Netherlands Tax Plan 2021

On September 15, 2020, the Dutch government published its 2021 budget including its tax proposals for 2021 and onward. The budget is strongly marked by the Covid-19 crisis and the focus on encouraging businesses to invest in the Dutch economy. One of the measures taken by the Dutch government to stimulate investment is a job-related investment relief allowing a set-off against the payroll tax and social security contribution when investing within the Netherlands.

Tax Proposals Overview

The main measures in the area of direct taxes relevant for multinational enterprises (MNEs) doing business in the Netherlands are the following:

• introduction of a job-related investment relief;
• introduction of a tax-deductible “corona reserve”;
• unlimited carry forward and annual limitation of loss compensation;
• change in the corporate income tax rates;
• amendment of the liquidation and discontinuation loss regime; and
• change to thin cap rules for banks and insurers.

In the area of indirect taxes the following measures have been announced:

• increase in standard real estate transfer tax rate;
• expansion of scope of standard real estate transfer tax rate; and
• postponement of value-added tax (VAT) e-commerce package.

Job-Related Investment Relief

The Dutch government has announced the introduction of a job-related investment relief as of January 1, 2021. The measure allows companies to deduct a percentage of their investments (e.g. acquisition of new equipment) from their Dutch wage tax payable. The government has budgeted 2 billion euros ($2.34 billion) for the measure. This is a temporary measure and aimed at stimulating business investment: the Dutch government will propose a long-term measure with a similar objective at a later stage. The specific details of the job-related investment relief will be released shortly.

Tax-Deductible Corona Reserve

To offer relief for businesses meeting their financial obligations during the economic downturn, the Dutch government has taken several tax measures to improve the liquidity of businesses during the downturn. One such measure is to allow corporate taxpayers to effectively set off anticipated tax losses in 2020, in advance with their 2019 taxable profits, by creating a deductible “corona reserve” in their financial year 2019 corporate income tax return. In this manner, the cash refund of any set-off of 2020 tax losses with 2019 taxable income is accelerated, because the taxpayer does not have to wait until the 2020 corporate income tax return is filed.

Certain conditions need to be taken into account when creating a corona reserve. Most importantly, the amount of such a reserve:

• is limited to an expected 2020 tax loss which results from the Covid-19 pandemic;
• cannot exceed the total of expected 2020 tax loss;
• cannot exceed the taxable profit in the 2019 tax return; and
• must be released in the 2020 tax return.

Part of the Tax Plan 2021 is a legislative proposal to formalize the corona reserve measure via a statutory provision in the Dutch Corporate Income Tax Act. Some additional guidance was also included with the legislative proposal. The corona reserve measure creates a cash benefit by enabling an accelerated loss-compensation sooner than would be the case under the regular tax loss rules.

Unlimited Carry Forward and Annual Limitation of Loss Compensation

The Dutch government has announced that, as of January 1, 2022, net operating losses (NOLs) can only be utilized to reduce the taxable profits fully up to 1 million euros and the excess up to 50% of the taxable profits. In conjunction with the limitation on the utilization of NOLs, the carry-forward period will be made indefinite (from six years) as of January 1, 2022.

Although the limitation of the loss compensation to 50% of the taxable profits is framed by the Dutch government as a measure to tax MNEs more fairly, the measures may in the end benefit MNEs as the carry-forward period will be made indefinite.

Change in Corporate Income Tax Rates

The Dutch government has announced it will change the corporate income tax rates as indicated in the table below.

The effective tax rate for the innovation box regime will be increased to 9% (from 7%).

Amendment Liquidation Loss Regime

One of the key benefits of the Dutch tax system for MNEs is the participation exemption that fully exempts dividends and capital gains realized from qualifying (foreign) participations. The same regime applies for income derived from foreign permanent establishments. In principle no tax-deductible losses can be taken into account in respect of exempt participations or permanent establishments.

