Download The Dutch corporate income tax 2007:

The Dutch Go Into the Offensive
Amendments towards a more competitive tax system
(Peter Kirpensteijn and Bereket Gündüz; Udink & De Jong, The Netherlands)
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Reduction of the corporate income tax rate from 29.6 % to 25.5%;
Reduction of the dividend withholding tax rate from 25% to 15%;
Introduction of a royalty box with an effective tax rate of 10%;
Introduction of an interest box for group interest income with an effective
tax rate of 5%;
Favorable amendments to the so-called participation exemption, under
which benefits derived from participations (including capital gains realized
and dividends received) are exempt.
1. Executive summary
For decades The Netherlands was well known as attractive (tax) residency country for
international operating groups. Its assets were an attractive tax climate, a favorable
geographic location, a good physical infrastructure, a highly educated working
population and a stable political and social environment. As a consequence, The
World Economic Forum ranked The Netherlands in the world top five of most
attractive countries of residence.
At the same time the OECD ranked The Netherlands also as one of the top five
industrialized countries that supported harmful tax competition. Also the EU
Primarolo Report was rather critical about the Dutch tax regulations. The Dutch
response was generally seen as too much of a good thing. The result was a descent in
the World Economic Forum ranking to a current 9th place.
In the meantime, other European countries introduced favorable tax regulations to
attract foreign investors, currently often seen as the start of a “race to the bottom”.
With the accession of 10 new countries in the European Union in 2004 having
corporation tax rates averaging 18.5%, it became apparent that measures had to be
introduced to stand up to the competition.
On May 24, 2006 the State Secretary of Finance submitted a Bill containing major
revisions of the current Dutch corporate income tax. The intended effective date is 1
January 2007. The Bill contains amongst others the following proposals:
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Reduction of the corporate income tax rate from 29.6 % to 25.5%;
Reduction of the dividend withholding tax rate from 25% to 15%;
Introduction of a royalty box with an effective tax rate of 10%;
Introduction of an interest box for group interest income with an effective tax rate
of 5%;
Favorable amendments to the so-called participation exemption, under which
benefits derived from participations (including capital gains realized and
dividends received) are exempt.
The following paragraphs elaborate on the above proposals.
2.
Introduction
From big multinationals to (relatively) small privately owned companies, when
determining how to set-up their international structures most of them had The
Netherlands on their short-list. This favorable position had everything to do with the
attractive tax climate The Netherlands could offer new investors. Whether it was for
purposes of creating the required flexibility in their holding structure, obtaining a
“gateway” to Europe, optimizing up-the chain distributions, locating joint-ventures or
using a Netherlands company for foreign branches, The Netherlands was seen as the
place to be. This positive tax climate was amongst others generated by its:
 advance tax ruling practice;
 liberal Revenue Service
 extensive tax treaty network;
 participation exemption, exempting all benefits derived from participations
(including capital gains realized and dividends received);
 exemption system for profits attributable to foreign permanent establishments
(branches);
 withholding tax system, i.e. no withholding tax on interest and royalty payments;
 stable political climate.
This favorable position was put on pressure with the publication of the OECD Report
on Harmful Tax Competition and the EU Primarolo Report. The response of the
Dutch government did not receive critical acclaim. On the contrary, the drastic change
of its tax ruling system in 2001 and the introduction of various anti-abuse tax
regulations was clearly seen as too much of a good thing.
In the meantime, its European colleagues introduced various regulations aiming to
improve their tax systems towards foreign investors, either by reducing their
corporation tax rates (e.g. Ireland), introducing, albeit less favorable, participation
exemptions (e.g. UK and Germany), unilaterally reducing withholding taxes (e.g.
Denmark) or disregarding the comments in the two reports and continuing to maintain
bank secrecy rules and criticised tax ruling practices (Luxembourg).
When in 2004 the European Union welcomed Cyprus, the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia, it became apparent
that measures had to be taken in order to meet the competitive standards (also)
introduced by these new member States. Although, in general, the current tax systems
of these new Members, especially those of the East-European countries, have recently
been amended to meet the European standards and consequently only for that reason
include uncertainties, with an average corporate income tax rate of approximately
18.5% they offer an interesting alternative to foreign investors for the “old economy”
countries like The Netherlands.
