Dutch Government publishes 2017 Budget Proposal

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1 20 September 2016 Global Tax Alert Dutch Government publishes 2017 Budget Proposal EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 20 September 2016, the Dutch Ministry of Finance issued its tax budget proposals (the Proposals) for fiscal year 2017 and beyond. The Proposals contain several anticipated tax law changes to be effective as of 1 January 2017, including changes to further align the innovation box regime with the recommendations of the Organisation for Economic Co-operation and Development (OECD), and certain changes in the provisions regarding the deductibility of interest for corporate income tax purposes (anti-base erosion rules and leveraged buy-out rules) to counter specific situations that are considered to be abusive or to counter unintended consequences of the current legislation. 1 The Proposals furthermore include a structural extension of the first corporate income tax bracket of 20% up to the first 250,000 of taxable income as from 2018, with gradual further extensions up to the first 350,000 of taxable income, as from In addition, a separate letter was published on 20 September by the Dutch Secretary of Finance in which an announcement was made regarding the proposed alignment of the Dutch dividend withholding tax treatment of profit distributions made by Dutch Cooperatives and limited liability companies (Dutch BVs/NVs). The announcement states that the domestic dividend withholding tax exemption will be expanded to include dividends distributed by a Dutch

2 2 Global Tax Alert company to any shareholders with a qualifying interest 2 that are resident of treaty countries, irrespective of the treaty rate. Furthermore, it is announced that cooperatives that act as holding companies should no longer fall within a separate general exemption for Co-ops, but will be treated the same as limited liability companies (including the expanded domestic exemption discussed above). The proposal will be subject to an internet consultation before it is submitted to Parliament, with the aim of enacting the new legislation ultimately by 1 January The announcement only consists of a legal framework and no draft legislation has actually been published yet. This Alert highlights selected key topics of the Proposals and the above-noted letter. Detailed discussion Anti-base erosion rules The deduction of interest, including related costs and currency exchange results, by a Dutch company on a relatedparty loan is disallowed to the extent that the loan is used to finance capital transactions with related parties, e.g., acquisition of shares, dividend distributions and capital contributions (tainted transactions). A party is considered a related party among others if an entity has at least one third interest in the Dutch party or is (in)directly owned at least one third by an entity that (in)directly owns at least one third interest in the Dutch party. The interest deduction related to tainted transactions might however still be allowed if it can be argued that there are predominantly business reasons for the transaction and the debt financing. The Proposals suggest to expand the definition of a related party to also include a company that is part of a cooperating group of companies holding a total combined interest of at least one third in a Dutch company. Hence, even if the formal requirement of at least a one third interest is not met by a company on a stand-alone basis, that company could still be considered a related party if that company is part of a cooperating group. Whether there is a cooperating group has to be determined based on the facts and circumstances, for which it is relevant whether the investment and financing structure has taken place under a coordinated approach. A specific example of a cooperating group, included in the explanation to the Proposals, is multiple private equity funds that are managed by the same general partner. It is mentioned that a cooperating group shall in any case be deemed present if: The voting power of (and the design of) the investment and interest in the acquired company is in substance vested in a coordinating (legal) person Each shareholder made its investment under similar conditions with a comparable mix of equity and (risk bearing) loans However, as mentioned above, if these conditions are not fulfilled, there still can be a cooperating group depending on the specific facts and circumstances. If enacted, the legislation that expands the definition of related party will enter into force for fiscal years starting on or after 1 January Leveraged buy-out rules As per 1 January 2012, legislation was introduced regarding the disallowance of financial expenses relating to (deemed) excessively leveraged acquisitions. This legislation intends to deny only the interest expense incurred by excessively leveraged Dutch acquisition companies (i.e., if the acquiring company that obtains the debt and is included in the fiscal unity with a Dutch target has no stand-alone profits). If the acquiring company has no stand-alone profits, the deductibility of interest expenses on (related and third party) debt is limited to 60% (reduced by five percentage points annually to 25%) of the purchase price in the first tax year the target company is included in the fiscal unity. In the Proposals, several amendments were announced to address certain loopholes that are perceived as circumventing the effective application of the leveraged buy-out rules. Three specific legislative changes are proposed: 1. Amendment of the mathematical rule that determines the stand-alone profit (the amount of profit that is available for offset against interest expenses) to tackle a specific debt-push down transaction. In the case of such a debt push down transaction, the current mathematical rule would allow a higher amount of interest deduction than would have been possible without the push down transaction. Under the Proposals, this is no longer possible. 2. Introduction of stricter rules that prevent planning by transferring the target company to a new acquisition company within the group to restart the seven year period (and therefore effectively always applying the 60% threshold) by using a new internal acquisition company each year.

