The Dutch government has released its budget plans for 2020, as well as certain tax proposals. The introduction of a withholding tax on interest and royalties marks a significant policy shift. This measure and other key items of interest for international businesses are summarized below.
Withholding tax on interest and royalties
From 2021, a 21.7% withholding tax on interest and royalties (“I&R WHT”) paid to related parties if they are resident in, or allocate the relevant payments to a permanent establishment in, a low-tax jurisdiction - meaning a jurisdiction on a list to be published annually by the Dutch government. The I&R WHT will also apply if interest or royalties are paid to a related party not resident in a low tax jurisdiction, if that party has been interposed to avoid the imposition of the I&R WHT on another person. An example would be if, within a group of companies, a Luxembourg company is interposed between a Cayman Island entity and the Dutch interest payer. In that case, it would also be unlikely that the interposed recipient could rely on a double tax treaty because, following the entering into effect of the Multilateral Instrument, most Dutch treaties will contain a principal purpose tests.
The introduction of the I&R WHT marks the end of an era. Because the Netherlands never had a withholding tax on interest and royalties, Dutch companies have, for a long time, been used as intermediaries in international financing and licensing arrangements. To the extent that these arrangements directly or indirectly involve related parties in low tax jurisdictions, the introduction of the new tax will effectively end this practice from 2021, unless the application of the I&R WHT can be ruled out, for example, through an advance tax ruling. Existing structures will be affected. No grandfathering rules are proposed to protect interest or royalties accrued before 2021.
Role of minimum substance requirements downgraded
Currently, a claim for exemption from, for example, the Dutch dividend withholding tax will not be denied as an abuse of law, if certain minimum substance requirements are met by the recipient. This safe harbour rule is incompatible with the ECJ’s decisions in the Danish beneficial ownership cases which require all relevant facts and circumstances to be taken into account in determining whether a structure is abusive under EU law. It is therefore proposed that the safe harbour rule is downgraded to a rebuttable presumption from 2020. In our view, it is doubtful whether this change goes far enough because a situation that meets the minimum substance requirements, but is abusive by the ECJ’s criteria, would benefit from the relevant exemption unless and until the Dutch tax authorities challenge it.
Increase of corporate tax burden
The headline rate for 2020 will remain at 25% (it was to be reduced to 22.55% according to the 2019 budget) and, for 2021, it will drop to 21.7% (instead of the 20.5% rate provided for in the 2019 budget). The proceeds from these measures will, in part, be used to finance a reduction in the tax burden on individuals. The government has further announced that it intends to increase the tax rate for innovation box income from 7% to 9% in 2021 and curtail corporate taxpayers’ ability to deduct losses from the liquidation of subsidiaries.
Thin-capitalisation rule for banks and insurance companies
Banks and insurance companies will be subject to a thin-capitalisation rule. Under this rule, interest incurred by banks and insurance companies will not be deductible to the extent that their leverage ratio (in the case of banks) or their equity ratio (in the case of insurance companies) is below 8%. The leverage ratio and the equity ratio are determined in accordance with the EU Capital Requirement Regulation and the EU Solvency II Directive, respectively. Interest deductions disallowed under the thin-capitalisation rule for banks and insurance companies may not be carried forward. (In contrast, carry-forwards are possible under the Dutch implementation of ATAD2's earnings stripping rule.)
Definition of permanent establishment codified
The definition of permanent establishment (“PE”) for Dutch domestic law purposes will be taken to be the definition of this term in the applicable Dutch tax treaty. As a result, a situation in which a PE exists for treaty purposes, but not for Dutch domestic law purposes and which could result in tax avoidance, can no longer occur. For non-treaty situations, the 2020 budget and tax proposals implement the definition of PE contained in the 2017 OECD Model Convention. This definition includes the amendments to the PE definition as a result of BEPS Action 7 (including the amendments dealing with, amongst others, commissionaires, which the Netherlands has opted out of under the Multilateral Instrument).