Dutch Closing Door on Popular Corporate Tax Breaks (Corrected)

Sept. 18, 2019, 5:01 AM; Updated: Sept. 19, 2019, 2:58 PM

The Netherlands is taking another swipe at companies that take advantage of its tax laws to lower or avoid taxes.

It is proposing two measures intended to make sure multinationals pay enough tax, and pay some of it in the Netherlands, as part of its 2020 budget plans.

One measure would withhold tax on interest and royalties on payments from or through the Netherlands to low-tax and tax-haven jurisdictions, as designated by the government. Another measure would target a provision that helped some Dutch-based multinationals pay zero corporate income tax in the Netherlands by deducting foreign losses at home.

The government’s announcement follows a public outcry over prominent Dutch multinationals Royal Dutch Shell Plc and Koninklijke Philips NV Philips admitting to paying no corporate income tax in the Netherlands.

The Netherlands has sought to fight criticism that it enables the strategies companies use to lower their tax bills. In a 2018 report, the European Commission pointed to the Netherlands’ lack of withholding tax on royalties and interest payments as one of the factors that “may facilitate aggressive tax planning.”

And a report from the International Monetary Fund this month on “phantom” foreign direct investment—funds routed through “empty corporate shells”—identified the Netherlands as one of the biggest culprits. “Interestingly, a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half,” the report said.

“Internationally there has been a lot of pressure on the Netherlands,” said Arnold Merkies, coordinator of Tax Justice Netherlands. “So the Netherlands has to do something to change its image abroad.”

“Companies must contribute more fairly in paying for our public services,’' Menno Snel, deputy finance minister, said in a statement.

The government’s announcements on both the withholding tax and liquidation loss rules are part of the Netherlands’ broader efforts to crack down on tax avoidance, said Bart le Blanc, a partner at Norton Rose Fulbright LLP in Amsterdam.

“The withholding tax is certainly a response to public and political pressure on the government,” he said. “The same goes for the liquidation loss rules, which pressure was triggered by parliamentary discussions on how much” corporate tax multinationals were paying in the Netherlands.

“The aim of the government is still two-fold: real businesses should be allowed to use the Dutch tax system,” without allowing “flow-through” entities and with amended liquidation loss rules, he added.

The Sept. 17 budget announcement also included plans to delay a planned cut to corporate income tax rates.

Limiting Deductions

The announcement that the government will pull back at least some of the deductions that provided tax relief for losses could mean companies that have paid little or nothing will end up paying tax in the country.

The provision in Dutch law known as the liquidation loss scheme has allowed the head offices of multinational corporations to offset losses arising from the liquidation of overseas subsidiaries against their taxable profits in the Netherlands under certain circumstances.

Up to now, the provision has allowed multinationals to pay little or no corporate tax in the country. Alan McLean, executive vice president for taxation at Shell, and Hans de Jong, president of Philips in the Netherlands, told lawmakers May 29 that they didn’t pay tax in the Netherlands in part because of the regime.

The government is acting in the face of domestic political pressure over the multinationals’ Dutch corporate tax payments, Merkies said. “To change its image it’s in the interest of the government to give the impression it’s acting tough on tax avoidance.”

In its 2020 budget plans the government said it was planning to limit use of the liquidation loss, but it didn’t provide details of how the rule would change. It expects the move to yield 265 million euros ($292 million) for treasury coffers.

Targeting Tax Havens

The provision known as the conditional withholding tax, which would apply starting in 2021, is aimed at companies using the Netherlands as a “conduit to low-tax jurisdictions” and shifting profits from the Netherlands to low-tax jurisdictions, Snel wrote in a letter to Parliament Sept. 17, the day the budget was released. The withholding rate will be 21.7%, matching the corporate income tax rate in 2021.

Each year about 22 billion euros goes through the Netherlands to 21 countries the Dutch government has identified in a list of low-tax jurisdictions, the government said in its budget plan.

The intention of the tax is not to raise revenue but to change behavior, said Robert Van der Jagt, chair of KPMG’s EU Tax Center. “It is expected by the Dutch government that the withholding tax will have a prohibitive effect, as a result of which the interest and royalty payments concerned will be entirely shifted or cease to exist,” he said. “The budgetary impact of this bill is therefore estimated to be negligible.”

The measures could affect Dutch or foreign companies that have entities in one of the listed countries.

“This will affect both Dutch companies who stash money offshore but will also touch financial flows rerouted through the Netherlands by foreign companies,” said Peter Kavelaars, of counsel at Deloitte. “The companies being targeted here are the ones sitting on a pile of money that they temporarily stash in a low-tax jurisdiction.”

The measure also contains an anti-abuse provision: The withholding tax can apply to a company’s related-party payments to recipients not in a low-tax jurisdiction, if “one of the main purposes is avoiding the levy of taxes” and the structure is considered artificial, said Roeland Bavinck, an associate at Baker & McKenzie in Amsterdam.

The new measures may not ultimately affect many companies, several tax advisers said, since many companies have already structured out of blacklist jurisdictions in response to changing international tax norms.

“It seems the impact would be limited, since it would only apply to a set number of jurisdictions that are considered low-tax,” Bavinck said. “As long as you don’t pay any royalties or interest to tax havens, the impact of these rules are limited.”

The fact that the tax is conditional—only applying to certain situations—means that, “in practice, it’s not something you will see that often,” he added. “Because it’s such a limited set of jurisdictions that are being caught under these rules.”

Not Far Enough?

The new measure doesn’t go far enough because it doesn’t apply to all potentially problematic countries, Merkies said.

“The intentions are good, but there are two problems,” Merkies said: The measure defines low-tax jurisdictions as having a statutory rate below 9%, although there are countries with a statutory tax rate above that where a company can still achieve a lower rate through deductions or other measures. It also doesn’t apply to European countries, which aren’t included on the EU blacklist, he said. That means potentially problematic structures using Luxembourg, for example, may still be possible—though it’s not clear how strongly an anti-abuse rule might apply.

With only a limited number of countries on the list, companies may just move to other countries with favorable treaty networks, like Singapore or Hong Kong, Markies said. “Then we didn’t win anything. That’s also a tax haven.”

Nevertheless, the proposal signals “that the Netherlands is really aiming to crack down on tax avoidance,” Rene van Eldonk, a partner at Simmons & Simmons LLP in Amsterdam, wrote in an email.

“There will remain tax strategies and planning opportunities to get around this new conditional withholding tax in the Netherlands,” he said. But, he added, it may be tough for companies to do so.

The creation of a conditional withholding tax comes after the Dutch government tried last year to dismantle an existing withholding tax on dividends, a measure that would have appealed to companies but cost the government significant tax revenue. The government changed its plans after public backlash to the proposal.

—With assistance from Linda A. Thompson (Bloomberg Law) and Ruben Munsterman (Bloomberg)

(Corrects Kavelaars' position with firm in 22nd paragraph of a Sept. 18 story.)

To contact the reporter on this story: Isabel Gottlieb in Washington at igottlieb@bloombergtax.com (Bloomberg Tax)

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com (Bloomberg Tax)

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