The Dutch government (finally) realized that this threatening development required
some “counter” measures. On May 24, 2006 the State Secretary of Finance submitted
a Bill (‘Werken naar winst’) to the Dutch 2nd Chamber of Parliament. This Bill
contains major revisions of the current Dutch Corporate Income Tax Act. The
proposals still needs to be discussed in and approved by the 2nd and 1st Chamber of
Parliament in the fore coming period, but it is to be expected that the proposals will be
enacted before years end and will become effective on 1 January 2007. The Bill
contains amongst others the following amendments:
a.
Reduction of the corporate income tax rate from 29.6 % to 25.5%.
b.
Reduction of the dividend withholding tax rate from 25% to 15%.
c.
Introduction of an interest box for group interest income with an effective tax
rate of 5%.
d.
Introduction of a royalty box with an effective tax rate of 10%.
e.
Favorable amendments to the so-called participation exemption, under which
benefits derived from participations (including capital gains realized and
dividends received) are exempt.
The Bill, however, also contains certain measures that will broaden the tax base.
These measures are:
a.
Limitation of the tax loss carry back period from three years to one year.
b.
Limitation of the tax loss carry forward period from indefinite to nine years.
c.
Limitation of the depreciation on real estate.
d.
Extension of the amortization period for goodwill to ten years (current usually
five years).
e.
Extension of the amortization period for all capital assets to a minimum of five
years.
f.
Less favorable tax treatment of “work in progress”.
g.
Limitation of the tax deduction of costs incurred with issuing call options (e.g.
warrants and employee stock options)
3.
Reduction tax rates
3.1. Reduction corporate income tax rate
A crucial element in the proposed amendments is a further reduction of the corporate
income tax rate. For 2006 the 31.5% rate was already reduced to 29.6%. The Bill
proposes a further reduction to 25.5% effective 1 January 2007. The latter rate is
applicable to taxable profits in excess of EUR 60,000. In the Bill a rate of 20% is
proposed for the first EUR 25,000 taxable profits and a 23.5% rate for profits between
EUR 25,000 and EUR 60,000. It is assumed that a reduced rate supports the
investment climate in the Netherlands. With the reduction of the corporate income tax
rate the Netherlands will have one of the lowest tax rates of Western Europe and one
that is equal to the average rate in the European Union.
Corporate Tax Rates 2006
25.5
EU 25
Countries Eastern-Europe
18.5
12.5
Ireland
Hungary
16
19
Poland
Czech Republic
24
The Netherlands
25.5
Finland
26
Denmark
28
United Kingdom
30
Luxembourg
30.4
France
34.8
Germany
38.6
0
5
10
15
20
25
30
35
40
45
Source: Deloitte Touche Tohmatsu: Corporate Tax Rates at a Glance 2006
Copied from the Explanatory Notes to the Bill, page 5
In the Explanatory notes to the Bill, the State Secretary of Finance notes that it is not
to be expected that the corporate income tax rate will be reduced even more. This is to
avoid that due to controlled foreign corporation rules applicable in certain countries
(e.g. Japan), the benefit of the Dutch tax rate reduction is undone by a higher foreign
tax.
3.2. Reduction of the dividend withholding tax rate
In addition to a reduction of the corporate income tax rate, the Bill also proposes to
reduce the current dividend withholding tax rate of 25% to 15%.
Effectively, this measure mainly benefits those shareholders of Netherlands
companies that are located in non-tax treaty countries. First, because when dividends
are distributed in domestic situations the parent either has a full credit of the dividend
withholding tax paid against corporate income tax due or no dividend withholding tax
is levied due to the participation exemption. Secondly, when dividends are distributed
to parents located in a country with which The Netherlands has concluded a tax treaty,
the tax treaty usually reduces the dividend withholding tax rate to 15%, 5% or even
0%. The US/NL tax treaty is an example where a qualifying parent may invoke the
0% dividend withholding tax rate. Finally, in EU-relationships the ‘parent/subsidiary
directive’ prohibits any withholding taxes on dividends between affiliated EU
companies in case the parent company owns more 20%1 of the shares in an EU
subsidiary.
Obviously, the suggested reduction does have an administrative benefit. Currently, in
order to benefit from the reduced tax treaty rates, (foreign) parent companies often
need to submit refund requests in The Netherlands. Each year about 200.000 requests
are submitted to the Dutch tax authorities. With afore-mentioned dividend tax
reduction, this administrative burden is eliminated.
