Michel Bilars, Huub Laauwen, Eric Vermeulen and Ivo Vreman
Luminous Tax Matters
Michel Bilars, Huub Laauwen, Eric Vermeulen and Ivo Vreman of Luminous Tax Matters outline some of the plans being considered by the Dutch government to ensure that the economy remains tax competitive
Dutch investment climate
The Netherlands is an important player when it comes to head office location for multinational companies. Next to its geographical location, the competitive and stable tax climate and the relatively high number of talented people are well respected worldwide. Other important factors are the presence of main ports, a proper infrastructure (also digital), political and social stability as well as the international orientation. All these factors together launched the Netherlands into the top 10 of Fortune Global 500 business locations. To put things in perspective, the presence of the Dutch head offices of 30 Fortune 500 companies delivered the country 150,000 jobs in 2006 that contributed €13 billion ($18 billion)to the gross national product.
The Dutch government is well aware of the relevance of a good investment climate. In February 2011 this year a Top Team Head Offices was put in place, with representatives from the business sector, knowledge institutes and government. In June they announced their plan of action. In this plan first of all the most positive aspects of the tax climate for companies were identified, such as the participation exemption, an extensive and efficient tax treaty network, the opportunity to receive advance certainty from the tax administration and last but not least, the absence of an interest and royalty withholding tax. Next to keeping these aspects in place, the team pleads for a more efficient use of tax instruments on matters such as R&D, the tax treatment of participation interest and the taxation of expatriates. The Top Team has mentioned that it is inadvisable at this moment to abolish the Dutch dividend withholding tax. If the participation interest deduction, however, will be limited, a modernisation of the dividend withholding tax regime is proposed.
The report of the Top Team Head Offices has been received positively so far. The spotlight is now on the deputy minister of finance to come up with solid legislative proposals. The first of these proposals are expected in September at the presentation of the Budget 2012 by the Dutch government. At the time of writing, these proposals were not yet public.
Corporate income tax rates
As of January 1 2011 the top rate was cut from 25.5% to 25%. As a consequence, Dutch corporate income tax is levied at these rates:
|€0 – €200,000 ($280,000)
|€200,000 and more
A further reduction of the top rate to 24% may be expected from January 1 2012.
Tax losses can in principle be carried back one year and carried forward nine years. In 2010, an extension of the carry back period from one to three years was introduced as a temporary measure for the years 2009 and 2010. This temporary measure has been extended for one more year. In exchange, the taxpayer is only allowed to set off losses against profits derived in the next six years instead of using the carry forward period of nine years. The maximum amount of losses to be carried back in that case is €10 million per year.
Dutch participation exemption
Under the Dutch participation exemption, certain income from qualifying participations (for example, dividends and capital gains) can be received exempt from corporate income tax by entities subject to this tax. Broadly, since 2010, the exemption can be claimed if these requirements are met:
- At least 5% of the nominal paid-up share capital is held by the entity;
- The (foreign) subsidiaries have a capital divided into shares;
- Neither the (foreign) subsidiaries nor the investor is a qualifying investment institution; and
- The (foreign) subsidiaries are not held as passive portfolio investments ('motive test').
Low taxed passive portfolio participation
In case a participation is considered to be held as a passive portfolio investment the participation exemption may nevertheless still be applicable if the participation is not considered to be a low taxed portfolio participation. This will be determined on the basis of the 'subject to tax test' and the 'free asset test'.
From January 1 2010 the former 'subject to tax test' has been replaced with a requirement that the subsidiary is subject to a 'realistic tax levy' by Dutch tax standards. This is in principle the case if the subsidiary is subject to a profit-based tax with a regular statutory rate of at least 10%. In general, it will no longer be necessary to calculate the effective tax rate according to Dutch tax standards. However, according to the explanatory notes to the law, taxable base differences caused by, for example, tax holidays or deductible dividends may cause a levy to disqualify as a realistic levy for the 'subject to tax' test.
A subsidiary is considered to be held as a passive portfolio investment if the shareholders' only objective is to obtain a financial return that may be expected from normal asset management. If the taxpayer has a mixed motive, the predominant motive is decisive. According to the explanatory notes to the law, a subsidiary is not held as a passive portfolio investment if the subsidiary is engaged in the same line of business as the shareholder. Subsidiaries of top holding companies with an active management function and subsidiaries (engaged in a business) of intermediate holding companies are not considered to be held as passive portfolio investments.
The motive test is deemed not to be met in case more than half of the subsidiary's consolidated assets consist of shareholding(s) of less than 5% or if the predominant function of the subsidiary (together with the function of lower tier subsidiaries) is to act as a passive group finance company.
