The revised 2019 Budget is expected to be approved by the Dutch parliament before the end of 2018 and to enter into force by January 1, 2019.
Original 2019 Budget
On September 18, 2018, the Dutch government presented the 2019 Budget.
The original 2019 Budget includes proposals to gradually reduce corporate income tax rates and to abolish dividend withholding tax, and at the same time to introduce a conditional withholding tax on intra-group dividend distributions to low-tax jurisdictions and in case of abuse.
In addition, there is a separate legislative proposal to implement the EU Anti-Tax Avoidance Directive 1 (“ATAD 1”). This proposal includes measures to introduce earnings stripping rules and controlled foreign corporation (“CFC”) rules. For more background we refer to our articles from October 2018 and November 2018.
Revised 2019 Budget
A number of changes have been made to the original 2019 Budget. The most significant changes in the revised 2019 Budget are that the dividend withholding tax will not be abolished and further that no conditional withholding tax on dividends will be introduced. Below we will discuss these changes and certain other related changes.
The revised 2019 Budget has been approved by the Lower House on November 16, 2018 and is now being debated in the Senate. The Senate does not have right of amendment of a legislative proposal, so the final wording of the legislative proposal is now available. It is expected that the Senate will approve the revised 2019 Budget before the end of 2018. Accordingly, we consider the revised 2019 Budget final and expect it to enter info force on January 1, 2019.
Further Reduction of Corporate Income Tax Rates
The original 2019 Budget already included a proposal to reduce the Dutch corporate income tax rates. However, the government has now decided to reduce these rates even further. The rates will go down to ultimately 15 percent (for profits up to 200,000 euros ($226,758))/20.5 percent (for profits in excess of 200,000 euros). See the table.
Fiscal Investment institutions
The original 2019 Budget includes the proposal that a fiscal investment institution (fiscale beleggingsinstelling) which is subject to 0 percent corporate income tax rate in respect of its profits will no longer be allowed to invest directly in Dutch real estate due to abolition of the dividend withholding tax. Given that the dividend withholding tax will now not be abolished (as further discussed below), fiscal investment institutions will continue to be allowed to invest in Dutch real estate.
Furthermore, a fiscal investment institution may continue to set off Dutch and foreign withholding tax on dividends received by the fiscal investment institution against withholding tax to be withheld by it on profit distributions made to its investors.
Reduction of benefits for incoming expatriates will come into force by January 1, 2019, but a transitional scheme will apply with respect to 2019 and 2020.
The original 2019 Budget proposes to limit in time the tax benefits for incoming expats, the so-called 30 percent ruling. According to this 30 percent ruling an employer can make a tax-free payment to a qualifying employee in the amount of 30 percent of the employee’s remuneration for a period of eight years. The period in which the 30 percent ruling can be applied is reduced from eight years to five years.
The revised 2019 Budget includes a transitional scheme for the years 2019 and 2020 as follows:
- if the end date of the 30 percent ruling of an employee is in 2019 or 2020, nothing will change for the employee;
- if the end date of the 30 percent ruling of an employee is in 2021, 2022 or 2023, the employee will continue not paying tax on up to 30 percent of their salary until December 31, 2020; and
- if the end date of the 30 percent ruling of an employee is in or after 2024, the employee will not qualify for the transitional scheme. The end date of the 30 percent ruling will be brought forward by three years.
Dividend Withholding Tax
The original 2019 Budget includes a plan to abolish the current dividend withholding tax by January 1, 2020 and to introduce a new conditional withholding tax by that same date. However, under heavy political pressure, the government has decided to retain the current dividend withholding tax. The introduction of the new conditional withholding tax has been postponed.
For the avoidance of doubt, the introduction of the conditional withholding tax on interest and royalty payments to group companies in low-tax jurisdictions and in abuse situations is still intended to enter into force on January 1, 2021.
The original 2019 Budget includes implementation of the CFC rule of ATAD 1, such that any non-distributed passive income of a CFC will be included in the taxable income of the Dutch corporate shareholder, unless the CFC carries on genuine economic activities.
Broadly, a company is a CFC if the Dutch corporate shareholder holds a 50 percent or more interest in the foreign entity and the foreign entity is established in a low-tax jurisdiction (Anguilla, the Bahamas, Bahrain, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Kuwait, Palau, Qatar, Saudi Arabia, the Turks and Caicos Islands, the United Arab Emirates, and Vanuatu) or a jurisdiction on the EU list of non-cooperative jurisdictions.
The original 2019 Budget considers a country a “low-tax jurisdiction” when the statutory profit tax rate is less than 7 percent; however the revised 2019 Budget has raised this to a rate of less than 9 percent.
It has now been made absolutely clear that indirect interest in foreign entities may constitutes CFCs of a Dutch shareholder as well; and further that tax transparent entities may be CFCs as well. This may expand the group of (potential) CFCs of a Dutch company significantly.
Therefore, we recommend that MNCs with Dutch group companies carefully consider going forward whether such Dutch group company may hold—directly or indirectly, alone or with group companies—a 50 percent or more interest in a foreign entity established in a low-tax jurisdiction or a jurisdiction on the EU list of non-cooperative jurisdictions.
- Fiscal investment Institutions will continue to be allowed to invest in Dutch real estate and further they may continue to set off Dutch and foreign withholding tax on dividends received by the fiscal investment institution against withholding tax to be withheld by it on profit distributions made to its investors. This means that the acquisition and holding of Dutch real estate through a Fiscal Investment Institution remains a tax efficient structure for Dutch and non-Dutch investors. This is really good news for the real estate sector.
- MNCs should assess by January 1, 2019 whether their Dutch group companies have a direct or indirect interest in a CFC. If so, MNCs may consider restructuring so that the Dutch group company will no longer be a direct or indirect shareholder of the CFC. Alternatively, an MNC should ensure that the income from its CFCs is distributed up the chain each year, so that the CFC rule in practice would not have adverse tax consequences—as it only applies to non-distributed income.
- MNCs and any of their employees that make use of the 30 percent ruling should assess what the impact of the new transitional scheme in their situation will be.
René van Eldonk is a Partner and Steven den Boer is a Senior Associate at Simmons & Simmons Tax Team in Amsterdam, The Netherlands.