2018 Tax Budget. new perspectives UPDATE BDO TAX ADVISORS

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1 BDO TAX ADVISORS UPDATE 2018 Tax Budget On September 19, 2018, the 2018 Tax Budget has been published. The measures proposed in the 2018 Tax Budget are mainly measures of which introduction is deemed necessary on January 1, This is mainly because the formation of a new cabinet is still pending. The amendments that are proposed on the Dutch CITA are limited to technical amendments that are mainly driven by (pending) court rulings. In the Dividend Withholding Tax Act, a significant change will be made in respect of holding cooperatives and an expansion of the dividend withholding tax exemption in tax treaty situations. For wage tax purposes, changes are proposed in respect of taxation of non-executive directors and the treatment of severance payments whereby new perspectives share options rights have been awarded. Finally, an amendment has been proposed to reduce the administrative burden on R&D withholding agents. Below we will in more detail describe the various proposed amendments. Please do note that the 2018 tax plan contains various other amendments on a variety of topics. However, from our perspective, the below amendments are the most relevant for corporate clients.

2 2 OF 5 Corporate income tax Limitation of interest deduction rules sound business reasons test In principle, interest is deductible for Dutch corporate income tax purposes. The Dutch CITA, however, includes specific anti-abuse rules that aim to avoid base erosion through interest deduction. The 2018 Tax Budget includes an amendment of one of the existing specific limitation of interest deduction rules. Article 10a Dutch CITA counters structures that, through artificially creating an interest cost, erode the Dutch taxable base. Under this article however, the interest (expenses and currency exchange results included) can be deducted if the taxpayer can demonstrate that the loan and the transaction are predominantly based on sound business reasons. On April 21, 2017, the Supreme Court ruled that these conditions are met when the taxpayer is able to demonstrate that the loan, which is due to a related entity, is in fact due to a third party. In such a case, it would not be required to demonstrate that the transaction, for which that loan has been attracted, is also based on sound business reasons. The cabinet does not consider this Supreme Court ruling to be in accordance with practice. Therefore, it is now proposed that a taxpayer also needs to demonstrate sound business reasons of the transaction in the event that the loan is indirectly obtained from a third party. This amendment also reflects the current policy of the Dutch tax authorities based on which the sound business reasons of the transaction are tested separately. This amendment codifies current policy of the Dutch tax authorities and the burden of proof becomes heavier for taxpayers. In addition to the amendment of this specific limitation of interest deduction rule, a general limitation of interest deduction rule (so-called earningsstripping rule) has been introduced in the Anti Tax Avoidance Directive. Still the cabinet deems it necessary to amend the existing limitation of interest deduction rule before introducing a general limitation of interest deduction rule. At a later stage, it will be considered whether or not specific limitation of interest deduction rules should still be kept in place after introduction of such a general rule. Double loss outside fiscal unity but within a group The existing rules that aim to avoid taking a double loss within a fiscal unity, are extended on two specific points. One measure aims to counter a potential double loss on a group receivable which is routed outside the fiscal unity and which loss actually relates to a loss incurred at the level of a fiscal unity entity ultimately receiving the funds. The other measure concerns an amendment of the liquidation loss rules and aims to counter a similar planning through a liquidation loss instead of a loss on a receivable. Both these amendments are very technical and are likely only relevant for very specific cases and appear to only counter a theoretical issue. Liquidation loss on intermediate holding companies The current liquidation loss rules include a specific provision that aims to avoid that an artificial liquidation loss incurred on an intermediate holding company can be taken into account. In case an intermediate holding company is excluded from an existing fiscal unity, the acquisition price has to be determined. Under current legislation, the acquisition price is determined based on the equity of the (intermediate holding) company that is excluded from the fiscal unity. In case an intermediate holding company owns participations, the equity of the intermediate holding company reflects the book value of such participations. As a result, when determining the acquisition price at the time of excluding the intermediate holding company from the fiscal unity, no account is taken of the fair market value of the underlying participations. The cabinet now proposes to, when determining the acquisition price upon exclusion from the fiscal unity, take into account the fair market value of the participations held by an intermediate holding company in case the fair market value is lower than the book value of the participations in the books of the intermediate holding company. With this amendment the cabinet anticipates on a pending Supreme Court case, by repairing a ruling by the Den Bosch court of October 20, 2016 in which the court called the legislator to action to repair this flaw in current legislation. Double tax relief on permanent establishments The object exemption aims to provide double taxation relief for profits that are attributable to a permanent establishment. Under this provision, the profit that is attributable to a foreign permanent establishment, is exempt at the level of the Dutch taxpayer (head office) for corporate income tax purposes. In certain specific cases, where a Dutch fiscal unity has a foreign permanent establishment, the profit calculated for the purpose of double taxation relief, is considered to be too high, which leads to an unintended advantage for taxpayers. This is due to the fact that user fees paid within the fiscal unity such as rent, lease and royalties are eliminated for tax purposes. This is also the case when such payments would have to be attributed to the permanent establishment.

