September 2017 Tax alert The Netherlands Budget 2018 On September 19, 2017 the Dutch government released its Budget 2018 containing the Tax Plan 2018 which includes certain amendments to Dutch tax law. After the general elections held on 15 March 2017, the Netherlands is still run by a caretaker government composed of the Liberal Party and the Social Democrats. Four parties (Liberal Party, Christian Democrats, Liberal Democrats and the Christian Union) have been negotiating the formation of a new coalition government for quite some time and the general expectation is that a coalition agreement will be concluded in the next weeks, followed by the installation of the new government by King Willem Alexander. The Budget and Tax Plan 2018 that was released today in the interregnum after the general elections is a reflection of the limited political leeway for the care-taker government; it is not controversial and also not very ambitious. Important political issues and potentially controversial choices are carefully avoided and left for the new government to deal with. As a result, there are various important tax policy issues that are not addressed in the Tax Plan 2018 but that will be high on the agenda of the new government. These include the implementation of the ATAD I package pursuant to which earning stripping measures and Controlled Foreign Company rules will be introduced in the Corporate Income Tax Act (a legislative proposal is announced for the beginning of 2018). Later this year, a bill will be submitted to Parliament to ratify the Multilateral Convention implementing tax treaty measures to prevent Base Erosion and Profit Shifting. In addition, it is possible (but not yet certain) that the new government may reduce the corporate income tax rate which is currently 25%. Furthermore, the introduction of a simpler flat personal income tax with two rates is being considered and the 30% facility for expatriates could be curtailed. The Tax Plan 2018 contains a number of legislative proposals (hereafter also referred to as the Bill") which are summarized below. The government will discuss the Bill in the coming weeks in parliament. Further to these discussions, some elements of the Tax Plan 2018 may change. Most proposals will become effective on January 1, 2018. Tax alert The Netherlands Budget 2018 Page 1 of 7
1 Corporate Income Tax & Dividend withholding tax Dividend withholding tax - Dutch holding cooperatives subject to Dutch dividend withholding tax Profit distributions made by a Dutch cooperative to its members are currently not subject to Dutch dividend withholding tax, unless the structure is considered abusive. The Bill introduces an obligation for so called holding cooperatives to withhold Dutch dividend withholding tax at a rate of 15% on profit distributions to qualifying members. Under the Bill, a cooperative qualifies as a holding cooperative in case the activities of the cooperative usually consist for 70% or more of (i) owning shareholdings that qualify for the Dutch participation exemption regime or (ii) financing related entities. A qualifying member is a member that is entitled to at least 5% of the annual profits, or 5% of the liquidation proceeds, of the holding cooperative. Holding cooperatives and its qualifying members may, however, be eligible for the expanded exemption in tax treaty situations as described hereafter. As usual, application of bilateral tax treaties may also reduce this domestic withholding tax rate to a lower rate. Dividend withholding tax - The EU/Netherlands withholding tax exemption expanded to corporate shareholders in tax treaty jurisdictions Dividend distributions made by a Dutch company (such as a BV or NV) are currently typically exempt from Dutch dividend withholding tax if the recipient is a corporate tax resident in the Netherlands or a member state of the European Economic Area (including the European Union), and in some cases where a bilateral tax treaty results in an exemption. For many cases the Bill expands this exemption to corporate shareholders that are resident in a country with which the Netherlands has concluded a tax treaty that contains a dividend income clause. It is important to note that even if the dividend income clause does not provide for a 0% rate, the exemption will nevertheless apply in full based on the mere fact that a tax treaty is in place. The proposed rules principally apply only to corporate shareholders that are resident in a tax treaty jurisdiction, although specific relief is available for hybrid entities that receive dividends from a Dutch company, provided certain conditions are satisfied. The proposed exemption is however rejected in case (i) the foreign shareholder holds the interest in the Dutch company with a purpose to mitigate the levy of Dutch taxation and (ii) an artificial arrangement is in place. These two anti abuse tests already exist in Dutch tax law. Similar to the existing tests, the proposed rules should not result in the levy of Dutch dividend withholding tax in case of dividend distributions by a Dutch taxpayer to (i) any shareholders with an active business enterprise or (ii) intermediate holding companies that (indirectly) link two active business enterprises, provided the intermediate holding company has relevant substance in its country of establishment. Tax alert The Netherlands Budget 2018 Page 2 of 7
