International Tax Newsletter - Winter 2011-12 - Netherlands
2012 TAX PROPOSALS
On 15 September 2011, the Dutch government published the 2012 Tax Proposals. These contain a number of measures aimed at implementing the ambition of the Dutch government to achieve a simpler, more solid and fraud-resistant tax system. The proposed enactment date is 1 January 2012.
- Limitation on interest deduction concerning acquisition holdings
A common structure in the Netherlands is that an acquisition vehicle borrows funds to acquire shares in the Dutch target company and subsequently forms either a fiscal unity or legally (de)merges with the target company. Through these actions, the interest expenses of the acquisition vehicle can be deducted from the operating profits of the Dutch target company, therefore reducing the Dutch tax base. Current rules that do not allow interest deduction, such as thin capitalisation, could be avoided by borrowing funds from a third party (instead of a related party) or by increasing the acquisition’s vehicle equity by contribution of shares in other subsidiaries (in which the Dutch participation exemption applied).
To challenge this undesirable base erosion, the 2012 Tax Proposals contain a new provision to disallow the deduction of acquisition interest. This provision applies to interest paid or accrued on intra-group and third-party debt used for the acquisition of Dutch target companies that subsequently become part of a fiscal unity or that are merged with the acquiring company. Interest deduction against the profits of the target companies is not allowed except:
- if and to the extent the interest does not exceed € 1,000,000; or
- if and to the extent the debt equity ratio (of the fiscal unity) does not exceed 2:1. For this calculation, the amount of equity will be reduced by the tax book value of participations that qualify for the participation exemption. Furthermore, the goodwill that arises due to the acquisition can be added to the fiscal unity’s equity (taken into account 10% yearly depreciation of the goodwill) for the calculation of the 2:1 debt equity ratio.
Furthermore, acquisitions that resulted in a fiscal unity or a legal (de)merger with the target company that occurred before January 1, 2012 are grandfathered.
- Object exemption of profits and losses of foreign permanent establishments (PEs)
Currently, foreign PE losses are deductible from the worldwide tax profits of Dutch taxpayers, while foreign PE profits are generally exempted via the applicable method to avoid double taxation. PE losses will have to be recaptured but this can be postponed. The 2012 Tax Proposals proposes to change this method for avoiding double taxation as follows:
- the income, either positive or negative from an (active) foreign PE, is no longer included in the tax base (object exemption) of Dutch taxpayers
- a tax credit for foreign low taxed passive PEs (this is applicable if the activities of the foreign PE consist primarily of passive investing or leasing and the profit of the foreign PE is not subject to reasonable taxation, i.e., a tax rate generally of at least 10%)
- a measure to deduct liquidation losses from the Dutch taxable profit.
- Amendment to substantial interest levy regime for foreign corporate taxpayers
Based on current Dutch tax law, non-Dutch resident corporate taxpayers which hold a substantial interest (generally at least 5%) in a Dutch resident company are subject to Dutch corporate income tax with respect to income and capital gains, unless the substantial interest can be attributed to an enterprise carried on by the foreign shareholder. This Dutch tax legislation created tension with EU-tax law, as Dutch resident companies that hold a substantial interest in a Dutch subsidiary are favoured, due to the fact that the income and capital gains are exempted based on the Dutch participation exemption.
As a result, the 2012 Tax Proposals amend the substantial interest taxation rule in the following manner: Non-Dutch residents are only subject to corporate income tax if (i) the substantial interest cannot be attributed to an enterprise carried on by the foreign shareholder AND (ii) the main purpose (or one of the main purposes) of the holding of the substantial interest in the Dutch company is held to avoid income tax or Dutch withholding tax of another person. Furthermore, in case the substantial interest is only held to avoid Dutch withholding tax, the substantial interest levy is limited to 15% instead of 25%.
- Anti-abuse measures for dividend distributions by a Cooperative (Coop)
The Dutch Coop is popular for international tax structuring, as under current Dutch tax law income and capital gains received by the Coop from its subsidiaries are generally tax exempted based on the participation exemption (assuming that the relevant conditions are met). In addition, distributions made by the Coop to its (foreign) Members are normally not subject to Dutch withholding tax. The 2012 Tax Proposals contain an anti-abuse measure with respect to structure which the Dutch government considers abusive in which the Dutch Coop holds shares in a company with the main purposes (or one of the main purposes) to avoid Dutch withholding tax or foreign tax of another person.
In such case, distributions to Members will be subject to Dutch withholding tax (in principle 15%) if the membership interest in the Coop cannot be attributed to an enterprise. Also if the membership interest can be attributed to an enterprise, distributions of the Coop will be subject to withholding tax but only to the extent necessary to preserve a Dutch withholding tax claim on profits of a Dutch company whose shares are held by the Coop and the claim already existed at the time the Coop acquired the shares in the Dutch company.
