International Dutch (Tax) News: 2016 Budget Special

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1 International Dutch (Tax) News: 2016 Budget Special Highlights: Introduction of anti-hybrid rule The Dutch government published legislative proposals for the implementation of the amended EU parent-subsidiary directive (here after referred to as PSD ) that are expected to take effect as from 1 January The PSD amendments require EU member states to implement an anti-hybrid rule and a general antiabuse rule (here after referred to as GAAR ) by 31 December The Netherlands-2016 Budget 1. Corporate income tax/dividend withholding tax 2. Wage tax 3. Personal income tax 4. Gift tax The Netherlands Budget 2016 On September 15, the Dutch government released its Budget 2016, containing the Tax Plan 2016 which includes amendments to Dutch tax law. We would like to emphasize that the Tax Plan is a Bill and that the government will discuss the plans the coming weeks in Parliament. As a consequence, some elements of the Tax Plan 2016 may still be amended. Aim is to enact the Bill as per 1 January 2016, unless otherwise indicated. Here after you find a summary of the most important Dutch tax law changes to be implemented. Note that this is not a comprehensive summary. Our tax advisors are available for further information if additional information is required. Corporate income tax/dividend withholding tax Budget with proposed Changes 1 st of January 2016 Anti-hybrid rule The Dutch participation exemption provides for a full exemption (without any minimum holding period requirement) for income from EU and non- EU subsidiaries that are (in short) either sufficiently active or sufficiently subject to income tax. The amended PSD requires member states to disallow the benefits of the directive in the case of hybrid mismatches. The proposed Dutch rule would disallow the application of the participation exemption for payments received that are tax deductible at the level of a group company. With reference to the OECD BEPS project and the global scope of the participation exemption, the Dutch government does not intend to limit the scope of the anti-hybrid rule to EU situations, so the rule will also apply to non- EU participations. Essentially, the rule aims at catching income received under hybrid financing arrangements, such as certain types of profit-participating loans and preferred share arrangements. However, capital gains and foreign exchange results in relation to these instruments would remain exempt under the participation exemption, since these items generally will not lead to a deduction. Specific rules shall apply where a hybrid instrument is acquired with existing accrued dividends. In such case the dividends, when paid out, would not be credited against the value of the investment (which generally is not a taxable event), but instead would be treated as taxable income. GAAR in the Foreign Substantial Shareholding (FSS) regime - 1

2 In the Bill, the GAAR is not be implemented in the Dutch dividend withholding tax act, but in the FSS regime, which may apply to both dividends and capital gains. The FSS regime may apply where a foreign entity owns a substantial interest (5% or greater) in a Dutch company and the main purpose, or one of the main purposes, of the foreign entity for holding such interest is to avoid Dutch dividend withholding tax or personal income tax and, at the same time, the arrangement(s) is (are) considered artificial. Based on the explanatory notes to the Bill, the artificiality of a structure depend upon the presence of valid business reasons for an arrangement(s), under which relevance would be given to the substance of the foreign shareholder. Shareholders that carry on business activities or that qualify as a top-tier holding company (performing governance, management and/or financial activities with respect to the Dutch entity) would not be considered part of an artificial arrangement. Use of Coop more attractive! The substance of foreign intermediary holding companies that do not themselves perform business activities would be tested along the lines of the existing substance requirements applied to Dutch holding companies applying for a ruling from the Dutch tax authorities. The proposed rules are not expected to result in a substantial change in practice. This in comparison to the current FSS regime, which already contains a similar form of a GAAR. The new substance requirements for the substantial interest holder would apply only where the substantial interest-holder itself is not an active company. The Bill specifically acknowledges that tax treaty protection would not be limited through the GAAR, absent specific anti-abuse measures in the relevant treaty. Therefore, situations in which the effects of the FSS regime currently are mitigated under a tax treaty would not be affected. Finally, no changes with respect to the GAAR are proposed to the participation exemption and, hence, the application of the participation exemption would not be limited as a result of the Dutch GAAR implementation. Withholding tax regime for coops Profit distributions by Dutch coops generally are not subject to Dutch dividend withholding tax, unless there is a tax avoidance motive in an artificial structure, in which case, withholding tax may apply. As in the case of the FSS regime, the proposed rules are not expected to result in a substantial change in practice since the current rules contain a form of a GAAR: unless a foreign member in a coop is not an active company and the coop is not considered as having a real economic function. In Such case, similar substance requirements may apply (similar to the FSS regime). Therefore, coops with a real economic function do not fall under the withholding tax regime. The explanatory notes to the Bill mention that a coop that carries on an active business would be considered to perform a real economic function. This would be at least the case if a coop has employees on the payroll and has an office at its disposal: such coop would be considered to carry on an active business. Thus, coops with a real economic function (office and employees) may be expected to become an increasingly attractive platform for corporate structures and various types of investment structures. Additional Dutch tax legislation (art. 29b-29h CITA) on TP documentation requirements The Dutch Ministry of Finance announced that the outcome of BEPS action point 13 would be implemented for book years that start on or after 1 January In this respect, the Dutch government has submitted a Bill to Parliament to introduce new additional transfer pricing requirements in the Dutch Corporate Income Tax Act (art. 29b 29h CITA). An important element in this proposal is the introduction of an additional obligation for Dutch entities that are part of a group with a consolidated turnover of at least 50 mio. to include a master file and local file in their administration. The following features are considered in the Bill. In the first place, the ultimate parent entity of a multinational group which has its tax residency in the Netherlands is obliged to file a country-bycountry report with the Dutch tax administration - 2