3 3 OF 5 The cabinet now proposes to take into account the fore mentioned internal payments when determining the exempt profit of a fiscal unity. As a result, the fiscal unity (consolidation) is disregarded when calculating the exempt profit. Under the current legislation, when calculating the exempt profit, internal finance costs are already taken into account. Through this amendment, the consequences of a ruling of the Supreme Court of June 3, 2016 are reversed. Extension of first corporate income tax bracket As of January 1, 2018, the first bracket in the Dutch CITA, on which a 20% rate applies, will be extended from 200,000 to 250,000. In 2020, the first bracket will be further extended from 250,000 to 300,000 and in 2021 from 300,000 to 350,000. These adjustments were already announced in the 2017 Tax Budget. The adjustment of the first bracket will lead to the following: % % % % % % Country by country reporting As of January 1, 2016, Dutch tax resident entities which are members of an MNE group will need to meet certain documentation requirements based on Country by Country reporting legislation. The MNE group is obliged to provide a CbC report within one year after the of the reporting (financial) year to the tax authorities where the ultimate parent of the group is located. The CbC reporting should include: Aggregate, jurisdiction wide information on global allocation of income; The taxes paid (including withholding taxes); and Indicators of economic activities. In the case the ultimate parent company is resident in a jurisdiction which has not timely implemented CbC legislation, documentation requirements cannot be met by group entities and therefore, such entities would need to locally file the CbC report. With retroactive effect, as of January 1, 2016 countries may opt to allow voluntary filing of the country by country report by the ultimate parent company. The Dutch tax resident group entities would in that case and provided that certain other conditions are met, no longer be obliged to file the country by country CbC report to the Dutch tax authorities. Dividend withholding tax As part of the 2018 Tax Budget proposals, the bill on the Withholding obligation for holding cooperatives and expansion of the withholding exemption Act (hereafter: the bill) has also been published on September 19, This bill introduces a dividend withholding tax inclusion obligation for Dutch holding cooperatives and expands the dividend withholding tax exemption for dividends from participations distributed to shareholders located in tax treaty countries. The bill is broadly in line with the draft bill, which was published in May Proposed changes The bill proposes to expand the dividend withholding tax obligation in order to remove the difference in treatment between B.V. s/n.v. s and holding cooperatives. In principle, dividend withholding tax will also be levied on holding cooperatives. We will briefly discuss the three proposed changes: (1) the expansion of the withholding obligation for profit distributions on qualifying membership rights in holding cooperatives, (2) the expansion of the dividend withholding tax exemption to third countries and (3) the amendment of the anti-abuse provision in the Dividend Withholding Tax Act and the Dutch CITA.

