September 17, 2024 Netherlands budget proposals; key legislative developments for 2025
Executive summary On 17 September 2024, the Dutch Government published its budget proposals, which are subject to review and discussion by Parliament and may be subject to changes. Furthermore, a government program was published 13 September 2024 containing certain expected proposals, as described below. The plans also address the importance of (further) improving the Dutch business climate, including its attractiveness to multinational companies by, for example, safeguarding and enhancing a favorable investment climate. The current government would like to return the Netherlands to a position among the top-five of the most competitive countries in the world. The plans stress that clear, stable, and predictable tax policies are important for businesses and that the current government stands for stable and predictable tax policy. This could be achieved through, for example, stability in the regular corporate income tax rate, an adequately attractive fiscal scheme for knowledge workers, Research and Development incentives (WBSO), and the Innovation Box. This Tax Alert provides an overview of the relevant budget proposals in an international corporate tax context and indicates the current legislative status of each topic in brackets. Further, certain relevant upcoming legislative changes that were proposed or enacted outside of the current budget proposals are also included in this Tax Alert. Netherlands budget proposals Amendment of the definition of "cooperating group" for the purpose of the Conditional Withholding Tax [Budget Day — Proposal] Effective date: 1 January 2025 The Netherlands levies Conditional Withholding Tax (CWHT) on dividend payments (since 2024) as well as on interest and royalty payments (since 2021) that are paid to related entities in low-taxed jurisdictions, to hybrid entities and in certain abusive structures. These payments are subject to 25.8% CWHT (2024 rate). For purposes of the CWHT, whether entities are considered related is determined by the presence of a "qualifying interest." This qualifying interest can also be present if there is a so-called "cooperating group." In practice, this definition is unclear and there is legal uncertainty around what falls in scope of the definition of a cooperating group for CWHT purposes. Due to this uncertainty, it is proposed that a new definition of "cooperating group" will be introduced in the CWHT that replaces the old definition. The proposed definition is a "qualifying unity" (kwalificerende eenheid), which consists of two elements. There must be a joint action between the entities that has as its main purpose, or one of its main purposes, to avoid the levy of CWHT at the level of these entities. This should be assessed on a case-by-case basis. It is anticipated that, given the main-purpose test, in principle only investments that have been (wholly or partly) structured through a scheme to avoid the CWHT tax will be affected. The burden of proof lies with the tax inspector to show there is a "qualifying unity." Increase of the maximum interest deduction percentage for the application of the earnings-stripping rule [Budget Day — Proposal] Effective date: 1 January 2025 The Netherlands has introduced an earnings-stripping rule as a general interest deduction limitation rule based on the European Union (EU) Anti-Tax Avoidance Directive (ATAD1). The earnings-stripping measure is a general interest deduction limitation whereby the balance of interest is not deductible to the extent that it exceeds the higher of €1m or (currently) 20% of fiscal earnings before interest, taxes, depreciation and amortization (EBITDA). This threshold applies per taxpayer. As announced in the government program, the Budget proposes to increase the maximum interest deduction to 25% of the fiscal EBITDA as of 1 January 2025. Clarifications of subject-to-tax tests in the Dutch Corporate Income Tax Act 1969 in light of Pillar Two Minimum Tax [Budget Day — Proposal] Effective date: 1 January 2025 Various provisions in the Corporate Income Tax Act 1969 (CITA) include a subject-to-tax test. This means that a regulation or exception (usually a tax advantage for the taxpayer) is only applicable if a company is subject to a tax levy that is considered sufficient under Dutch standards. This is relevant, for example, with regard to the participation exemption, branch exemption and anti-base-erosion rules. After the introduction of the Global Minimum Tax (Pillar Two), there was uncertainty around whether the Pillar Two top-up tax could be characterized as a "tax levied on profit" for purposes of the subject-to-tax tests. By amending the definition in the relevant provisions of the Dutch CITA, in general, a qualifying Pillar Two top-up tax1 should also fall under the definition of "tax levied on profit." The proposed changes do not include changes in the "profit tax inclusion tests" in other provisions in the Dutch CITA (e.g., the transfer pricing mismatch rules or the anti-hybrid mismatch rules (ATAD2)). However, if the taxpayer can demonstrate that a qualifying Pillar Two tax leads to the application of a top-up tax rate of 15% with respect to the relevant transaction or asset, it may be considered that there is profit tax inclusion for the application of these tests (to be determined on a case-by-case basis). Updates in the Global Minimum Tax Act 2024 [Budget Day — Proposal] Effective date: 31 December 2024 (with retroactive effect to 31 December 2023 for certain provisions) The Budget provides a separate legislative proposal to provide additional guidance and amendments on the already enacted Minimum Tax Act 2024. The revisions relate to the administrative guidance and amendments as published by the Organisation for Economic Co-operation and Development (OECD) in February 2023, July 2023, December 2023 and June 2024. The OECD rules on minimum taxation, including any commentary, or administrative guidelines, do not directly apply in the Minimum Tax Act 2024. To promote the consistent application of the OECD model rules on minimum taxation and to prevent discrepancies with the application of the rules concerning other jurisdictions, it is proposed to incorporate the administrative guidelines into the Minimum Tax Act 2024, if necessary. Whether further guidance needs to be implemented on in the Minimum Tax Act 2024 will therefore be assessed on a case-by-case basis. The changes also include a specific provision against the use of qualification differences (hybrid arrangements) that may arise in the context of the Country-by-Country Reporting safe harbor rule, based on the OECD administrative guidance from December 2023. These latter rules are proposed to be effective for fiscal years starting on or after 31 December 2024 applicable to hybrid arrangements entered into or changed after 15 December 2022. Revision of the cancellation of debt income exemption in light of the limitations introduced in 2022 for the loss utilization rules [Budget Day — Proposal] Effective date: 1 January 2025 The current Budget proposes to amend the interaction between the exemption for (genuine) cancellation of debt (COD) income and the loss carryforward rules. In principle, COD income realized by a Dutch debtor is taxable; however, under certain circumstances the COD income exemption may apply. The COD income exemption is only applicable if the debtor does not have any compensable losses. To the extent there are losses, the COD income is taxable. However, under the amended loss utilization rules applicable as of 2022, the annual (indefinite) carryforward and (one year) carryback loss utilization for CIT losses is limited to €1m of taxable profit, plus 50% of the taxable profit exceeding €1m. As a result of this limitation, potentially only a part of the COD income that leads to a taxable profit can effectively be offset with losses and part of the COD income is still taxable. This amendment proposes that the non-application of the COD income exemption in certain situations should not result in taxable income. In case there are losses exceeding €1m, the exemption applies for the total amount of the COD income, insofar this exceeds the losses incurred in that same financial year. As a result, there would be no tax due on such COD income. Correspondingly, the losses available for setoff are reduced accordingly. For losses less than €1m, the revision does not apply and the current rules remain applicable. Reversal of the curtailment on the 30% facility for expatriates [Presentation letter Budget Day proposal] Anticipated effective date: 1 January 2025 The so-called "30% facility" is a Dutch tax facility designed to facilitate specialized foreign employees in the Netherlands. This facility allows employers to provide a portion of the employee's salary tax-free as compensation for the additional expenses incurred by the employee for working outside their country of origin. As of 2023, the 30% facility has a maximum duration of five years. Furthermore, a bill was adopted to phase out, for 2024 onward, the untaxed allowance into a 30%, 20% and finally 10% facility, instead of 30%. Under the current rules, the tax-free allowance may amount to a maximum of 30% of the income taxable in the Netherlands during the first 20 months. In the subsequent period of up to 20 months, the tax-free allowance may be a maximum of 20% of the taxable income in the Netherlands. For the remaining 20 months, the tax-free allowance will be no more than 10% of the taxable income in the Netherlands. The presentation letter to the Budget Plan proposes to reverse the curtailment of the tax-free allowance to 20% and 10% — as an alternative, the 30% would be reduced to 27% for a full five-year period as of 1 January 2027. For 2025 and 2026, the tax-free allowance is set at 30%. Further details, including the salary-capped amount, will be included in the note of amendment of the Budget Day proposals. Codification of EU general anti-abuse rule in the Dutch legislation [Budget Day — Proposal] Effective date: 1 January 2025 The ATAD1 imposes an obligation on EU member states to implement and apply a general anti-abuse rule (GAAR) in their corporate income tax. The Netherlands previously did not consider an introduction of the codified GAAR as necessary because of the already existing doctrine of fraus legis, essentially an uncodified general anti-abuse provision. Following the request of the European Commission, the Netherlands reconsidered the position and the GAAR will be codified in the Dutch CITA to align with ATAD1. However, the introduction of the GAAR measure is not intended to make any substantive change compared to the existing fraus legis doctrine. Reversal of the abolition of the dividend tax repurchase facility [Budget Day — Proposal] Effective date: 1 January 2025 Last year, it was decided by amendment that the dividend withholding tax (WHT) exemption on certain share buyback schemes would be abolished as of 1 January 2025. As a result, the deemed distribution of reserves in share buybacks of Dutch tax resident listed entities would be taxable against the dividend WHT rate of 15%. As announced in the government program, the Budget reverses the abolishment and stipulates that the existing exemption for certain share buyback schemes, (i.e., the dividend tax repurchase facility) is retained. Considering the adverse effects of the abolition of the share buyback schemes on the competitive position of Dutch companies, the Budget proposed to maintain the share buyback scheme in the Dutch Dividend Withholding Tax Act 1964 (DWTA). Therefore, the abolition of the dividend tax repurchase