3 (here after referred to as: DTA ) if the total consolidated group turnover is at least 750 million. In specific cases, this obligation can however also be on a Dutch resident group entity that is not the ultimate parent entity of the group. This report will be provided automatically by the DTA to states with which the Netherlands have concluded an agreement for the automatic exchange of information. The report has to be submitted to the Dutch tax administration within 12 months after each reporting year. In the second place, a group entity that is a Dutch tax resident is obliged to notify the tax inspector if it is the ultimate parent entity of the group. If the Dutch group entity is not the ultimate parent entity, the group entity is obliged to disclose the identity and the tax residency of the reporting entity (in most cases this will be the foreign ultimate parent entity). The DTA will use the report to assess substantial transfer pricing risks and other risks that relate to base erosion and profit shifting, including noncompliance of applicable transfer pricing rules by members of the group. The report can also be used for economic and statistical analyses. If the country-by-country report filing obligation is not met, penalties may be imposed to the entity. In the third place, under the proposed article 29g CITA, additional transfer pricing documentation requirements are introduced for Dutch tax resident group entities that have a consolidated turnover of at least 50 mio. Obviously, existing documentation requirements remain applicable for Dutch tax resident group entities that have a consolidated turnover of less than 50 mio. The additional documentation requirements include an obligation to include a master file and a local file in the administration of the Dutch group entity. This obligation should be met within the term for filing the Dutch corporate income tax return. The master file and the local file can be drafted in the Dutch or English language. As these measures will apply for book years starting on 1 January 2016, any Dutch entity that is part of a group with a consolidated turnover of Dutch TP Amended per 2016 October 2015 at least EUR 50 mio, should verify whether it can meet these new requirements. The Dutch Ministry of Finance will issue guidelines on the rules regarding form and content of the master file, the local file and CbCreporting. In the Netherlands alone the Dutch government expects that at least 8,000 MNEs have to draft TP documentation and over 150 Dutch ultimate parent entities have to draft the CbC-reporting. To be able to handle this additional work stream the DTA is going to employ additional staff capacity, including senior transfer pricing specialists. Step-up in case of cross-border legal merger As of 1 January 2016, companies involved in a cross-border legal merger or legal split-up, will need to consider a socalled step-up provision. This will mean that the shareholders must set the tax value of the capital paid up to the new shares, which they received as a replacement for the shares of the merged or demerged body, to the fair market value of the capital which was transferred due to the merger or demerger. In this way, the legislator prevents the Netherlands from establishing a dividend tax claim on existing foreign retained profits. This provision will not be effective insofar the transferred capital consists of shares in a Dutch company. Wage tax Integration of Research & Development benefits The special Research & Development (R&D) Deduction for corporate income tax purposes ( RDA ) will be integrated into the R&D wage withholding tax deduction ( WBSO ). The background is that the RDA only results in an immediate benefit if the R&D product or service becomes profitable. The RDA as such will be abolished in the CITA and, in addition to the R&D wage costs, also R&D costs and expenditure will qualify for the WBSO regime, resulting in lower wage withholding taxes. The brackets of the WBSO will be amended as of January 1, The first bracket will be increased from 250,000 to 350,000 and the tax benefit of this bracket will be - 3