4 4 OF 5 (1) Expansion of withholding obligation Dividend withholding tax will also be levied on holding cooperatives, in case of profit distributions to owners of qualifying membership rights. To ensure the withholding obligation does not apply to cooperatives carrying out real business operations, the following two conditions have to be met: a. The cooperative must qualify as a holding cooperative. A holding cooperative is defined as a cooperative whose actual activities in the year preceding the profit distribution predominantly (i.e. for 70% or more) consisted of holding of participations or direct or indirect financing of related entities or individuals; and b. There must be a profit distribution to a qualifying membership right, i.e. membership rights that grant an entitlement to at least 5% of the annual profit or to at least 5% of the liquidation dividends. (2) Expansion of dividend withholding tax exemption Dutch treaty policy aims at agreeing on an exemption for participation dividends in the source country. Therefore, the bill contains an expansion of the dividend withholding tax exemption to third countries. This exemption only applies if a tax treaty with a dividend clause has been concluded with the Netherlands and the recipient qualifies for treaty benefits. Furthermore a new anti-abuse provision will be introduced in the Dividend Withholding Tax Act. The dividend withholding exemption will not be applicable in case of abuse. In summary, this is the case if the shares in the Dutch entity or the membership rights in the Dutch cooperative are held for the principal purpose of, or one of the principal purposes is, avoiding dividend withholding tax being levied from another party (subjective test) and there is an artificial structure or transaction (objective test). Valid business reasons are deemed present if the immediate shareholder/member carries on an active business enterprise. In case the immediate shareholder/member does not carry out an active business enterprise, then valid business reasons are deemed present if the immediate shareholder/member meets the Dutch minimum relevant substance requirements. Two additions are made to the current Dutch minimum substance requirements, the minimum labor costs requirement of 100,000 and the office place requirement (for at least 24 months). The two additional requirements should be met as from April 1, 2018 (so not as from January 1, 2018, as mentioned in the draft bill). In addition to the draft bill, provisions are included in the bill with respect to dividend distributions to hybrid entities. An arrangement for two situations has been included: The Netherlands qualify the recipient of the dividend as a corporation, while this entity has been qualified as transparent based on foreign law. The participants of this hybrid entity will then be qualified as recipients of the dividend, if the income of the hybrid entity will be qualified as income of these participants at the level of all underlying participants; The Netherlands qualify the recipient of the dividend as transparent, while this entity has been qualified as non-transparent based on foreign law. The hybrid entity will be qualified as recipient of the dividend income if the hybrid entity will be qualified as a taxpayer in the country of residence. Entities which are qualified as recipients of dividend income based on the above mentioned rules, can apply for the dividend withholding tax exemption, if the conditions of that exemption are met. (3) Amendment of anti-abuse provisions The current anti-abuse provisions will be brought in line with the EU law and tax treaty anti-abuse provisions. The current anti-abuse provision in the Dutch CITA briefly stipulates that in case of abuse the foreign shareholder will be taxable for corporate income tax purposes for income and gains derived from certain shares or membership rights in an entity established in the Netherlands, the so called substantial interest rule. Based on the bill, the foreign shareholder will become taxable based on the substantial interest rule when the main purpose or one of the main purposes of its shareholding in a Dutch entity is to avoid the levy of personal income tax of an indirect shareholder. When only Dutch dividend withholding tax will be avoided, this substantial interest rule would not come into play as the Dutch Withholding Tax Act has its own anti-abuse legislation. This is different from the proposed in the draft bill. Another important difference compared to the draft bill is that the anti-abuse provision in the Dutch CITA as mentioned above will apply to both capital gains and regular income. Consequently, also profit distributions, e.g. dividend distributions, are included in this anti-abuse provision and, therefore, taxable at a corporate income tax rate of 20%- 25%. The proposed changes in the bill will be of great importance for cooperatives in international structures, especially where members are situated in a non-tax treaty country. In addition, it also creates possibilities to claim the dividend withholding tax exemption in more situations. The abovementioned tax changes will apply as of January 1, 2018.

5 5 VAN 5 Wage tax Abolishment deemed employment of non-executive directors Deemed employment of non-executive directors of listed companies will be abolished. Through this abolishment, the cabinet aims to equally treat non-executive directors of listed companies and commissioners as they perform similar roles as supervisors. Deemed employment for supervisory board members had already been abolished as per January 1, As a result of this abolishment, both non-executive directors of listed companies and supervisory board members do not fall within the scope of Dutch wage tax. Executive directors of (un)listed companies still remain within the scope of Dutch wage tax. Non-executive directors and executive directors are mentioned separately in the Dutch Chamber of Commerce. Excessive severance payment Whether or not a severance payment is considered to be excessive is determined based on a mathematical rule. This is only different in case certain share option rights have been awarded unconditionally in the calendar year before the calendar year preceding the calendar year in which the employment has been terminated. On December 23, 2016, the Supreme Court ruled that the fore mentioned exemption for share option rights also applied in case such rights were not unconditional. To avoid potential constructions with conditional share option rights, this amendment is proposed to limit the exception to unconditional share option rights. Research and development Under existing legislation, R&D withholding agents are required to report the R&D hours, costs and expenses separately for each R&D statement. To reduce the administrative burden for R&D withholding agents, it is proposed to allow one report in respect of all R&D statements that have been issued for a certain calendar year. new perspectives 09/2017 FB17190 Although this publication has been prepared and put together with due care, its wording is broad and the information contained in it is general in nature only. This publication does not offer recommendations for concrete situations. Readers are explicitly discouraged from acting, not acting or making decisions based on the information contained in this publication without having consulted an expert. For an advice geared to your specific situation, please contact BDO Accountants & Belastingadviseurs B.V. or one of its advisers. BDO Accountants & Belastingadviseurs B.V., its affiliated parties and its advisers do not accept liability for any damages resulting from actions undertaken or not undertaken, or decisions made on the basis of the information contained in this publication. BDO is a registered trademark owned by Stichting BDO, a foundation established under Dutch law, having its registered office in Amsterdam (the Netherlands). In this publication BDO is used to indicate the organization which provides professional services in the field of accountancy, tax and advisory under the name BDO. BDO Accountants & Belastingadviseurs B.V. also acts under the trade names: BDO Accountants, BDO Belastingadviseurs, BDO Global Outsourcing, BDO International Tax Services, BDO IT Audit & Security, BDO Tax Consultants. BDO Accountants & Belastingadviseurs B.V. is a member of BDO International Ltd, a UK company limited by guarantee, and forms part of the worldwide network of independent legal entities, each of which provides professional services under the name BDO. BDO is the brand name for the BDO network and for each of the BDO Member Firms.