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). 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
Specific guidance is in place, by way of a Decree, to classify foreign vehicles (ie, non-transparent or transparent) for Dutch tax purposes. In that respect, it is, among others, also relevant whether the approval of (all the) other partners is required to transfer an interest. This guidance is currently being reviewed by the Dutch government, the results of which are expected to be published on short notice.
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 (the "incorporation principle"). 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 procedure (MAP) between the two states.
Corporate income taxpayers are subject to a corporate income tax rate of 25% (2021) with a step-up rate of 15% for the first EUR245,000 of the taxable amount. In 2022, the step-up rate is expected to be 15% for the first EUR395.000 of the taxable amount.
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 2021):
The social security rate applied to individuals who are retired is 9.75%, resulting in a combined rate of 19.20%. The official retirement age in the Netherlands will remain at 66 years and four months in 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. A legislative proposal likely will be sent to the Dutch parliament in 2021 that will deny the deduction of at arm’s length expenses, to the extent that the corresponding income is not taxed at the level of the recipient. The legislative proposal is intended to enter into force as per 1 January 2022.
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 9% instead of the statutory rate of 25%. The regime has been amended as of 1 January 2017 among 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.
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 40% up to an amount of wage expenses in relation to R&D activities of EUR350,000 and 16% for the remainder (2021). The wage withholding tax credit for start-up entrepreneurs is, under certain conditions, 50% up to an amount of wage expenses in relation to R&D activities of EUR350,000 (2021).
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 or EIA). As to environmentally sustainable investments, the Environment Investment Allowance (Milieu Investerinsgaftrek or MIA) and the Arbitrary Depreciation of Environmental Investments (Willekeurige afschrijving milieubedrijfsmiddelen or 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.
Currently, various measures haven been taken by the Dutch government in view of the COVID-19 crisis, such as a relaxation of payment of taxes and requirements to be met to apply certain tax facilities as well as the possibility to create a so-called corona tax reserve.
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 2017-20.
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.
From 1 January 2022, tax loss carry-forwards are expected to be limited to 50% of the taxable income exceeding EUR1 million for that year. At the same time the current six year tax loss carry forward period is expected to be abolished so that tax losses can be carried forward indefinitely (but limited to 50% of the taxable income in a financial year).
As a starting point, at arm’s length interest expenses should in principle 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.
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). Mostly 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. 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.
There has been a public consultation with respect to the new, future-proof, Dutch tax group regime and the alternatives are still under review. The Dutch government has announced that they will further investigate the possible alternatives in 2021, and it is expected that the current regime will remain in place for the next couple of years.
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.
In relation to the application of the Dutch participation exemption by Dutch intermediary holding companies with no/low substance, it is being investigated by the Dutch government whether as per 2022 legislation can be introduced to enable the exchange of information with other jurisdictions.
Under the former rules, a shareholder that held at least 5% of the shares in a Dutch company was allowed to deduct a so-called liquidation loss, upon the completion of the dissolution of such company and provided certain conditions were met. This liquidation loss broadly equals the total capital invested in that company by the shareholder minus any liquidation proceeds received. As of 1 January 2021, additional requirements (ie, on top of the existing requirements) need to be met to be able to deduct liquidation losses exceeding the threshold of EUR5 million.
These additional requirements among others relate to the residence of the liquidated company (which – in short – should be within the EU/EEA) and the fact that the Dutch shareholder of the liquidated company must have decisive control to influence the decision making of the company that is liquidated.
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 8% should, in principle, be due upon the transfer of real estate or shares in real estate companies. For residential real estate a rate of 2% applies and, as of 2021, this rate can only be applied by individuals. As a result of the foregoing real estate investors no longer can apply the 2% rate. As of 2021, there is a RETT exemption for "starters"(ie, persons in the age of 18 to 35 buying their first primary residence).
The transfer of shares in companies that predominantly own real estate as portfolio investment may, under certain conditions, become taxable with 8% RETT.
Typically, but not always, only small businesses and self-employed entrepreneurs (partially including 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).
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
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 26.90% personal income taxation (2021). The corporate income taxation on the underlying profit currently amounts to 15% for the first EUR245,000 and 25% beyond that. This leads to a combined effective tax rate of approximately 45.18% (2021).
The top personal income tax rate amounted to 49.50% at the time of writing in 2021 (and applying to a taxable income exceeding EUR68,508). 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 EUR47,000 (2021).
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 EUR47,000 (2021).
