Multinationals based in the Netherlands should prepare for an increase in their Dutch tax burden. A number of measures, including changes to the fiscal unity regime, the application of the arm’s length standard, the participation exemption and reliefs available to Dutch headquartered multinationals, are on the horizon. Depending on how many of these measures are enacted, 2020 may prove the "annus horribilis" for multinationals.
New fiscal unity regime
Following last year’s emergency amendments to the Dutch fiscal unity regime after the European Court of Justice’s decision that certain parts of it are contrary to EU law, the Dutch government will outline the new fiscal unity regime in the first quarter of 2020 (having already stated it will not allow the formation of a cross-border fiscal unity). A public consultation is expected later in 2020.
Arm’s length pricing and holding companies without substance
During the first quarter of 2020, the Dutch government will also release studies on:
- whether the Netherlands should unilaterally amend the "at arm's length" principle. Over the years, a widespread practice has developed where structures exploited states’ different views on arm's length prices with the result that income remained untaxed. In many cases, the tax implications of these structures where confirmed in advance tax rulings issued by the Dutch Tax Authorities. The study will report on whether the possibility to make a downward adjustment to taxable income needs to change.
- the extent to which the participation exemption should apply to Dutch holding companies with little or no substance, which belong to a group that has no other activities in the Netherlands. The study is part of the Dutch government's drive to combat the use of the Netherlands in aggressive international tax planning structures. The difficulty with any new legislation will be that it will catch many "good guys"; and making such rules EU law compliant will also be a challenge.
Dutch-headquartered multinationals to pay a reasonable amount of tax
Following a public outcry over the amount of tax paid by Dutch-headquartered multinationals, the Dutch government set up a commission – now expected to report in 2020 – to consider how it can be ensured that such multinationals pay a reasonable amount of tax on their Dutch income while maintaining the Netherlands’ attractiveness.
It is true that Dutch-headquartered multinationals have often paid little or no tax on income from their Dutch operations. They often have significant head-office costs which cannot be re-charged to their subsidiaries. External borrowing also often takes place in the Netherlands, and it is possible to deduct losses from a subsidiary's liquidation.
In the future, the ability to deduct losses from a subsidiary's liquidation looks likely to become more limited. The Dutch government has endorsed draft legislation which is expected to become effective in 2021 and provides that a liquidation loss will only be allowed for EU subsidiaries with EU activities where the taxpayer holds a 25% stake (and the liquidation is completed within three years from the date when the subsidiary's activity stopped).
End of exiting without dividend withholding tax?
We are awaiting the text for a proposal (by a member of the Groenlinks opposition party in the Dutch Parliament) to close Dutch dividend withholding tax loopholes. Under current law, a cross border merger is not subject to Dutch dividend withholding tax and leads to the permanent loss of the Netherlands’ dividend withholding tax claim on the earnings of the disappearing company. The same is true, if a company becomes a resident of another jurisdiction on the basis of a tie-breaker provision in a double taxation treaty. Similarly, distributions by certain cooperatives are not currently subject to dividend withholding tax. According to a press release, the proposal would eliminate these loopholes, the idea being to impose dividend withholding tax instead.
Horizontal monitoring system
The Ministry of Finance has announced that the horizontal monitoring system (governing the relationship between most Dutch listed companies and the Dutch tax authorities) will be revised in 2020. It is not yet clear what the revisions will entail.