3 Global Tax Alert 3 3. The grandfathering rules cannot be applied if a fiscal unity formed before 15 November 2011 did become part of another fiscal unity formed on or after 1 January 2017 or if companies that are part of a fiscal unity formed before 15 November 2011, leave the fiscal unity and together form a new fiscal unity on or after 1 January Similar amendments are proposed to avoid that the leveraged buy-out rules can be circumvented through a legal merger or demerger. If enacted, these amendments will come into force as per the first fiscal year starting on or after 1 January It is important to note that in the explanatory notes to the Proposals, the Dutch Government reconfirmed that the following grandfathering rules remain applicable after the proposed law change: A fiscal unity formed before 15 November 2011 does not fall under the leveraged buy-out rules. The leveraged buy-out rules do not apply to the refinancing of debt obtained by companies in a fiscal unity that is grandfathered. A fiscal unity formed before 15 November 2011 remains grandfathered even in case of a share transfer but under the condition that the fiscal unity remains in place. The Dutch Government further announced that the necessity of the interest limitation rules, like the leveraged buy-out, will be reconsidered as part of the implementation process of the earnings stripping rule as included in the European Union (EU) Anti-Tax Avoidance Directive. Innovation box regime The innovation box regime reduces the Dutch corporate income tax rate on income that is derived from qualifying research and development (R&D). The effective corporate income tax rate of the innovation box is 5% instead of the statutory rate of 25%. The Netherlands needs to amend the innovation box regime due to its commitment to the OECD s Base Erosion and Profit Shifting (BEPS) Action Plan. Earlier in the year, the Dutch Ministry of Finance launched an internet consultation on the proposed amendments to the current Dutch innovation box. The Proposals are largely in line with the draft legislation made public in the internet consultation. 3 The main proposed changes relate to the amendment of the definition of qualifying intellectual property (IP) in line with the OECD definition. As a result of this proposed change, both an R&D declaration and a patent (or other IP assets that are functionally equivalent to patents) are needed in order to qualify for the application of the Dutch innovation box. Another important change is the introduction of the nexusapproach, as recommended by the OECD. This approach limits the application of the innovation box regime if R&D is being outsourced to related parties. The approach links the benefits of the regime with the R&D expenses incurred by the taxpayer. The key changes (positive expansion based on the consultation) included in the Proposals compared to the internet consultation document are the following: For the application of the Dutch innovation box, the definition of qualifying IP assets will be expanded by including the following categories, for which an R&D declaration has been issued: A filed application for a patent or a plant variety right by the taxpayer; In the event the request is denied the granted benefits of the innovation box will be recaptured A supplementary protection certificate issued to the taxpayer by the Netherlands Patent Office (Dutch: Octrooicentrum Nederland) A registered utility model has been granted for the purpose of the protection of the innovation Or An exclusive license for the limited use of the supplementary protection certificate The calculation of the income that can be allocated to the innovation box will be based on the nexus approach. A decree will be published in relation to innovation box rulings entered into by small taxpayers with the Dutch Tax Authorities. Normally, these rulings will be discontinued in the event of a change in legislation. Upon request, small taxpayers are able to continue their ruling after The grandfathering rules have been expanded in order to cover situations in which a patent or a plant variety right has been requested by the taxpayer, but has not been granted yet. Taxpayers should analyze to what extent the draft legislation may impact the application of existing innovation boxes and the application to future R&D income. Furthermore, the changes in categories of qualifying IP assets, like assets for which an exclusive license has been granted or an application for a patent or a plant variety right has been filed, may create opportunities to extend the application of the regime.