The relevant substance proposed in the Bill consists of the existing minimum Dutch substance requirements for foreign intermediate holding companies, but now expanded with the following requirements: (i) the intermediate holding company incurs at least 100,000 (or the equivalent thereof in a different currency) in wage costs that forms the remuneration for the linking role activities of the intermediate holding company and (ii) the intermediate holding company has an office space available with the customary facilities for the performance of the linking role activities. Foreign intermediate holding companies have until 1 April 2018 to satisfy the new substance conditions. Corporate Income Tax - Relaxation of the Dutch foreign substantial shareholder regime Under current law, non-resident entities that own a substantial interest in a Dutch company (i.e. 5% or more) are in principle subject to Dutch corporate income tax as a foreign substantial interest holder with respect to their substantial interest in case (i) the foreign shareholder holds the interest in the Dutch company to mitigate the levy of Dutch dividend withholding tax and/or Dutch personal income tax and (ii) an artificial arrangement is in place. The Bill limits the first test, on the basis of which the test now only focusses on whether Dutch personal income tax is avoided. Corporate Income Tax - Interest deductibility on indirect 3rd party debt Interest expenses on debts to related parties (at least 33% direct/indirect shareholding) that relate to certain "tainted transactions" (i.e. acquisitions of subsidiaries, capital contributions or dividend distributions) that can be indirectly linked to a third party debt (back-to-back loans), will no longer be automatically deductible. For such back-to-back third party debt, the interest will only be deductible if the taxpayer demonstrates that such transaction is predominantly entered into for business reasons. Although the proposal does not specifically address this topic, the proposed change could also adversely affect direct third party loans for which a group company provided a guarantee. Corporate Income Tax - Losses on loans to group companies To prevent double loss deduction schemes, the deductibility of losses on loans to related parties will be further restricted in specific cases. In general, if a taxpayer incurs a loss on a loan to a related party, such loss will no longer be deductible if it is indirectly related to a loss which arose at the level of a company that is (or was) included in a Dutch fiscal unity with the taxpayer. Corporate Income Tax - Losses on the liquidation of subsidiaries The Dutch legislature has taken the opportunity to repair a flaw in the wording of the socalled liquidation loss rule, which under circumstances allows Dutch corporate income taxpayers to deduct losses related to the liquidation of a subsidiary that qualifies for the participation exemption. Under the current rule and due to the wording of the law, a liquidation loss could be established too high in situations where a company would no longer take part in a fiscal unity for Dutch corporate income tax purposes. This has now been repaired. Tax alert The Netherlands Budget 2018 Page 3 of 7
Corporate Income Tax - Expansion of anti-abuse rule related to foreign permanent establishments The Bill expands an existing anti-abuse rule relating to the calculation of profits of a fiscal unity that has a foreign permanent establishment. Due to the fiscal consolidation provided by the Dutch fiscal unity regime, intercompany transactions between fiscal unity companies are in principle eliminated. Payments of one fiscal unity company to another that are attributable to a foreign permanent establishment of a fiscal unity company can create a mismatch, as such transactions are visible in the permanent establishment jurisdiction. For interest payments an anti-abuse rule countering this possibility is already in force. Based on the Bill, this anti-abuse rule will effectively also apply to other intra -fiscal unity payments such as royalty payments, lease payments and rental payments. Tax alert The Netherlands Budget 2018 Page 4 of 7
2 VAT Narrower scope of 6% VAT rate on medicine Under the Dutch VAT Act, certain pharmaceutical products - such as products that qualify as a medicine under the Dutch Medicine Act- are subject to the 6% reduced VAT rate. Under the Dutch Medicine Act, the qualification as medicine i.a. depends on whether a product is presented to consumers as medicine. In 2016, the Dutch Supreme Court has ruled that toothpastes that contain sodium fluoride as well as sunscreens with UVA and UVB filters can qualify as medicine for the purpose of the 6% reduced VAT rate. The question arose whether this judgment opened the doors for other products such as cosmetic products to fall inside the scope of the 6% reduced VAT rate. As from 1 January 2018, the scope of the VAT reduced rate for medicine will be limited to products for which a (parallel) trade license has been granted by the Dutch Medicine Authority or to products that are explicitly exempt from such a license on the basis of the Dutch Medicines Act. The envisaged aim of this measure is to ensure that the 6% reduced VAT rate only applies to products that are considered medicine according to societal views. Adjustment of VAT rate provisions in relation to sea vessels The definition of sea vessels for the purpose of the Dutch VAT zero rate provisions will be adjusted in order to be in line with the EU VAT Directive. Following feedback from the European Commission on the definition applied by the Netherlands, it will now also be a requirement that sea vessels are actually used for navigation on high seas to qualify for the Dutch VAT zero rate provisions. Liability for VAT on foreclosure sales A specific liability will be introduced for the VAT due on foreclosure sales. The party triggering such sale (like a mortgagee, pawnee or someone with an enforcement order) will be liable for the VAT on such sale when this amount is not received by the tax authorities in time. Agriculture: VAT Flat Rate Scheme Abolished The current - optional - VAT flat rate regime for the agricultural sector will be abolished as of 2018. Transitional measures will apply. Tax alert The Netherlands Budget 2018 Page 5 of 7
