The main changes for companies are:
Below we will briefly elaborate on the proposed changes.
It is noted that the new legislation is still only a proposal to be approved off by Dutch Parliament. The proposed legislation may be changed in the course of the legislative process. We will keep you informed on relevant developments.
If in the meantime you have any questions with regard to the new legislation, or if you wish to be advised on the way the new rules may affect your Dutch companies and possible measurers to avoid a negative impact of the new rules, please feel free to contact us via e-mail or call us at our offices in Amsterdam (+31 20 5709440) or Rotterdam (+31 10 2010466). Of course you are also welcome to visit our office.
Under the current Dutch tax regime, in essence no general limitations apply for the tax deduction of interest expenses incurred on a loan to fund the acquisition of shares in a Dutch company.
Dutch tax law does already provide for limitations of interest deduction (i.e. the general Thin Capitalization Ratio of 3:1 and the specific exclusion of interest deduction on artificially created loans form group companies), but this proposed limitation does also apply to third party loans and should be applied in addition to the existing limitations.
The proposed measure may limit the deduction of the interest expense on excessive loans obtained by a Dutch company that acquires a Dutch target company and subsequently will form a fiscal unity or legally merge (or apply a demerger) with the acquired Dutch company. This is currently the standard route to push down funding debt to the acquired company.
Under the new rules the interest expense on loans obtained to finance (e.g. group loans and third party loans) the acquisition will in principle be deductible against the stand-alone taxable income of the acquirer only, but no limitation will apply if (safe harbor):
On the basis of the current proposals, this new provision will only apply to acquisitions effected on or after 1 January 2012. Structures implemented before that date (e.g. acquisition and subsequent fiscal unity/merger/demerger) will be grandfathered.
The new limitation for interest deduction will only have an impact for future acquisitions in The Netherlands which generate € 1 million interest expense per year; let’s say any acquisition with a value of € 20 million or more (presuming a 5% interest rate applies). Whilst under the current regime is was generally possible to offset the interest expenses on funding loans obtained from non-related parties against the operational profits of the target company (through either the creation of a fiscal unity, a merger or demerger), this will in the future only be possible within the parameters provided. For major acquisitions (let’ say bigger than € 20 million) various alternative exist to avoid the non-deductibility of interest expenses.
The first, and most logical, alternative may be to inject extra capital into the Dutch holding company and to allocate the excessive debt at other levels in the Group. But it may also be possible to agree with a form of equity funding by a financial institution thereby neutralizing the tax impact of interest expenses altogether and effectuate a lower rate of funding. And finally, a (partial) asset deal may become a preferred option as the new limitations do not apply to straightforward asset deals. Which option is the best way forward will be dependent on the details of the acquisition and should be looked at on case by case basis.
Under the current regime a Dutch BV which has a permanent establishment outside The Netherlands (“PE”) must include the profits of the PE in its Dutch taxable profits (calculated on the basis of Dutch tax standards) and subsequently claim an exemption for the profits that can be allocated to the foreign PE.
The method prescribed by Dutch tax law (and most Dutch tax treaties) has as an important side effect that losses of the foreign PE reduce the Dutch taxable base. There is a claw back provision if the PE becomes profitable in later years, but in any case the tax payer can enjoy an important cash flow advantage in the start up phase of the PE. If the PE would stay in a loss position, the advantage of tax deduction in The Netherlands would be final. Another side effect of the current Dutch rules for calculation the exemption for foreign PE results are that taxable mismatches could occur (like translation results) because the exemption was to be calculated on the basis of Dutch tax standards, whilst the PE is subject to tax in the other country on the basis of the tax laws of that country (and calculated in the currency of that country).
Because under the current system foreign losses can be deducted immediately by the Dutch head office, this system is more beneficial than for instance the application of the participation exemption, because under the participation exemption the losses of a subsidiary are non-deductible (at least until liquidation). Therefore, there is currently a mismatch between the tax treatment of losses of a foreign PE in comparison to the tax treatment of losses of a foreign subsidiary.