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 49.50% in 2021, to the extent the amount of taxable profits exceeds EUR68,507. Note, however, that a base-exemption of 14% (2021) 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, 26.90% personal income taxation is due. A capital gain realised by a substantial shareholder is also taxable at the rate of 26.90% 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, 1.90% to 5.69% in 2021 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 31% to the extent net value of the underlying shares exceeds the exempt amount of EUR50,000 (2021).
For completeness sake, it has been announced that the current tax regime for income received by individuals that do not qualify as a substantial shareholder will be reformed in the near future. It has been indicated that taxing the actual return on the investment (instead of a deemed income) is the ultimate goal. Please note that no proposal has been published yet.
The Netherlands has 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 (see also further below). 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.
For completeness sake, it should be noted that in 2020 (possibly with retroactive effect to September 2020) an initiative legislative proposal for a conditional final dividend withholding tax levy emergency act has been proposed. The proposal introduces a taxable event (ie, a DWT exit levy) in case of, for example, a cross-border relocation of the (corporate) tax seat or a cross-border merger of a Dutch company, provided certain conditions are met. The proposal is not expected to cover situations in which can be relied on the domestic withholding exemption (inhoudingsvrijstelling) of the Dutch dividend withholding tax act. Due to the general elections to be held in 2021 it remains to been seen if, and to what extent, this proposal may become effective.
Conditional Witholding Tax
The Dutch government has the intention to introduce a conditional withholding tax (of 25%) on dividends as of 1 January 2024, which aims to prevent profit distributions to so-called low-tax-jurisdictions (in short, jurisdictions which have a statutory corporate income tax rate of less than 9% or countries which are included in the EU list of non-cooperative jurisdictions). The proposal is still pending, and it remains to be seen if, and to what extent, the proposal will be enacted after the general elections of 2021. As of 1 January 2021, a conditional withholding tax has been implemented on interest and royalty payments made to related entities in so-called "low tax jurisdictions" and in abusive situations. The low tax jurisdictions are listed in a ministerial decree, ie jurisdictions:
The tax rate is equal to the corporate income tax rate (ie, 25%). 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).
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 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.
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.
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.
International transfer pricing disputes are, in some cases, resolved through an MAP process. At the end of 2019 there were 276 MAPs outstanding, 105 of the in total 276 MAPs are international transfer pricing disputes. In 2019 179 MAPs were closed and 51 of those were international transfer pricing disputes. There is no data with respect to international transfer pricing disputes being resolved through double tax treaties. Generally, the Dutch tax authorities are open to MAPs and willing to cooperate in these procedures.
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 in principle be allowed. A legislative proposal however likely will be sent to the Dutch parliament in 2021 that will deny the deduction of at arm’s length expenses, to the extent that the corresponding income is not taxed at the level of the recipient. The legislative proposal is intended to enter into force as per 1 January 2022.
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.
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 applies on interest and royalty payments to related entities in low tax jurisdictions and in abusive situations as of 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. As of 2021, losses resulting from the dissolution of a PE in excess of EUR5 million are generally also limited to EU/EEA situations, quite similar to the rules that apply to participations.
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.
As mentioned, the Dutch government is currently investigating whether with regard to intermediary holding companies with no/low substance, legislation can be introduced in 2022 to enable the exchange of information with other jurisdictions.
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 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 9%.
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 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.
Abuse of EU Law
It must be emphasised 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.
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 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.
Some of the developments that have taken place since the outcomes of the BEPS Project, in chronological order, include the following.
Furthermore, the government has announced that it will investigate:
The central attitude of the Dutch government is to find a balance between, on the 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 May 2020, the Dutch government sets out its (updated) international tax policy. As a starting point, domestic and cross-border entrepreneurial activities should, in principle, be treated equally for tax purposes. Thus, foreign-sourced (business) income in principle is exempt from the Dutch tax base.
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 have been implemented by the Dutch government and as such are 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 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.
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.
The Netherlands has issued several statements 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 as well as the blue prints published by the OECD end of 2020. The State Secretary for Finance favours in this respect an international, coordinated (unified) approach, instead of jurisdictions implementing domestic legislation independently. It should be noted 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 applies to interest and royalty payments to states qualified as low tax jurisdictions. Furthermore, in case of passive offshore IP structures, the Dutch CFC-rules may apply.