3 Wage Tax Abolishment deemed employment relationship for non-executive board member listed company It is proposed to abolish the deemed employment relationship for non-executive board members of listed companies. This is in line with the legislation previously introduced for supervisory board members in 2017. Consequently, it will not be necessary to withhold, report and remit wage tax for these board members as from 1 January 2018. As from that date these board members will be treated similar to a supervisory board member in a two tier board. Legislation excessive severance payment adjusted It is proposed to adjust the legislation regarding the excessive severance payment scheme. The Netherlands Supreme Court ruled in December 2016 that unconditional stock options granted in the calendar year prior to the year of termination should be exempt from the calculation to determine the excessive severance payment. The proposed adjustments will prevent this as a result of which these stock options should be included in the calculation. New arrangement for issuing stock options by startups A new scheme will apply for issuing stock options to employees of startups. This was already included in the Tax Plan 2017 and will become effective as of 1 January 2018. Since startups often do not have enough opportunities to pay more salary, this scheme will provide for more flexibility and support. If a stock option right is granted to an employee, the employee is entitled to wage upon exercising or alienating that right. Insofar the gain for the employee does not exceed EUR 50,000, only 75% of that gain will be taxable (thus exempting 25%). The exemption amounts to a maximum of EUR 12,500. Stock options granted in 2017 may also be part of the new exemption from 1 January 2018. Tax alert The Netherlands Budget 2018 Page 6 of 7
4 General General - Voluntary disclosure regime tightened Currently, a voluntary disclosure within two years after filing an incorrect tax return could prevent penalties and other punitive sanctions. Furthermore, voluntary disclosure later than two years after filing the incorrect tax return could result in a limitation of the penalties due. As part of the Tax Plan 2018 the voluntary disclosure regime will be repealed as per 1 January 2018. Therefore, voluntary disclosure within the first two years after filing the incorrect tax return will no longer prevent penalties and/or punitive sanctions. However, voluntary disclosure is still considered as a mitigating circumstance, therefore it could still result in a limitation of the penalties for all relevant years. With regard to tax returns with a filing deadline prior to 1 January 2018, the current legislation remains applicable. This means that, provided that no extension for filing has been provided, the old regime will be applicable for tax returns covering any tax years up to and including the 2016 calendar year. Dutch filing exemption for groups that voluntarily file a Country-by-Country Report The 2017 budget proposal includes legislation on the voluntarily filing of Country-by- Country Reports outside the Netherlands and the associated filing exemptions that may apply to Dutch tax residents. The Dutch Country-by-Country Reporting ( CbCR ) regulations require Multinational Groups ( Groups ) that generated consolidated revenues of EUR 750 million or more in the preceding year to make the CbCR available to the Dutch Tax Authorities. These CbCR related reporting requirements are applicable for years that started on or after January 1, 2016. The Dutch regulations on CbCR are in line with the recommendations published by the Organisation of Economic Co-operation and Development ( OECD ). However, in several countries, the CbCR reporting requirements have been implemented differently, which may lead to a so called gap year. Considering that some countries adopted different implementation and / or CbCR filing dates, a mismatch in CbCR filing requirements may exist. The proposed legislation contained in art. 34f and 34g of the Dutch Corporate Income Tax Act ( CITA ) therefore effectively allows that - under specific conditions - Dutch tax residents are exempt from CbCR filing obligations in the Netherlands if the Group has voluntarily filed a CbCR for the gap year and this CbCR will be made available through the voluntarily filed CbCR. We would be happy to provide you with further information or discuss any development that could be relevant to your business. This Tax Alert has been prepared for general information purposes only. The information presented is not legal advice, is not to be acted on as such, and may be subject to change without notice. Disclaimer Our Organization cannot be held liable for any inaccuracies and their consequences. Tax alert The Netherlands Budget 2018 Page 7 of 7