The liquidation and discontinuation loss regimes allow taxpayers to take into account losses when liquidating a subsidiary (the liquidation loss regime) or a permanent establishment (the discontinuation loss regime).

The proposed amendment to the liquidation and discontinuation loss regime tightens the scope of these rules temporally, and for liquidation losses above 5 million euros, geographically and materially.

• Temporally the liquidation and discontinuation loss regime will be limited to three years after the calendar year in which the business of the subsidiary (or permanent establishment) was ceased or the decision to cease the business was taken, unless the taxpayer can substantiate that it took longer for business reasons.

For the deduction of liquidation or discontinuation losses above 5 million euros the following two conditions need to be satisfied:

• Geographically the liquidation and discontinuation loss regime will be limited to the EU and the European Economic Area (EEA).
• Materially the liquidation loss regime will be limited to subsidiaries in which the taxpayer has a holding in the capital of the company that confers it a definite influence over the company’s decision and allows it to determine its activities.

Change to Thin Cap Rules for Banks and Insurers

The specific interest deduction rules for banks and insurance companies will be changed to limit their interest deduction, following a ruling by the Dutch Supreme Court from which it follows that additional tier 1 capital instruments qualify as a debt obligation for Dutch tax purposes. Additional tier 1 capital instruments will no longer be included as capital when determining the capital base for purposes of the thin cap rule. Insofar as the leverage ratio (for banks) or the equity ratio (for insurance companies) is below 9% (2020: 8%), interest is non-deductible.

Furthermore, to finance the budgetary deficit as a result of the Dutch Supreme Court ruling that additional tier 1 capital instruments are tax-deductible, the bank tax is temporarily increased, for 2021 only. The bank tax will increase from 0.044 to 0.066% (short-term debt) and from 0.022% to 0.044% (long-term debt).

Increase in Standard Real Estate Transfer Tax Rate

As of January 1, 2021, the standard real estate transfer tax rate will be increased from 6% to 8%. Currently, the 6% rate applies to all nonresidential real estate properties and rights related to such properties. In addition to this increase, the scope of application of the 8% standard rate will be extended to residential properties which are not used for personal dwelling (see below).

Expansion of Scope of Standard Real Estate Transfer Tax Rate

Currently, a reduced real estate transfer tax rate of 2% applies to all residential properties. This reduction will no longer apply in situations where the buyer does not buy the property for a personal dwelling but instead, for example, as an investment portfolio property.

Postponement of VAT E-Commerce Package

The new European VAT regulations regarding e-commerce have been postponed until July 1, 2021. The VAT e-commerce package consists of a number of measures, such as:

• extension of the Mini One Stop Shop (MOSS);
• abolishment of low-value consignment VAT relief (value of less than 22 euros);
• introduction of a simplification for non-EU parcels (value of less than 150 euros);
• amendment of the distance sales regime;
• introduction of an import One Stop Shop (iOSS); and
• introduction of the electronic interface (online platform) fiction.

These measures are aimed at combating VAT fraud and could reduce the VAT compliance burden of EU and non-EU businesses. The abolishment of the low-value consignment VAT relief is expected to create a level playing field between EU and non-EU merchants. Additionally, the introduction of an electronic interface fiction (most notably targeting online platforms) shifts the burden of VAT compliance from merchants selling on the interface to the interface itself.

It should be noted that the e-commerce VAT package was supposed to take effect on January 1, 2021. On the initiative of the European Commission, due to the Covid-19 situation the introduction has been postponed to July 1, 2021. The Dutch State Secretary indicated, however, that the Netherlands, together with Germany, will advocate for a further postponement of the introduction of the package until January 1, 2022.

Other Announcements and Developments

Adjustment at Arm’s-Length Principle (Informal Capital Structures)

The Dutch government has announced the abolishment of informal capital structures (i.e., structures where the Netherlands grants a step-up, but there is no corresponding adjustment in the other jurisdiction) as of 2022.