Something Old, Something Borrowed, Something New
The Netherlands has been and will continue to be an attractive European jurisdiction to do business and to locate hubs for global operations. The Dutch geographical location, its well-developed financial sector, political stability and well educated and tech savvy work force, are just a few of the attractive features of the Netherlands. For many years, a dogmatic fundament of the Dutch corporate tax system has been the concept of capital import neutrality, forming the basis of the Dutch participation exemption in relation to qualifying equity interests of 5% or more. That fundament remains solid as a rock, although the public debate is glancing at the justification thereof.
The last year has been one of important changes resulting from EU and OECD initiatives and of the introduction of a novelty for the Netherlands: a withholding tax on interest and royalties. Inevitably, the COVID-19 pandemic led to some important temporary tax related rules to help businesses and the workforce to survive. The measures vary from flexible extensions from tax filings and payments combined with low (0.01%) late payment interest rate and the possibility to form a COVID-19 reserve in the 2019 tax books anticipating FY2020 losses.
Furthermore, as in recent years, the Dutch tax focus has shifted towards discouraging (abusive) tax planning by abolishing favourable tax rules and introducing anti-tax abuse measures. Prompted by public opinion, these anti-abuse measures are primarily targeting multinational enterprises. Small and medium sized enterprises – including, to a certain extent, start and scale-ups – on the other hand are stimulated through beneficial tax measures and incentives.
More in general, 2021 is an important year because of the recently held general elections. The elections resulted more or less in a consolidation of the political powers. The current outgoing government fell because of significant political malpractices in relation to child allowances, which also tainted the trust in the Dutch tax authorities, who administer these allowances. Following the elections, a new government must be formed. As Dutch governments are always coalitions of several parties (four parties in the current government), coalition negotiations require always many compromises. Given the various election programmes, increasing the tax burden of large companies will almost certainly be on the agenda for negotiations of several parties. How much of these wishes will actually be included in the coalition agreement and become law, is difficult to predict at the moment of finalising this contribution (25 March 2021).
Below is a bird’s eye view of some of the most notable Dutch tax developments of last year. In addition, future developments are considered. This mainly circles around withholding taxes and includes the recent introduction of a conditional withholding tax on interest and royalty payments, the proposed introduction of a similar conditional withholding tax on dividends, in addition to the already existing general dividend withholding tax, and the proposed introduction of a Dutch dividend withholding tax exit charge.
Reduced Corporate Tax Rates and Other Notable Changes
The focus on SMEs is reflected, amongst others, in recent changes to the Dutch corporate income tax (CIT) rates. For 2021, the first CIT profit bracket was increased from EUR 200,000 to EUR 245,000 (2022: EUR 395,000) subject to CIT at 15%. The mainstream rate for any surplus profits remained at 25%. Partly driven by the COVID-19 pandemic, previously envisaged reductions in this mainstream rate were redressed. Other recent developments are the strict implementation of EU Directives, such as the Anti-Tax Avoidance Directive (ATAD) 1 and 2 and the mandatory disclosure obligation of the Directive on Administrative Cooperation (DAC6).
As of 2022, tax losses may be carried forward indefinitely (instead of the current six-year time bar) but offsetting is limited to 50% of the taxable profits in excess of EUR1 million. This results amongst others in a revaluation of deferred tax asset positions. The first EUR1 million of taxable profit realised in a certain year may still be set off in full against available tax losses.
Furthermore, as of 2021, the liquidation loss scheme, allowing for losses on qualifying participations which would otherwise fall in scope of the participation exemption, is (further) restricted. It has been announced that as of 2022 downward arm’s length pricing adjustments may only be made if there is a corresponding taxable upward adjustment.
Since 2020, a thin capitalisation-based interest deduction limitation rule for banks and insurers applies, which restricts interest deduction in case the adjusted leverage ratio (banks) or adjusted equity ratio (insurers) is less than 9%. In 2020 this ratio was set at 8%. The reason for the increase in 2021 is mainly budgetary as the Supreme Court ruled in May 2020 in an important Dutch tax case that certain regulatory capital qualifies as debt for CIT purposes, generating tax deductible interest expenses.
Conditional Interest and Royalty Withholding Tax
Until 1 January 2021, Dutch tax law did not provide for a withholding tax on true interest and royalty payments, whereas the Netherlands did (and does) levy a 15% dividend withholding tax on certain proceeds from equity instruments. Thus, until 1 January 2021, interest payments were generally not subject to Dutch withholding tax.