facility, which was scheduled for 1 January 2025 will now be revoked — i.e., the dividend tax repurchase facility will remain available. Abolishment of the threshold for real estate entities in the earnings stripping rule [Budget Day — Proposal] Effective date: 1 January 2025 Due to the €1m threshold per taxable entity for purposes of the earnings-stripping rule, in certain situations the application of the earnings-stripping rule can be frustrated, or the impact can be limited by splitting up the investments or business activities financed with debt in different legal entities. This allows each entity to utilize the €1m threshold, while the adjusted profit per entity is lower than €1m. It has been observed that specifically real estate entities utilize this method. To target such situations and to align the tax treatment of debt vs. equity, the €1m threshold for the earnings stripping rules will be specifically abolished for real estate entities with real estate leased to third parties as of 1 January 2025. Entities with adjusted assets that, for at least half of the tax year, mainly consist of immovable property leased to third parties are considered real estate entities for purposes of this provision. Reduction of real estate transfer tax rate for investors [Budget Day — Proposal] Anticipated effective date: 1 January 2026 As announced in the government program, and as included in the presentation letter to the Budget plan, it is anticipated to be proposed to reduce the real estate transfer tax rate from 10.4% to 8% for investors as of 1 January 2026. Clarification of liquidation loss rules for intermediate holding companies [Budget Day — Proposal] Effective date: 1 January 2025 The liquidation loss regime is an exception to the Dutch participation exemption. Under certain conditions, losses incurred when a participation liquidates (i.e., when the cost basis for the participation is less than the liquidation distribution, also referred to as the "sacrificed amount") are deductible for Dutch tax purposes at the shareholder level. The proposal would amend two aspects of the liquidation loss rules. The first proposed change concerns the calculation of the sacrificed amount, which under certain circumstances should be increased with the write-down of certain receivables. The second proposed change relates to the so-called "intermediate holding company provision," based on which a liquidation loss with respect to an intermediate holding company may only be taken into account to the extent the loss exceeds the value decrease of the participation(s) held by the liquidated intermediate holding company. Under the proposed change, the intermediate holding company provision will take into account both value decreases of direct as well as indirect participations. This is in accordance with the purpose and intent of the liquidation loss provision, which includes avoiding the possibility of converting a nondeductible participation loss into a deductible liquidation loss. Clarification of branch exemption with respect to disregarded permanent establishments [Budget Day — Proposal] Effective date: 1 January 2025 Due to the implementation of the ATAD2 directive, the branch exemption for foreign-enterprise profits will not be applied with respect to disregarded permanent establishments (PEs). As a result, the profit of a PE is included in the Dutch taxable base if the respective state does not recognize that PE as such. In practice, the implementation of ATAD2 could result to double taxation for disregarded PEs. This concerns situations in which the profit of the disregarded PE is included in a profit-based tax in the other state. Therefore, the Budget proposes that the Dutch branch exemption applies to disregarded PEs to the extent that the profit of the disregarded PE is subject to a profit-based tax in the state where that PE is considered to be located for the purposes of the branch exemption. Other key legislation Alignment of legal entity and partnership classification rules with international tax standards — [already enacted]2 Effective date: 1 January 2025 The current budget includes a few clarifications and redactions in relation to the already-enacted legal entity and partnership classification rules. These rules revise the current Dutch classification rules for legal entities and partnerships to align better with international tax standards, where partnerships are generally tax transparent. It is expected that this will result in a reduction of potential hybrid outcomes due to mismatches in entity classifications between the Netherlands and foreign jurisdictions. In general, the relevant Dutch tax laws are proposed to be amended to fully codify the new classification methods of foreign legal entities/partnerships. Basis would be determined using (a) a comparison method (main rule) that applies if there is sufficient comparison with Dutch legal entities/partnerships; and (b) two alternative methods ((i) fixed classification and (ii) symmetrical classification) if there is insufficient comparison. Furthermore, and accompanying the above, the Dutch "consent requirement" (in Dutch: toestemmingsvereiste), which was an important condition historically required to consider Dutch (and comparable foreign) partnerships as transparent from a Dutch tax perspective (i.e., transferability of legal partnership interest was only allowed with prior written consent of all (general and limited partners), will be abolished. As a result, among other things, non-transparent Dutch (incorporated or tax-resident) partnerships basically cease to exist. Only in specific situations (e.g., under the fixed method — explained above) the Netherlands could consider foreign transparent legal entities/partnerships as non-transparent with regard to Dutch income.
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