Conditional Withholding Tax

As of January 1, 2021, the Netherlands will levy a withholding tax on interest and royalties paid to associated enterprises (controlling interest, which is deemed to be the case if 50% of the shares are held) that are resident for tax purposes in a so-called low-tax jurisdiction or non-cooperative jurisdiction and in certain abusive situations (jurisdictions included on the “Dutch list”). The rate of the conditional withholding tax is linked to the highest corporate income tax rate, which remains 25% in 2021.

The following jurisdictions are currently (for financial year 2020) included on the Dutch list of low-tax jurisdictions and non-cooperative jurisdictions:

• American Samoa
• American Virgin Islands
• Anguilla
• Bahamas
• Bahrain
• Barbados
• Bermuda
• British Virgin Islands
• Cayman Islands
• Fiji
• Guam
• Guernsey
• Isle of Man
• Jersey
• Oman
• Samoa
• Turkmenistan
• Turks and Caicos Islands
• Trinidad and Tobago
• United Arab Emirates
• Vanuatu

The list will be updated to include the jurisdictions on the EU list of non-cooperative jurisdictions for tax purposes on the date the new list is published and any jurisdiction that has a corporate income tax rate of less than 9% as determined on October 1, 2020.

Based on the current EU list of non-cooperative jurisdictions for tax purposes, Palau, Panama and the Seychelles would be added to the Dutch list.

With respect to tax treaty jurisdictions, the application of the conditional withholding tax on interest and royalties is deferred until at least three years after the first inclusion on the Dutch list.

As regards abusive situations, a structure where an interest or royalty payment is made to a company in a non-low-tax jurisdiction such as Luxembourg may be targeted, if the Luxembourg company on-pays the interest or royalty to a low-tax jurisdiction. This could be the case if only a small spread is reported in Luxembourg and the structure lacks the relevant substance. In addition, the use of hybrid entities may trigger the conditional withholding tax (under certain circumstances).

Our Assessment

As the term of the current government is at its end, and elections will take place on March 17, 2021, it is not surprising that in its last budget proposal no drastic measures were announced by the government. Furthermore, considering the government does not have a majority in the First Chamber of Parliament (Senate), a modest tax plan lends itself to finding a consensus among the political parties.

The Tax Plan 2021 is marked by the Covid-19 crisis and focuses on encouraging businesses to invest in the Dutch economy. One of the measures taken by the Dutch government to stimulate investment is a job-related investment relief allowing a set-off against the payroll tax and social security contribution when investing.

The Dutch government framed the new budget outwardly with the political message that the burden of the economic downturn during the Covid-19 crisis should not only be borne by workers and small companies, but MNEs must also contribute. All in all, the announced tax measures were largely as expected, and should on balance have a limited impact on the tax position of MNEs.

Planning Points

• MNEs should take the job-related investment relief into account when considering expanding their operational business activities in the Netherlands or selecting a business location (e.g. regional head office, (distribution) service center or production facility).
• MNEs should assess if the reduction of the lower corporate income tax rate (2021: 15% for the first 245,000 euros; 2022: 15% for the first 395,000 euros) is worth considering to have the Dutch company taxed as a standalone company instead as part of a fiscal unity on a total group level.
• MNEs should assess what the impact of the adjustments of the loss carry forward rules is for their forecast tax liquidity and the valuation of deferred tax assets.
• MNEs that are planning to liquidate subsidiaries outside the EU/EEA, for example as part of a rationalization plan, need to assess if the amendments to the liquidation regime may result in a disallowance of a tax-deductible liquidation loss.
• Real estate developers/asset managers should consider closing Dutch real estate deals before year-end to benefit from the current (lower) real estate transfer tax and limited scope (tax savings 2%–6%).

Roderik Bouwman is a Partner and Mehdi el Manouzi is an Associate with the DLA Piper Tax Team in Amsterdam, the Netherlands.

The authors may be contacted at: roderik.bouwman@dlapiper.com and mehdi.elmanouzi@dlapiper.com

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.