This was, broadly speaking, only different in case the relevant (debt) instrument was considered as equity for Dutch tax purposes, eg, if the instrument had been issued under such conditions that the creditor to a certain extent participated in the business of the debtor (a so-called participating loan). In those cases, dividend withholding tax is due on interest payments. Until 1 January 2021, the Netherlands did not levy any withholding tax on royalty payments as well.
The absence of a withholding tax on interest and royalty payments has always been one of the main features of the Dutch tax regime, and an important promotor of foreign investments in and through the Netherlands. In recent years, there has been debate as to how the absence of a Dutch withholding tax on interest fits in the recent global objective of preventing base erosion and profit shifting. A result of this debate was the adoption of the Withholding Tax Act 2021 (Wet bronbelasting 2021) (WTA 2021). And, this is not the end of the debate: in February 2021 the State Secretary of Finance installed a committee which must report on so called Dutch "pass-through entities". The results of this report may be taken into account in the political negotiations after the March 2021 general elections.
Conditional withholding tax
Pursuant to the WTA 2021, a conditional withholding tax may apply on certain interest and royalties due and payable to an affiliated entity of a Dutch tax resident entity or Dutch permanent establishment if such affiliated entity:
Equally, the conditional withholding tax applies if such amounts are not paid but accrued. Interest and royalties are calculated on an arm’s length basis. It is not relevant whether or not the interest or royalty paying entity has substance in the Netherlands; so also interest due by a Dutch multinational with many employees on Dutch soil could, in theory, become subject to the conditional withholding tax. There is no exemption for tradeable debt (yet).
The conditional withholding tax is levied by means of withholding by the Dutch borrower (the withholding agent) at a rate of 25% (directly linked with the Dutch mainstream CIT rate). If the tax is wrongfully not withheld and paid by the Dutch withholding agent, the withholding tax assessment may also be imposed on the recipient entity. It should be noted that the withholding tax is due when the interest is due and payable, which may not align with the moment the actual payments are made.
Listed low-taxing states and non-cooperative jurisdictions are jurisdictions that have no corporate tax or a corporate tax rate of less than 9% and jurisdictions that were included on the EU list of non-cooperative jurisdictions for tax purposes at the end of the previous year. The 2021 list includes the American Virgin Islands, American Samoa, Anguilla, the Bahamas, Bahrain, Barbados, Bermuda, the British Virgin Islands, the Cayman Islands, Fiji, Guam, Guernsey, the Isle of Man, Jersey, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, Turkmenistan, the Turks and Caicos Islands, Vanuatu and the United Arab Emirates.
The concept of affiliation is quite broad and entails that, broadly:
An interest in an entity is regarded as a "qualifying interest" if influence can be exercised directly or indirectly in the decision-making and as such the activities of an entity can be determined. This is, for example, the case if an entity has more than 50% of the voting rights in the other entity. Considering that this conditional interest withholding tax only applies in affiliated situations, interest paid under a bank financing or note issuance or in the context of a securitisation should normally not become subject to the conditional interest withholding tax.
Conditional Dividend Withholding Tax
In its coalition agreement, the current outgoing government proposed to abolish dividend withholding tax. Thus, the government hoped gaining a level playing field with the UK, that does not levy a withholding tax on dividends, and keeping amongst others the head offices of Anglo-Dutch multinationals in the Netherlands. In direct relation to the abolition of the dividend withholding tax, the government proposed introducing a conditional dividend withholding tax as from 2020. After fierce societal and political turmoil, the Dutch dividend withholding tax was not abolished.
Notwithstanding that the dividend withholding tax is not abolished, the current government proposes to introduce, in addition to the yet existing dividend withholding tax, a conditional withholding tax on dividends in 2024.
Draft legislative proposal
A draft legislative proposal was published for consultation in September 2020. This conditional withholding tax would be implemented by expanding the Withholding Tax Act 2021 to dividends, whereas currently only interest and royalties are in scope thereof. This also means that the new conditional dividend withholding tax would only apply in case the recipient of the dividends is affiliated to the distributer of the dividends and at least one of the conditions for application of the WTA 2021 apply.
It should be noted that tax treaty benefits may reduce the withholding tax burden, though the government has indicated that it intends to renegotiate tax treaties with listed jurisdictions to allow the Netherlands to tax the dividends at the applicable rate of the WTA 2021. Currently, such dividend payments are often not subject to Dutch withholding tax because of Dutch domestic exemptions that mainly apply in relation to dividends distributed to holder of at least 5% of the nominal paid-up share capital of the distributing entity that are resident of the EU/EEA or a jurisdiction with which the Netherlands has concluded a double tax treaty.
