On 15 September 2015, the Dutch Ministry of Finance issued its tax budget proposals (the Proposals) for fiscal year 2016.
The Proposals contain several anticipated tax law changes, including the implementation of the recent amendments to the European Union (EU) Parent- Subsidiary Directive (PSD) into domestic law. The amendments to the PSD seek to address the use of hybrid instruments and to introduce a common minimum general anti-abuse (GAAR) rule for all EU member states.1
As previously announced by the Dutch State Secretary of Finance in his letter of 2 June 2015, the Proposals furthermore include draft legislation containing revisions to the current transfer pricing requirements and new country-by-country (CbC) reporting rules to implement the outcome of Action 13 of the Organisation for Economic Co-operation and Development’s (OECD) project on Base Erosion and Profit Shifting per 1 January 2016. Specific details related to these CbC reporting rules, are to be published in the form of Ministerial Regulations.
This Alert highlights the key proposals.
Revisions due to the recent amendments to the PSD
Draft law is proposed which will enact the recent amendments to the PSD. The
first amendment of July 2014 entails a specific linking rule designed to prevent companies from using hybrid loan arrangements to benefit from double non-taxation under the PSD (Anti-hybrid rule). The second amendment, which the European Council adopted on 27 January 2015, entails the introduction of a common minimum GAAR in the PSD. Member States will have until 31 December 2015 to implement these two amendments into their domestic law.
Implementation Anti-hybrid rule
Based on the proposed wording of the Proposals, the Dutch participation exemption will not be applicable for income derived from an otherwise qualifying participation (including
the available credit for non-qualifying participations), to the extent this income can, directly or indirectly, be deducted in the source state. The explanatory notes explicitly mention that this anti-abuse rule is not limited to hybrid loans and may also apply to e.g., cumulative preferred dividend that could be deductible in the source state. The explanatory notes mention that it is not relevant whether the income can be deducted in the same year as in which the income is (to
be) received by the Netherlands tax payer.
Furthermore the explanatory notes outline that currency exchange results and capital gains should
in principle not be included in the scope, as they typically do not result in a local deduction.
In order to ensure equal treatment of EU/European Economic Area (EEA) countries and non-EU/EEA countries, this newly proposed anti- hybrid rule will apply to both EU/ EEA and non-EU/EEA situations.
Implementation of common minimum GAAR
The proposed draft legislation incorporates the wording of the GAAR as adopted in the PSD into (i) the current Dutch Substantial Interest Rules included in the Dutch Corporate Income Tax Act (Substantial Interest rules) and (ii) the anti-abuse rules for cooperatives in the Dutch Dividend Withholding Tax Act (Coop Anti- Abuse rules).
In short, the current Substantial Interest rules provide that a foreign taxpayer is subject to Dutch corporate income tax with respect to its income derived from a substantial interest (more than 5% interest) in a Dutch entity if
it cannot allocate the interest in the Dutch entity to its business enterprise, and the structure is considered abusive (in relation to Dutch dividend withholding tax
or personal income tax). Similar (anti-abuse) rules apply in relation to the Coop rules, in which case
a Cooperative can be considered
a withholding agent for Dutch dividend withholding tax purposes.
Based on the draft legislation, a foreign taxpayer becomes subject to Dutch corporate income tax with respect to its substantial interest,
if (a) such interest is held with the main purpose or one of the main purposes to avoid Dutch personal income tax or dividend withholding tax, and (b) the arrangement
or series of arrangements are considered artificial. In line with
the wording of the PSD it is noted that an arrangement may be comprised of more than one step or part. An arrangement or series of arrangements shall be regarded as artificial to the extent they are not put into place for valid commercial reasons which reflect economic reality.
Similar wording has been included in the amendments to the Coop Anti-Abuse rules.
Valid commercial reasons exist if they are reflected in the substance of the entity holding the substantial interest in the Dutch entity.
Based on the explanatory notes
to the Proposals, valid commercial reasons in any case exist if the direct shareholder/member of the Dutch entity is considered to have an operational business enterprise (to which it can allocate its interest in the Dutch entity) or if it functions as a strategic management/top holding company. As such the proposed amendments do not substantially change the current application of these (anti-abuse) rules for such direct shareholders/members.
In addition, an (intermediate) holding company should also
not fall within the scope of these amended rules, provided it meets certain (minimum) substance requirements. These substance requirements are similar to those that Dutch resident (holding) entities seeking to obtain a ruling should meet, based on the Dutch Advance Pricing Agreement/Advance Tax Ruling Decrees.2 Taxpayers are advised to review to what extent these Proposals are applicable to their specific fact pattern.
