven by the fact that the Dutch economy relies for a large part on foreign markets, given that the domestic market is relatively small. In a letter from June 2015, the Dutch government sets out its (updated) international tax policy. As a starting point, domestic and cross-border entrepreneurial activities should be treated equally for tax purposes. Thus, foreign-sourced (business) income in principle is exempt from the Dutch tax base, whilst the Netherlands currently has no source taxation on interest or royalty payments (ie, application of conditional withholding tax. See 4.1 Withholding Taxes). At the same time, the government is aware of international corporations increasingly eroding domestic tax bases and shifting profits. It is therefore seeking to find a balance between mitigating the risk of abuse by international taxpayers whilst avoiding unnecessary hindrance of real corporate activities.
As the Dutch government generally takes a balanced approach for each measure, consideration will be given to the pros and cons of existing practices, and the relevance for real business activities, including the accounting and legal services industry. Thus, it is difficult to say which areas are vulnerable to scrutiny, except for structures with low substance and structures that are clearly tax-driven whilst bearing little or no relevance for the real economy.
The proposals addressing hybrid instruments are being approved by the Dutch government and as such will be included in Dutch tax law and/or Dutch double tax treaties. This applies to the measures taken as part of BEPS as well as the extension of the EU Anti-Tax Avoidance Directive, the latter of which the Netherlands, as an EU Member State, is obliged to implement into national law.
The Netherlands has no territorial tax regime as it – as a starting point – taxes resident (corporate) taxpayers for their worldwide income, subject to the application of double tax treaties and unilateral rules for the relief for double taxation.
It is difficult to make a general prediction as to the impact of the interest limitation rules for Dutch taxpayers as this is to a large extent fact-driven, whilst the Netherlands already has a range of interest limitation rules and it is currently proposed to abolish two of the existing interest limitation rules.
A cornerstone of Dutch international policy for decades has been to avoid economic double (including juridical double) taxation within corporate structures, which is why the Netherlands has exempted dividend income received from foreign group companies (under the so-called participation exemption regime). Furthermore, the Netherlands so far has been advocating the principle of so-called capital import neutrality, by which a resident state should exempt foreign-sourced income from its taxation to allow its corporations to make foreign investments on a level playing field (in terms of taxation).
The Netherlands should therefore used to be reluctant to let go of its position to exempt foreign income. As a matter of fact, former proposals to include a so-called switch-over provision (whereby an exemption of taxation is basically replaced by a tax credit for certain types of income) were strongly and successfully opposed by the Dutch government. However, as part of the implementation of the EU Anti-Tax Avoidance Directive (ATAD), CFC rules have been introduced in the Netherlands as per 1 January 2019. See 9.1 Recommended Changes.
Under the Dutch CFC regime, the CFC regime does not apply if the controlled foreign company carries out material economic activities. Broadly speaking, the Netherlands supports the OECD/Inclusive Framework initiatives, including the current work on Pillar 2 (Global Anti-base Erosion, GloBe), although the latter is still in an early stage and, as such, a definitive position of the Dutch government is not yet known.
The Netherlands favours (as reflected in the Dutch notification to Article 7 of the Multilateral Instrument) a principal purpose test as opposed to a limitation on benefits provision, mainly because the principal purpose test is considered to work out proportionately in most situations. Thus, truly business-driven structures, either inbound or outbound, should not be harmed. Nevertheless, the principal purpose test is principle-driven rather than rule-driven, which makes it less clear which structures will be affected by the principal purpose test. In other words, there may be legal uncertainty, especially in the beginning when there is also little practical experience. Furthermore, some countries might apply the principal purpose test liberally, which might make corporations decide to avoid the Netherlands. However, this remains to be seen, especially as in other countries the same issues should come up. The potential impact of EU law in this respect is subject to debate.
Aside from the introduction of country-by-country reporting and to a lesser extent the documentation requirements (eg, master file and local file), the Netherlands has already applied the at arm's length principle as a cornerstone of its transfer pricing regime. As such, these changes should not lead to a radical change, which should also apply to intangibles.
The Netherlands is in favour of increasing transparency in international tax matters, provided an agreement can be reached on an international level as broad as possible to avoid national economies being harmed by MNCs' decisions to avoid jurisdictions that have transparency requirements.
No legislative proposals have been published in this area yet.
In November 2019, the Netherlands has issued a statement following the publication of the most recent public consultation documents on Pillar One and Two as published in October and November 2019 by the G20/OECD Inclusive Framework on BEPS. In its letter, the State Secretary for Finance stresses that the Netherlands prioritises the targeting of tax avoidance via an international, coordinated approach. We note that the Pillar Two proposal may substantially impact the sovereignty of states as regards to the taxation of business profits and their ability to employ an international tax policy based on the principle of "capital import neutrality".
The Netherlands has no specific provisions as to the taxation of offshore intellectual property. Note however that as of 1 January 2021, a conditional withholding tax will be applied to interest and royalty payments to states qualified as low taxed jurisdictions. Furthermore, in case of passive offshore IP structures, the Dutch CFC-rules may apply.
It is a positive development that aggressive tax planning by MNCs is countered by introducing anti-abuse rules and increasing transparency. It is important, however, that measures are introduced multilaterally to avoid real economies of ambitious states being harmed whilst less ambitious ones benefit from it. In the end, BEPS can only be reduced by measures that are broadly implemented and whereby a fair balance is struck between sparing real economic activity and reducing tax-driven structures.