The OECD’s initiative to crack down on Base erosion and Profit Shifting (BEPS) world-wide was “gold plated” in the EU BEPS Anti-Tax Avoidance Directives, ATAD 1 and ATAD 2. Member States of the European Union (EU) are currently in the process of putting these EU Anti-Tax Avoidance Directives (ATAD1 and 2) into national law.
On July 10, 2017, the Netherlands published a preliminary proposal (the Proposal) to implement ATAD1, as adopted by the EU in 2016. The Proposal addresses earnings stripping rules, exit taxation, general anti-abuse (GAAR) and Controlled Foreign Companies (CFC). Implementation of ATAD1 into Dutch law must be completed as of Jan. 1, 2019. ATAD1 also contains rules in regard to hybrid mismatches, which were expanded based on the directive that the EU adopted on May 29, 2017 (ATAD2). Because these expanded ATAD2 rules will not become effective until 2020, they will be addressed in a separate proposal. The Proposal contains new rules to limit the deduction of interest on the basis of earnings stripping and CFC rules. In addition, the Proposal provides for minor adjustments to the exit taxation rules. The GAAR will not be implemented separately, due to the Dutch Legislator’s view that the abuse of law-doctrine in Dutch case law achieves the same goal.
Below, we have outlined the key features of these rules below.
Following the Dutch parliamentary elections in March of this year, the Netherlands is still governed by the outgoing government. Rules may be strengthened or expanded once the new government is in office.
Earnings Stripping Rules
According to the proposed rules, the deduction of net borrowing costs is limited to the highest of (i) 30 percent of the earnings before interest, taxes, depreciation and amortization (EBITDA) and (ii) an amount of Euro 3 million. The Proposal contains two variants for a group escape. Under the first variant, the limitation does not apply if the taxpayer can demonstrate that, based on the consolidated commercial accounts, its average equity / average total assets is at least equal to the corresponding group ratio. Under the other variant, the percentage of 30 percent as it applies in the EBITDA rule is replaced with the ratio of net group interest income to pre-tax result of the group, if that ratio is more than 30. Otherwise, non-deductible interest can be carried forward unlimited.
It is unclear whether the existing Dutch interest deduction limitation rules will be abolished or amended as a result of the implementation of these new earnings stripping rules. This is definitely a topic for further debate.
Under the proposed CFC-regime, specified types of so-called tainted income of a controlled foreign company (CFC) are included in the Dutch corporate income tax base of a corporate taxpayer in proportion to the interest held in the CFC to the extent the income has not been distributed to the corporate taxpayer at the end of the financial year. The following types of passive income are taken into account (1) interest or other benefits from financial assets, (2) royalties or other income from intellectual property, (3) dividend income and capital gains in relation to the alienation of shares, (4) financial lease income and (5) income less related expenses with respect to invoicing activities existing out of sales and services purchased from or rendered to affiliated companies or affiliated individuals that add no or limited value. If on balance the tainted income of CFC's results in a loss, the loss is not included in the Dutch corporate income tax base of the taxpayer but instead is carried forward for a period of up to 9 years to be offset against positive tainted income of subsequent years.
A CFC is a subsidiary (a) in which the taxpayer – without or together with affiliated companies or an affiliated individual – has an interest of at least 50 percent of the (i) nominal paid-in capital, (ii) the voting rights, or (iii) profits, and (b) whose income is not subject to taxation that is reasonable according to Dutch standards. Taxation is considered reasonable according to Dutch standards if it results in taxation against a corporate tax base, in line with Dutch standards, and has a tax rate that amounts to at least 50 percent of the applicable Dutch tax rate (whereby income of a permanent establishment is not taken into account if that income is not subject to a profit tax or is exempt from it). Therefore, if less than 12.5 percent Dutch corporate tax is levied on taxable profits based on Dutch standards, it does not meet the fair tax test under these rules.
A company is not considered a CFC if (a) the income of the CFC at least predominantly (70 percent or more) exists of non-tainted income or (b) if the company is a financial institution as referred to in article 2(5) of ATAD1 and the tainted income is predominantly derived from others than the taxpayer or affiliated companies/affiliated individuals. The CFC-regime is not applicable to the extent that the CFC, in relation to which tainted income is included in the Dutch corporate income tax base, carries out a fundamental economic activity supported by personnel, equipment, assets and buildings.
Local profit tax paid at the level of the CFC can in principle be credited against Dutch corporate income tax due.
Various clauses are included in the Proposal to avoid unintended accumulation with the existing rules on (passive low taxed) shareholdings as part of the Dutch participation exemption regime.
The exit charge included in ATAD1 basically consists of two elements. Firstly, corporate income tax is charged on a capital gain (i.e. difference between the fair market value and the book value for tax purposes) of an asset at the time the asset is transferred cross-border. Secondly, upon request of the taxpayer, the corporate income tax on a capital gain is deferred and becomes payable in five annual and equal installments.
With respect to the first element, the Dutch Corporate Income Tax Act 1969 already includes provisions that trigger taxation of a capital gain upon the transfer of an asset abroad. In this respect, Dutch corporate income taxation already meets the requirements of ATAD1. With respect to the second element, the Dutch Tax Collection Act already includes rules for deferred payment. However, given that these rules provide for a 10-year period during which the exit tax due should be paid (in annual and equal installments), the ATAD1 only allows a five-year period. It has been proposed to shorten the deferral to five years.
Currently, it is not clear how ATAD1 will be implemented in the Dutch legislation as the proposed rules may be strengthened or expanded once the new Dutch government is in office.
For more information or assistance on these matters please contact:
|Jelle R. Bakker
| +31 88 321 08 07 |+31 6 51 74 45 67
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