4 decreased from 35% (2015) to 32%. Costs exceeding 350,000 will result in a tax benefit of 16% (2015: 14%). As per January 1 st, 2016, two specific activities will be excluded from the WBSO qualification: technical feasibility analysis of own R&D work, and technical research on substantial amendments of production methods or modeling of processes. Work-related cost scheme. Since the start of 2015, all employers must use a work-related cost scheme. Certain allowances and benefits will qualify for a final levy as long as a customary test is met. Under that test, the regime may not be applied to items which deviate more than 30% from the normal value in comparable situations. Starting 2016, the test will be amended and will include the rule that it is customary for an employer to grant the specific allowances and benefits to its employees. Personal income tax Income tax brackets. The tax rate of the second bracket will be reduced from 42% to 40.15%. The threshold from which the third bracket of 52% applies will be increased from 57,585 to 66,421. Abolition of protective assessment for emigrating substantial shareholders Until September 15, 2015, PM, substantial shareholders (i.e. a person who owns an interest of 5% or more in a company) who emigrated were confronted with a tax assessment on the difference between the fair market value of their substantial shareholdings at the moment of emigration and the historic cost of that shareholding. This assessment was preserved and only collected if the shares were alienated or the reserves of the company were distributed for more than 90% within ten years of the start of the year of emigration. After this term, the uncollected part of the assessment was waived. This made it possible to avoid collection of the preserved income tax assessment. It is now proposed to make collection of the assessment possible indefinitely per the date indicated above. Moreover, any distributions made after emigration will immediately lead to collection of the Income tax: Box 3 calculation changes October 2015 assessment for the amount distributed (rather than only if 90% or more was distributed). This could lead to effective double taxation of a dividend distribution after emigration. Fictitious yield on savings and portfolio investments reduced Until now, all income from savings and investments was calculated at a notional return of 4% of the value of the underlying net assets and taxed at a rate of 30% (resulting in an effective tax rate 1.2% of the net asset value as per 1 January). This system was scrutinized in recent years because the yield on bank deposits has dropped substantially below 4% in many cases. Starting 2017, the rate of 4% will be reduced for savings and increased for investments. The new rule will not apply to the actual amount of savings and investments, but instead to a notional division between these categories. The change will result in a lower than 1.2% effective tax rate for net assets with a value up to 100,000, and a higher effective tax rate for net assets with a value in excess of 100,000. If the net asset value exceeds 1 mio, the effective tax rate will be 1.65%. This proposal will not achieve the much-desired aim to make the tax return easier and - due to the market conditions - less frustrating, as the yield is still not in line with the current market situation as far as interest is concerned. Gift tax Increased exemption for gifts to finance own house At present, an exemption from gift tax exists only in case of a gift from a parent to his child, and the exemption is limited to the amount of 52,752. As of 1 January 2017, this exemption will be increased to 100,000 and will no longer be limited to parent-child relations. The recipient of the gift needs to be between 18 and 40 years of age. Other measures Preliminary ruling by Supreme Court in tax cases As of 1 January 2016, it will be possible for a District Court and a Court of Appeal to ask the - 4

5 Supreme Court for a preliminary ruling on general questions of tax law. If the Supreme Court issues a preliminary ruling, the lower courts must base their own ruling on this outcome. The procedure is largely comparable to the existing procedure in Dutch civil law and the procedure before the EU Court of Justice. Trials The Dutch Tax authorities increasingly deploy IT in order to simplify the service provision and auditing. Trials regarding levying and paying taxes without a previous assessment or a fine being imposed, and widening the possibilities of setting-off, should assist the simplification process of the service provision. Note in this respect that a taxpayer is not obliged to participate in a trial and that the taxpayer needs to consent to it. Suspending effect of appeal in case of benefits Currently, an appeal has no suspending effect with regard to benefits, whereas this is the case for social security and tax law. As a result, the Dutch Tax authority often must pay and subsequently reclaim, with all the associated problems. In order to simplify the execution, the suspending effect of appeal will be effectuated now. For information please contact: Amersfoort: Amersfoort: Marco Visser Walther van der Zwaag T: T: E: visser@crop.nl E: wvanderzwaag@crop.nl Arnhem: Hoofddorp/Amsterdam: Huib Schellekens Ton van Deijl T: T: E: schellekens@crop.nl E: tvandeijl@crop.nl Arnhem: Nieuwegein/Ede: Theem van Meegen Erwin Deijmann T: T: E: tvanmeegen@crop.nl E: edeijmann@crop.nl Disclaimer: CROP registeraccountants and CROP Belastingadviseurs makes no representation nor gives any warranty (either express or implied) as to the completeness or accuracy of this publication. CROP registeraccountants and CROP belastingadviseurs is not liable for the information in this publication or consequences of the use of this publication. - 5