- Miscellaneous measures
The 2012 Dutch Tax Proposals set forth a number of miscellaneous measures. These are concisely
(not limitative) outlined below:
- Foreign associations, foundations or religious societies:
Currently, non-Dutch resident associations, foundations and religious societies are subject to Dutch corporate income tax, which is not in line with the tax treatment of similar Dutch residents. The 2012 Tax Proposals provide that non-Dutch resident entities that are similar to Dutch associations, Dutch foundations and Dutch religious societies are only subject to Dutch income tax to the extent that they carry on a business enterprise.
- R&D deduction:The Dutch government considers introducing an R&D deduction that reduces the direct costs relating to R&D, other than labour costs (these already benefit from an R&D wage tax deduction and from the innovation box), in order to ensure the attractiveness of the Netherlands for R&D activities. The details of the aforementioned are expected to be published in Q4 2011.
- Extension of Dutch withholding tax refund for foreign companies:
Based on current Dutch law, Dutch resident entities, EU entities and EEA entities which are exempted from Dutch corporate income tax (such as pension funds) can request a refund of the Dutch withholding tax that was withheld from them. According to the 2012 Tax Proposals, the scope of this legislation is to be extended to similar non-EU and non-EEA residents if the below mentioned conditions are met:
- the Netherlands agreed a bi- or multilateral agreement (including an exchange of information provision) with the other country
- the interest relating to the refund is a portfolio investment (i.e., no potential control over the withholding company)
- the concerning entities perform another function as Dutch Fiscal Investments Institutions and Exempt Investment Institutions.
It seems that this extension makes it more attractive for non-EU government exempt entities (such as non-EU exempt pension funds and exempt Sovereign Wealth Funds) to invest in the Netherlands from qualifying third countries.
DUTCH EXIT TAXATION VIOLATES EU LAW
Dutch tax law contains an exit charge in the event that a taxpayer ceases to be a Dutch tax resident. National Grid Indus Company (NGIC) challenged this exit charge. NGIC transferred its place of effective management to the United Kingdom. Under Dutch corporate law, NGIC does not lose its legal personality because the Netherlands apply the “incorporation principle” and not the “seat principle.”
The assets of NGIC solely consist of receivables denominated in GB Pounds with unrealised currency gains. The transfer of the effective management triggered — according to the Dutch tax authorities – taxation on the unrealised currency gains.
The Appeals Court in Amsterdam presented the case to the EU Court and, on 8 September, the Advocate General of the European Court of Justice issued her opinion. According to the Advocate General, the Dutch exit taxation on companies that transfer their place of effective management to another EU Member State violates EU law. Regarding this matter, the Advocate General of the European Court of Justice argued that there is no justification, based on the freedom of establishment in the EU, to levy exit taxes without the possibility of postponing the payment and to take into account later losses on the hidden reserves of the transferred assets. The decision of the EU Court is expected in the spring of 2012.
DUTCH SUPREME COURT UPHOLDS EXEMPTION FROM REAL ESTATE TRANSFER TAX
The Netherlands levy 6% Dutch real estate transfer tax (DRETT) upon the acquisition of (certain rights to) Dutch real estate. This equally applies when a company acquires at least one third of the shares in a Dutch real estate company. A company qualifies as a real estate company if the entity’s assets at the time of the acquisition and during the preceding year consist for 50% or more of real estate of which at least 30% is Dutch real estate (asset test) which real estate is held mainly (70% or more) for acquisition, sale or exploitation (purpose test).
The sale and purchase of Dutch real estate is exempt from Dutch Value Added Tax (VAT), except if (i) it is new real estate or (ii) it qualifies as a building premise. If the acquisition is subject to VAT, no DRETT is payable except if the (i) new real estate is used as a business asset and the purchase is within two years of taken into use and (ii) the purchaser is entitled to recover the VAT (in whole or in part).
In a recent court case, the question was whether the DRETT exemption was also applicable if shares in a real estate company were purchased whose asset was a building premises; i.e., the exemption would have been applicable if the building premises would have been purchased directly instead of the shares. On 10 June 2011, the Dutch Supreme Court ruled in favour of the taxpayer and decided that the DRETT exemption applies regardless of whether the real estate property was acquired directly or by the acquisition of shares in a Dutch real estate company.
More information on these developments can be provided by Jan Roeland, Partner, PKF Wallast, through the EisnerAmper contacts listed on the homepage.
International Tax Newsletter - Winter 2011-12 Issue