4 4 Global Tax Alert Extension first corporate income tax bracket Currently the standard corporate income tax rate is 25%. However, profits up to an amount of 200,000 are taxed against a lower step up rate of 20%. In the Proposals, it is suggested to expand application of the 20% rate to profits up to 250,000 as of 1 January 2018, to 300,000 as of 1 January 2020 and to 350,000 as of 1 January This has to be seen as a first (small) step in the strategy of the Dutch Government to lower the corporate income tax rates in the future, to remain competitive. Dividend withholding tax update Under the current legislation, a distinction is made between cooperatives on one hand and companies with a capital divided into shares (like BVs and NVs) on the other hand. Dividend distributions by BVs and NVs are in principle subject to 15% dividend withholding tax (although reductions and exemptions might be applicable based on treaties, EU-legislation or domestic legislation), while dividend distributions by cooperatives are in principle not subject to dividend withholding tax (except for abusive situations). In the letter that was published on 20 September, it is stated that the intention of the legislator is that this distinction will disappear for certain cooperatives that act as a holding company. It is therefore announced that on a later date, after a public internet consultation, new legislation will be proposed with the aim to enacting it ultimately by 1 January That bill will consist of the following elements: Dividends distributed by cooperatives that act as a holding company will become subject to dividend withholding tax if distributed to a member that owns at least an interest of 5% in the cooperative. Cooperatives that do not act as a holding company will not be subject to dividend withholding tax. It is at the moment not clear when a cooperative will be treated as a holding company if the cooperative has mixed activities (e.g., holding activities and/or finance activities and/or an operational enterprise). In the letter, it is suggested that having proper substance and a genuine enterprise in the cooperative is sufficient to claim the withholding tax exemption no attention is given to the question of whether the enterprise needs to have a certain size relative to the size of the genuine enterprise. The domestic exemptions will be expanded such that no dividend withholding tax will, in principle, be due if the dividend distributing company is part of an entrepreneurial group, the shareholder holds a qualifying interest 4 in the dividend distributing company, and the shareholder is resident of a country that has concluded a tax treaty with the Netherlands. For the domestic exemption, the actual treaty rate and minimum holding thresholds requirements mandated by the treaty should be(come) irrelevant. The abolishment of dividend withholding tax for entrepreneurial groups if the shareholder of the Dutch dividend distributing company is resident of a treaty country is an important step in further strengthening the Dutch fiscal investment climate. Final remarks 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 The announced amendment to the Dutch Dividend Withholding Tax Act is however anticipated to become effective no later than 1 January 2018 and is anticipated to be subject to public consultation first. Endnotes 1. See also EY Global Tax Alert, Dutch Government releases proposed amendments to interest limitation provisions for consultation, dated 23 June A qualifying interest is an interest to which the participation exemption would have applied in the hypothetical situation that the shareholder had been a resident of the Netherlands. This would generally be an interest of 5% in the Dutch company, or a smaller interest if another group company holds an interest of at least 5%. 3. See EY Global Tax Alert, Dutch Government issues consultation on proposed amendments to Dutch innovation box regime, dated 1 June See endnote 1.

5 Global Tax Alert 5 For additional information with respect to this Alert, please contact the following: Ernst & Young Belastingadviseurs LLP, International Tax Services, Amsterdam Danny Oosterhoff danny.oosterhoff@nl.ey.com Reinout Kok reinout.kok@nl.ey.com Dirk Stalenhoef dirk.stalenhoef@nl.ey.com Ernst & Young Belastingadviseurs LLP, International Tax Services, Rotterdam Michiel Swets michiel.swets@nl.ey.com Ronald van den Brekel ronald.van.den.brekel@nl.ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, New York Dirk-Jan Sloof dirkjan.sloof@ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, Chicago Erwin Sieders erwin.sieders@ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, San Jose Sebastiaan Boers sebastiaan.boers1@ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, Beijing Yee Man Tang yeeman.tang@cn.ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, Singapore Barbara Voskamp barbara.voskamp@sg.ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, Sydney Yvette Gorter-Leeuwerik yvette.gorter@au.ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, London Jelger Buitelaar jbuitelaar@uk.ey.com

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