International Tax Newsletter - Summer 2011 - NETHERLANDS: Corporate Income Tax
DUTCH TAX AGENDA
On 14 April 2011 the Under-Minister of Finance published the Dutch Tax Agenda ("the Agenda"). This document consists of ideas to move the Dutch tax system towards a simpler, more solid and fraud-resistant tax system and refers to individual income tax, value added tax and corporate income tax. Below we address relevant Dutch corporate income tax issues – with respect to these items, the intention is to present legislative proposals for possible enactment from 1 January 2012.
Over the past years, several alternatives have been discussed to curb the deduction of funding costs with respect to investments in qualifying subsidiaries. There is now a perceived imbalance between the deduction of interest whereas the benefits are tax-exempt if the subsidiary is a qualifying participation.
In addition, the Agenda focuses on limiting the interest deduction in Dutch acquisition company structures. A common practice in the Netherlands is that an acquisition company borrows funds to acquire shares in the target company and forms a fiscal unity with the target company. The interest costs of the acquisition are then deducted from the operating profit of the target company. Anti-abuse rules (e.g., to curb thin capitalization with respect to the ratio of debt and equity) can often be avoided by borrowing from a third party instead of a related party and by increasing the equity of the acquisition company by the contribution of shareholdings in other subsidiaries. The Agenda describes measures to limit the interest deduction from (only) the acquisition company's debt (and not from the target company's debt) concerning third party and related party interest expenses, in case the interest expenses exceed €500,000 taking into account a certain debt-to-equity ratio.
PERMANENT ESTABLISHMENT LOSSES
The Agenda proposes to align the treatment of foreign permanent establishments with that of foreign subsidiaries. For this purpose, the profits of a foreign permanent establishment would be excluded from the taxable basis in the Netherlands, i.e., by so-called object exemption. Losses of the permanent establishment – pursuant to the object exemption regime – could no longer be offset against profits of Dutch head offices. An exception would be introduced for losses resulting from the liquidation of a foreign permanent establishment, as such a deduction is also available upon the liquidation of a foreign subsidiary which is a qualifying participation.
REDUCED CORPORATE INCOME TAX RATE
The Agenda proposes to reduce the corporate income tax rate to 24%.
TAXATION OF FOREIGN SHAREHOLDERS
In addition to the items mentioned above, the Agenda also indicates that there will be changes in the rules governing taxation of foreign shareholders with asubstantial interest (in general, an interest of at least 5% of the issued and outstanding capital) in a Dutch company, but the Agenda does not contain any further information about what the changes should be.
FOREIGN CURRENCY (FX) RESULTS ON EXEMPT PARTICIPATIONS
In addition to the Agenda, in April 2011 the Under-Minister of Finance announced legislation with respect to the Deutsche Shell judgment of the EU Court of Justice (decision of the European Court of Justice concerning Deutsche Shell GmbH, dd. 28-2-2008, C-293/06). Since that decision, a debate has ensued in the Netherlands whether that case could also apply to FX results under the Dutch participation exemption.
The Dutch participation exemption provides for a full exemption of all profits and losses, including FX results, from qualifying subsidiaries. However, applying the Deutsche Shell case to the participation exemption would mean that FX losses would be tax deductible, while the corresponding gain would be tax exempt under the participation exemption. Indeed, in recent court cases taxpayers have taken the position that FX losses concerning exempt participations should be deductible from the Dutch taxable basis.
The Under-Minister of Finance considers such an imbalance to be undesirable from a budgetary view and therefore has announced legislation that aims to redress it, by providing that taxpayers who have successfully claimed a deduction will no longer qualify for the participation exemption with respect to FX gains. The announced legislation, if enacted, will have retroactive effect to 17.00 hrs on Friday, 8 April 2011.
VALUE ADDED TAX (VAT)
The Netherlands currently applies a general VAT tax rate of 19% and a reduced rate of 6% for items such as food, books and medication. To finance the suggested tax changes included in the Agenda referred to further above, the following proposals are laid down in the Agenda:
- Increase the reduced VAT rate to 8%
- Partially abolish the reduced VAT rate whereby food would continue to apply for a reduced rate of 6% or 8% or
- Completely abolish the reduced rate which would bring all goods under the general rate of 19%.