In line with the current rules, the explanatory notes furthermore specify that the specific Coop Anti-Abuse rules in the dividend withholding tax act do not apply
to a Dutch cooperative that has genuine economic substance (e.g., if it conducts a business enterprise). It is further clarified in the explanatory notes that this is for instance the case if the cooperative has an office space at its disposal and has own employees.
Finally, it should be noted that the Proposals explicitly mention that these anti-abuse rules should not override the provisions of currently concluded tax treaties.
Implementation CbC reporting
Draft legislation is proposed containing revisions to the current transfer pricing requirements.
The draft law sets forth a three- tier approach for transfer pricing documentation that includes a master file, a local file and a template for CbC reporting. Further guidance on the specific implementation of the master, local file and CbC reporting requirements will be issued through Ministerial Regulations.
These proposed revisions are in line with the OECD’s report on Action
13, issued on 16 September 2014, which contains new standards for transfer pricing documentation
to be incorporated in the OECD Transfer Pricing Guidelines. It is emphasized in the explanatory notes that it is of great importance to the Netherlands that the new transfer pricing standards are consistently implemented in domestic law. As such, the draft law is aligned with the OECD’s implementation guidelines under Action 13, as published on
6 February and 8 June, 2015.
More information on the transfer pricing requirements and the new CbC reporting requirements will be provided in a separate Global Tax Alert.
Other proposed amendments
The Dutch Ministry of Finance also took the opportunity to propose several other amendments, including (among other things) the integration of the Research and Development Allowance (RDA) into the Wage Withholding Tax Grants available under the so-called WBSO and a proposal to include a tax step- up for Dutch dividend withholding tax in the case of cross-border spin- offs and legal mergers.
RDA integration into WBSO
Currently, Dutch tax law contains several attributes to encourage innovation in the Netherlands. In addition to the special tax regime for income from innovative activities (the innovation box), Dutch tax law includes a tax credit for research and development work under the Dutch WBSO as a payroll tax benefit. It furthermore includes an RDA as an additional opportunity to deduct costs and expenses from the taxable profit in the corporate income
tax (in additional to the regular deduction). The Proposals seek to integrate the RDA into the WBSO. This implies that RDA will no longer result in an additional deduction in the Dutch corporate income tax,
but in a reduction of the payroll tax to be remitted. This new RDA will in particular be beneficial for innovative start-ups in the Netherlands, which generate initially little or no profit to benefit from the additional deduction in the corporate income tax.
More information on the RDA integration into the WBSO will be provided in a separate Global Tax Alert.
Step-up for cross-border spin-offs and legal mergers
The Proposals furthermore include a step-up for Dutch dividend withholding tax purposes in the Dutch Dividend Withholding Tax Act for cross-border spin-offs and legal mergers into the Netherlands. Such a step-up was already included in the Dutch Dividend Withholding Tax Act with respect to cross- border share transfers, but not
yet for cross-border spin-offs and legal mergers. The purpose of this amendment is to prevent that the Netherlands will have a Dutch dividend withholding tax claim
on foreign profit reserves, after a cross-border spin-off or legal merger.
The Proposals are currently subject to the review and discussions by the Dutch Parliament and as such may be subject to further possible amendments. If adopted, the Proposals are expected to come into effect on 1 January 2016.
- See EY Global Tax Alert, European Council formally adopts binding general anti-abuse rule in Parent- Subsidiary Directive, dated 27 January 2015.
- See EY Global Tax Alert, Updated Decrees confirm Dutch APA/ATR procedures and practice, dated 16 June 2014.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, International Tax Services, Amsterdam
• Danny Oosterhof + 31 88 407 1007 email@example.com • Dirk Stalenhoef + 31 88 407 1977 firstname.lastname@example.org
Ernst & Young Belastingadviseurs LLP, International Tax Services, Rotterdam
• Michiel Swets + 31 88 407 8517 email@example.com Ernst & Young Belastingadviseurs LLP, International Tax Services, Eindhoven
• Bas Leenders +85 22 846 9018 firstname.lastname@example.org Ernst & Young LLP, Belgium-Netherlands Tax Desk, Singapore
- Barbara Voskamp| Partner | Dutch/EMEIA Tax Desk | Global Tax Desk Network, Asia Pacific | Direct: +65 6309 8063 | Barbara.Voskamp@sg.ey.com