The proposed rate for the conditional dividend withholding tax is equal to the rate for the conditional withholding tax for interest and royalties (25% in 2021) and linked to the mainstream CIT rate. The existing withholding tax on dividends would not be abolished, meaning that the Netherlands would have two different withholding taxes on dividends as from 2024.
In theory, it could be that a certain dividend distribution would both be subject to the existing 15% dividend withholding tax and the proposed 25% conditional dividend withholding tax. To avoid double (withholding) taxation, the draft legislative proposal contains a mechanism that allows dividend withholding tax payable to be credited against conditional withholding tax payable.
Dividend Withholding Tax Exit Tax Proposal
Under current law, Dutch dividend withholding tax is due in relation to certain proceeds from equity investments such as dividends, share buybacks and interest on participating loans distributed by companies that are tax resident of the Netherlands. The Dutch dividend withholding tax rate is 15% and may be reduced pursuant to applicable double tax treaties. Furthermore, certain domestic exemptions apply, in particular in relation to qualifying distributions to holders of at least 5% of the nominal paid-up share capital of the distributing entity that are resident of the EU/EEA or jurisdictions with which the Netherlands has concluded a double tax treaty.
Certain cross-border corporate reorganisations such as migrations, cross-border conversions, (de)mergers and share-for-share mergers currently do not trigger a taxable event for Dutch withholding tax purposes. This means that in these cases undistributed profit reserves of Dutch resident companies may no longer be subject to Dutch withholding tax.
The Exit Tax Proposal
In 2020, a Dutch opposition party sent a legislative proposed to Parliament which – if adopted – would introduce a new Dutch dividend withholding tax liability in relation to such cross-border reorganisations to avoid that undistributed profit reserves that accrued at the level of a Dutch entity escape the Dutch tax net. This is often referred to as the Exit Tax Proposal. The Exit Tax Proposal includes a retroactive effect to the date of its publication, ie, 18 September 2020, 12.00 CET, to avoid anticipatory behaviour.
The Exit Tax Proposal is still a legislative proposal and subject to fierce debate, both from a political, macro-economic, tax treaty, EU-law and mere tax technical perspective. The Parliamentary debate on the proposal will continuein the coming months. It is not certain if the Exit Tax Proposal will be adopted and, if it will be adopted, whether that will be in its current form or after amendments have been made.
Under the Exit Tax Proposal, a Dutch tax resident company is deemed to have distributed its net profits, insofar as these amount to more than EUR50 million, to its equity holders in cases where a Dutch resident company effectively migrates by way of migration or change of tax residency or cross-border conversion, (de)merger and share-for-share merger to a jurisdiction that:
One of the most notable examples of a jurisdiction qualifying as such is the United Kingdom.
If no exemption applies, the deemed distribution would be subject to a 15% Dutch dividend withholding tax unless and exemption or rate reduction applies. Although the withholding tax is formally levied from the shareholders, in principle a so-called protective tax assessment is imposed at the time of the restructuring at the level of the withholding agent. In principle, the tax is not collected at the time of the restructuring as an unconditional deferral is granted, yet only once certain distributions are made by the migrated or surviving entity (in case of a merger or demerger) or when such entity is liquidated.
The Exit Tax Proposal does not introduce a new tax. It simply expands the scope of the existing Dutch withholding tax by introducing a new taxable event in the Dutch Dividend Withholding Tax Act 1965. This also means that any reduced rates and exemptions would equally apply in relation to the Dutch withholding tax due pursuant to the Exit Tax Proposal.
It is yet to be seen if the Exit Tax Proposal will be implemented in Dutch law and if so, in what form.
An Interesting Year Ahead
2020 has for many reasons been a challenging and interesting year from a Dutch tax perspective. For obvious reasons, COVID-19 has been the most relevant agenda item and this has further put the relevance of tax in a broader perspective. It is evident that the quest to end tax abusive structures will continue to be a top priority for many jurisdictions. In this context, in March 2021, the Netherlands has announced various, partly still conceptual, changes to Dutch tax law, including an important recalibration of the rules that govern the qualification of foreign legal entities as either tax opaque or tax transparent.
The Netherlands has been introducing, partly at its own initiative and party driven by broader EU and OECD developments, a set of new measures creating a robust, albeit quite complex, tax environment. Many tax related files will await the new Dutch government and some difficult policy decisions are to be made.