INTERNATIONAL AND EU ISSUES
- Tax Treaty Policy of the Netherlands - The Dutch Under-Minister of Finance has issued a Notice concerning the Tax Treaty Policy 2011 of the Netherlands (the Notice). The Notice sets out that it serves the interest of the Netherlands to have an extended tax treaty network and to ensure capital import neutrality and the exemption method in order to avoid double taxation. The Notice, furthermore, outlines the Dutch policy with respect to future negotiations for new tax treaties and/or changes in current tax treaties, but recognizes that each tax treaty requires its tailor- made solutions.
The focus of the policy laid down in the Notice seems to be the following:
- Clearer rules for residency for exempt entities and entities subject to a special regime
- Clear language for hybrid entities
- 0% withholding tax rate for dividends, interest and royalties
- The use of recent OECD Commentary under the dynamic interpretation method
- Inclusion of an arbitration clause
- Curbing tax treaty abuse.
INTEREST DEDUCTION AND EU LAW
Case law has recently addressed whether Dutch rules limiting interest deductions are in conflict with EU law. The first case deals with the Dutch thin capitalization rules in force since 1 January 2004, denying interest deductions in the event of excess debt unless certain conditions are satisfied. According to the Dutch Supreme Court, the thin cap rules do not create an imbalance between a pure domestic situation and an EU situation because in each situation the same ratios apply.
The second case involves payment of interest by a Dutch company to a Belgian group company which enjoyed the "co-ordination tax regime" in Belgium. The interest payment by the Dutch company was governed by a rule limiting interest deductions. Those rules would not apply if the transaction and the debt were predominantly driven by business reasons or if the interest were subject to tax in Belgium at an effective rate which, according to Dutch standards, is reasonable.
The Appeals Court Amsterdam ruled that there was not a predominant business reason for the debt and that the interest was not subject to a reasonable tax in Belgium (taxation in Belgium was 1%). Finally, the Court tested the Dutch rule under EU law. According to the Appeals Court Amsterdam, the rule limiting interest deduction is in principle in conflict with the freedom of establishment but the rule is justified by compelling reasons of public interest.
EU PROCEEDINGS REGARDING FISCAL UNITY VAT
Companies which are entrepreneurs for VAT purposes can form a VAT fiscal unity provided that certain conditions are satisfied. The question is always whether a holding company qualifies as an entrepreneur. According to policy applied by the Dutch tax authorities, a holding company can be included in a VAT fiscal unity if the holding company has a central role with respect to policy making and management of the group (in Dutch, beleidsbepalend en sturend) even if the holding company conducts those activities without receiving a remuneration.
According to the European Commission, this policy applied is in conflict with European VAT rules. A holding company should be considered an entrepreneur – based on EU case law – if it performs services for group companies in exchange for a fee. The Commission has initiated an infringement procedure at the European Court of Justice in order to investigate whether the Netherlands is acting in violation of European VAT Guidelines.
However, continuation of holding companies in a VAT fiscal unity can be achieved – even if the European Court rules in favor of the EU Commission – if the holding company starts to perform its management activities in exchange for a fee.
International Tax Newsletter - Summer 2011
- CHILI: New Audit Process For Transfer Pricing
- CHINA: Corporate Income Taxes (CIT) Treatment On Asset Transfer Income Derived By Enterprises
- CZECH REPUBLIC: Corporate Tax Legislation
- GERMANY: Electronic Transmission Of Tax Accounting Introduced For 2012 Onward
- HUNGARY: Corporate Income Taxation
- INDIA: Finance Act 2011 — Amendments Relevant To International Taxation
- IRELAND: Finance Act 2011 Changes For Companies Investing In Ireland
- JAPAN: Recent Tax Treaty Reforms
- MEXICO: Recent Tax Treaty Reforms
- NETHERLANDS: Corporate Income Tax
- RUSSIA: New Zero Rating For Income From The Sale Of Shares In Russian Companies
- UNITED KINGDOM: Corporation Tax Rate
- UNITED STATES: Key International Tax Developments