The idea behind this proposal is that a permanent establishment and a subsidiary should to the extent possible be treated equally. For this reason an “object exemption” is proposed.
The object exemption will be applicable for an active foreign permanent establishment (branch). The object exemption means that profit and losses are exempted from the Dutch taxable base, similar like under the participation exemption regime. This implies that foreign profits in The Netherlands will in essence no longer be subject to tax and that losses of a PE are no longer deductible (beware true “liquidation” losses).
The new regulations of the object exemption consist of three elements:
We note that there are transitional rules for example how to deal with accumulated tax losses from an existing PE.
The new regime is bound to have the most material impact for Dutch companies which generate Dutch taxable profits.It were they who could utilize (start up) losses from a foreign PE by offsetting them against their Dutch taxable profits. This benefit will now go away, so that these companies will have to look for other ways to finance their foreign start up losses.
The most logical alternative seems to be increase the equity funding of a foreign PE by the Dutch head office and with that reduce the risk on PE losses altogether. This would still leave the possibility to apply some of the alternative funding mechanisms which we mentioned above (for the avoidance of the proposed limitation of interest deduction on group loans), but the essential cash advantage of doing business through a foreign PE is gone.
But it is surely not all bad news, in particular not for the international practice. The introduction of an object exemption implies a far easier mechanism to apply in daily practice (a one amount exemption instead of a very complicated an technical calculation of allocable PE profits according to Dutch tax standards) whereby also the phenomena of disturbing taxable translation results will belong to the past. More over, a very attractive feature of the proposed object exemption is that it also applies to PE’s in non-treaty countries without a subject to tax requirements. We can imagine that in particular the offshore and Oil & Gas business can benefit from this liberalization.
It is proposed to align the tax liability of foreign foundations and associations with the tax liability of domestic foundations and associations. As such, foreign foundations and associations comparable with domestic foundations and associations should be subject to tax, insofar they carry out a business. In case they do not carry out a business, the tax liability of such entities in the Netherlands will be limited due to the proposals.
Under certain conditions foreign entities (e.g. non-Dutch resident entities) that hold a substantial interest (i.e. an interest of at least 5%) in a Dutch resident company can be subject to Dutch corporate income tax for the income derived from such a substantial interest. This is the case if the interest cannot be allocated to the equity of an active enterprise of the foreign shareholder.
It has been proposed to make the levy of this tax subject to the condition that the shares in the Dutch company are not held by the foreign shareholder in order to avoid the levy of Dutch personal income tax and/or Dutch dividend withholding tax.
Currently a Dutch coop is not subject to Dutch dividend tax. Under the proposed legislation, dividend withholding tax will be due if the Coop is solely interposed with the objective to avoid Dutch dividend withholding tax and/or foreign tax.
In the tax plan 2012 it has been proposed to introduce a R&D deduction. In the tax plan 2012 no further details have been proposed. It is mentioned that the rules for a R&D deduction will be outlined in an additional plan which is to be introduced in the next Parliamentary phase.
On 7 October 2011 an additional plan has been introduced. In this plan also the R&D deduction has been explained in more detail. It is envisaged to introduce a R&D deduction for other direct costs of R&D (not wage costs). This measure is a separate measure and will be applicable next to the current R&D incentives (e.g. R&D deduction rules in the wage tax and the current patent box in the corporate income tax).
The R&D deduction will be 40% (in 2012). This will effectively lead to a R&D deduction of 10% in 2012 (40% fo the top rate of 25%).
This can be illustrated as follows:
If a company has other direct costs of R&D for an amount of € 100,000 in 2012, the R&D deduction will be € 40,000. With a corporate income tax rate of 25%, the effective R&D tax deduction will be € 10,000 (e.g. 25% x € 40,000; and therefore, this is an effective deduction of 10% of the other direct R&D costs).