Innovation box regime
In 2011, the innovation box regime proved to be a valuable tax instrument to attract R&D activities to the Netherlands. The innovation box applies to income derived from intangible fixed assets which have been produced by a company and are patented or for which a so-called R&D statement (S&O-verklaring) has been issued. As a consequence, if the innovation box applies, only five-twentyfifths part of the positive results from the R&D activities will be subject to corporate income tax. Effectively this will result in a 5% corporate income tax rate. Losses which are related to the exploitation of the intangible fixed assets do not fall within the scope of the innovation box. Losses can be offset against the normal tax rate of 25% at maximum.
Not only patented intangible fixed assets qualify for the innovation box but also intangible fixed assets for which a so-called R&D statement has been issued. In the Act on the Promotion of Research and Development (ARPD) it is stated which activities are qualifying for such R&D statement. These activities are:
- The development of technically new physical products, physical production processes, software or components thereof;
- Technical-scientific research seeking to explain phenomena in fields such as physics, chemistry, biotechnology, production technology and information and communication technology;
- Analysis of the technical feasibility of an R&D project;
- Technical research aimed at enhancing your physical production process or software.
During the legislative process, the deputy minister of finance declared that the R&D related activities do not have to be entirely performed by the Dutch company applying for the innovation box. In the situation in which a minority of the R&D-related activities are outsourced, the innovation box could still be applicable. In this respect, it should not matter whether these activities are outsourced outside the Netherlands or not.
As of January 2011, the Innovation Box can also be applied to income from so-called patent-assets (octrooi-activa) in the years during which the patent application is still pending. Before, the Innovation Box could only be applied where a patent had been granted to the taxpayer and therefore not on income that was realised in the period the patent was requested for, but not yet granted to the taxpayer.
Fiscal unity with EU companies?
On June 16 2011, the European Commission announced that it has sent the Netherlands a reasoned opinion (second stage of the infringement procedure under article 258 of the Treaty on the Functioning of the EU (TFEU)) requesting the Netherlands amend its fiscal unity regime.
Under the fiscal unity legislation, all the companies of the fiscal unity are required to be resident in the Netherlands. In practice, this means that (sister-) companies which have their parent company in another EU member state cannot benefit from the fiscal unity regime. The Commission regards this to be contrary to EU law and does not see any possible justification for these restrictions. In this context, the Commission referred to the decision of the European Court of Justice (ECJ) in Papillon (C-418/07), in which the court ruled that a French parent company and a French sub-subsidiary company should be able to form a fiscal unity, though the intermediate subsidiary is in another member state. Therefore, the Commission considers that the Dutch legislation on fiscal unities is contrary to the freedom of establishment provided in articles 49 and 54 of the Treaty on the Functioning of the EU (TFEU)) and articles 31 and 34 of the EEA Agreement.
If the Netherlands does not respond satisfactorily to the reasoned opinion, the matter may be referred to the ECJ.
Some important changes to be expected in 2012
In April 2011, the deputy minister of finance presented the so-called Tax Agenda to Dutch Parliament. This agenda sets out the Cabinet's position on changes to the tax system. Though the Budget 2012 was not issued at the time of writing this article, based on the agenda, these amendments of the Dutch Corporate Income Tax Act are to be expected:
- A further limitation on the deduction of interest for holding companies that acquire a company and form a fiscal unity with the newly acquired company. This amendment is designed to ensure that the interest on the loan to enable the acquisition could not be offset against the profits of the acquired company. However, up to €500,000 of net interest paid would remain deductible and the disallowance of a deduction would apply only to interest on debt more than a 1,5:1 debt-to-equity ratio. This new limitation of interest deduction would mean that third-party interest on loans which are used to finance a transfer of a company from a third party may also be non-deductible within a fiscal unity.
- The tax regime applying to a permanent establishment (PE) would be converted into a tax-exempt regime similar to the Dutch participation exemption. As a result, annual losses of a foreign PE can no longer be directly offset against the profits of the company of which the PE is a part. An exception would apply in the case of definitive losses, that is, losses arising where the PE is liquidated or transferred to a third party. Such losses would be available for offset.
- The so called "Substantial Interest" rules are likely to change. Under these rules a foreign company owning 5% or more of the nominal paid-up share capital of a Dutch company can, under certain circumstances, be subject to Dutch corporate income tax as a non-resident taxpayer (based on article 17, paragraph 3, sub b Dutch Corporate Income Tax Act 1969) unless they are part of the assets of an active business enterprise of the non-resident shareholder.
Michel Bilars (email@example.com)
Huub Laauwen (firstname.lastname@example.org)
Eric Vermeulen (email@example.com)
Ivo Vreman (firstname.lastname@example.org)