Tax plans 2021

Today, the Dutch Ministry of Finance published the tax plans for the year 2021. These include relevant changes for multinational companies and (real estate) investors.

The tax package contains various tax proposals, announcements and reports. We discuss the key points. Where useful, we indicate the practical implications and actions for our clients. For more details on the proposed rules and their effects, please contact us.

OUTLINE

The following legislative proposals are included in the package:

  1. Corporate income tax rate change
  2. Innovation box rate change
  3. F/x results in article 10a
  4. Tightening of liquidation loss rules
  5. Corona measures
  6. Real estate transfer tax changes

The following measures are considered by the Dutch government (and are not certain). The first two measures could be added to the tax plans 2021; legislative proposals for the last three measures are not expected before Spring 2021:

  1. Investment credit
  2. Loss compensation rules
  3. Arm’s length principle / informal capital
  4. Equity deduction & earnings stripping rule
  5. Sofina changes

In addition, the government publishes a reaction on the recent report on the taxation of multinationals and a letter regarding a new group regime for CIT purposes. We do not comment in detail on these publications. One item we would like to highlight relates to holding companies without substance. Potential changes have been reviewed. The outcome of this review is that information exchange is a potential measure considered towards the future (2022). Amending the participation exemption is considered ineffective and complex.

The tax package does not include an update on the dividend withholding exit tax proposal or the legal entity classification rules.

KEY LEGISLATIVE PROPOSALS

1.      Corporate income tax rate

The Dutch headline CIT rate will remain at 25%. The step-up rate will amount to 15%. The new CIT rate will apply per 1 January 2021.

The planned decrease of the headline CIT rate to 21.7%, as enacted last year, will therefore be reversed. The decrease in the step-up rate from 16.5% to 15% per 2021 was already enacted. New is that the step-up profits increase from EUR 200k to EUR 245k in 2021 and to EUR 395k in 2022, a measure from which all businesses may benefit.

This measure is relevant for the CIT burden in future years as well as for the valuation of deferred tax assets and liabilities.

2.      Innovation box rate

The innovation box rate will increase from 7% to 9% for book years starting on or after 1 January 2021.

3.      F/x results in article 10a

The government proposes to eliminate the possibility that the anti-base erosion interest deduction rule (article 10a) results in a reduction of taxable profits, e.g. due to currency gains.

Article 10a of the Dutch CIT Act denies the deduction of interest expenses and related costs on intercompany debts that were entered into to fund certain tainted transactions (such as acquisitions, capital contributions or dividend distributions). Pursuant to Supreme Court jurisprudence, currency gains and losses on article 10a-debts are fully tax exempt. To the extent the sum of interest expenses and other results on a 10a-debt is positive (e.g. due to currency gains), this amount will be excluded from the application of article 10a.

The change would apply for book years starting on or after 1 January 2021. It is highly recommended to review hidden currency gains on article 10a-debts and realize these results before the end of the year. This may be done in various ways.

4.      Liquidation losses

In line with earlier announcements, the liquidation loss regime will be tightened for non-EU subsidiaries and permanent establishments (“PEs”) for book years starting on or after 1 January 2021.

The liquidation loss regime enables Dutch taxpayers to take into account a tax deductible loss in case a subsidiary or PE is liquidated, in case the liquidation results in a loss (the investment exceeded the liquidation proceeds). The possibility to claim a deductible liquidation loss forms an exception to the participation and object exemption.

Under the proposal, liquidation losses up to and including EUR 5m continue to be deductible (only the excess is non-deductible).

Furthermore, liquidation losses related to subsidiaries and PEs in the EU/EER or in an associated state may be deductible in excess of EUR 5m. In case of the liquidation of a subsidiary, additionally, the taxpayer should have a controlling interest in the liquidated entity.

A liquidation should in principle be completed in the third year after the discontinuation decision. If certain conditions are met, the 3 year term can be extended.

To the extent a company has any non-EU subsidiaries or PEs with discontinued operations, it could be beneficial to liquidate the entity before the end of the year.

5.      Corona measures

The Dutch government will allow companies to form a corona tax reserve in the year 2019. The reserve amounts to the expected 2020 loss as a result of the corona crisis and is maximized at the 2019 fiscal profit. The reserve will be released in the following year (resulting effectively in a profit shift, which may have effects on loss compensation and earnings stripping rules).

As a result of the corona tax reserve, a refund of corporate income tax relating to 2019 may be obtained quickly. This creates a liquidity advantage.

6.      Real estate transfer tax rate

The general RETT rate will increase from 6% to 8%. Only acquisitions of residential property that will be used as the primary residency of the buyer will remain subject to a 2% RETT rate.

These changes apply as of 1 January 2021 and may make it attractive to close real estate transactions before 1 January 2021. If this is not possible with current transactions, alternative transfer methods can be considered.

The RETT rate increase puts pressure to close Dutch real estate deals before the end of 2020.

STILL TO COME (possibly)

7.      Investment credit (2021)

The government announces that possibly, a jobs-related investment credit “BIK” will be introduced per 2021. The BIK allows entrepreneurs to deduct a percentage of the investments made from the wage tax liability. Albeit the specific measure will be a crisis measure, the government intends to use the budget for the reduction of employer’s costs also going forward.

The investment credit is a welcome measure for companies that contribute to the Dutch economy by creating jobs.

8.      Loss compensation rules

The Dutch government will propose the following changes per 2022 to the loss relief rules:

  • Indefinite carry forward term (currently, the term is 6 years);
  • Limit the compensation of losses exceeding EUR 1m to 50% of the taxable profits in a year. Profits up to EUR 1m remain fully compensable.

Taxpayers with significant tax losses (> EUR 1m) should review the utilization of tax losses.

9.      Arm’s length principle / informal capital

The Dutch government announces to publish a bill to amend the Dutch arm’s length principle. The bill will tighten the so-called “informal capital” concept. Informal capital may arise in case of downward transfer pricing corrections. In international structures, the concept of informal capital sometimes results in a mismatch. Anti-hybrid rules oftentimes do not apply to such a mismatch. The government intends to limit the downward adjustment in the Netherlands if a related party in another country is not included correspondingly, or only for a lower amount.

It is expected that the changes will not apply before 2022. In case a taxpayer reports a deduction against informal capital, the structure should be reviewed and possibly amended.

10.  Equity deduction & earnings stripping

The government wishes to better align the treatment of debt and equity for tax purposes. It has announced to consider introducing two measures on a budget-neutral basis:

  • An equity deduction for capital financing; and
  • Tightening of the earnings stripping rule.

Given that these measures would have far-reaching effects, the government wishes to analyze the desirability and the form of this option further.

11.  Sofina changes (per 2022)

The government plans to limit the creditability of dividend withholding tax for Dutch CIT taxpayers to the amount of CIT payable in a given year. This means that it would not be possible any longer to obtain a refund of withholding tax if the recipient is in a loss-making position. There will be a carry forward possibility for withholding tax that would not be creditable further to this new limitation. This limitation will be implemented as of 2022.

These changes relate to the European Court of Justice ruling Sofina (C-575/17). Until the law change is enacted, the government will publish a decree with the conditions under which dividend withholding tax can be credited or reclaimed. This decree relates mainly to non-Dutch shareholders that currently cannot credit Dutch dividend withholding tax e.g. due to losses.