4.
Group Interest Box
Like the Patent Royalty Box (see paragraph 5 below), the Group Interest Box is a new
phenomenon in the NL tax regulations. In the Group Interest Box the balance of the
interest proceeds and interest costs will effectively be taxed at a reduced corporate
income tax rate of 5%. This effective rate is achieved because, briefly put, only 5/25.5
part of the afore mentioned positive balance should be included in the taxable profit.
That part is then subject to the “normal” corporate income tax rate, resulting in an
effective tax rate of 5%. The Box is only open for interest received and interest paid
on loans from group companies. For this particular regulation a group is defined as:
 A company in which the NL taxpayer has a more than 50% interest; or
 A company that has a more than 50% interest in the NL tax payer; or
 A company in which a 3rd party has a more than 50% interest, whereby that 3rd
party also has a more than 50% interest in the NL taxpayer.
In case a 3rd party is an individual, additional deeming provisions exist with respect to
the above definition of a group.
The Box is optional, which allows companies to examine whether the Group Interest
Box can be beneficial to them. The Group Interest Box may be applied following a
mutual request by all NL group companies, as defined. When granted, the Group
Interest Box should be applied for a period of at least three years by all companies in
the Group. The (positive) sum of interest paid and received that can be included in the
Box is capped. This maximum amount is the levy interest percentage, as determined
each quarter (currently 3.75%) on the average fiscal equity of the company in the
relevant tax year. A surplus will be taxed at the normal tax rate (in the proposal
25.5%).
1
In 2007 this percentage will be reduced to 15%, and in 2009 it will be reduced to 10%.
5.
Patent Royalty Box
The Patent Royalty Box is based on a similar treatment as the Group Interest Box. In
the Patent Royalty Box, benefits derived from self-developed intellectual property
will effectively be taxed at a corporate income tax rate of 10%. This effective rate is
achieved in a similar way as with the Group Interest Box, i.e. from the royalties
received only 10/25.5 is taxable. That part is subject to the normal rate, resulting in an
effective tax rate of 10%.
Also the Patent Royalty Box is optional. If the taxpayer does not choose for this box
treatment then all royalties are taxable at the normal rate. However, the Bill introduces
a change compared to the current situation. All development costs can be charged to
expense, i.e. it is no longer required to (partly) capitalize these costs.
The Patent Royalty Box is only open to intellectual property developed after 2006.
Furthermore the anticipated benefits of the intellectual property for 30% or more can
be attributed to a patent that is obtained by the NL taxpayer. However, patented
trademarks and logos do not qualify for the Patent Royalty Box.
The choice for the Box is made by the pertinent taxpayer and not by a group (see
Group Interest Box) and can be made on an asset-by-asset basis.
If an existing intellectual property is put in the Box, then the relating development
costs that in the previous years were charged to expense should be capitalised. The
resulting profit is fully taxable. Also development costs incurred for an intellectual
property already included in the Box should be capitalised. The capitalised costs may
be depreciated.
Different from the Group Interest Box, the 10% effective rate applies to all royalties
received, whether or not from affiliated parties. Furthermore, the 10% rate is not
limited to royalties received, but it applies to all benefits derived from the pertinent
intellectual property.
Similar to the Group Interest Box, also benefits from the Patent Royalty Box are
capped. Briefly put, during the economic life of the pertinent intellectual property
only those profits realised with that intellectual property are effectively taxed at 10%,
which in total do not exceed 4x the development costs relating to that intellectual
property. Any excess of profits is taxed at the “normal” rate (in the proposal 25.5%).
Note that it is not certain whether the Patent Royalty Box becomes effective on 1
January 2007. The Bill notes that the implementation of the Box depends on pending
discussions with the European Commission to avoid that the European Commission
will mark the Patent Royalty Box as harmful tax competition and regard it as in
conflict with the Code of Conduct.
6.
Adjustments participation exemption
An important exemption of the Dutch corporate income tax is the so-called
participation exemption. The Netherlands corporate income tax does not use a credit
system to avoid double taxation on benefits derived from subsidiaries. Instead those
benefits are exempt. The Dutch participation exemption can be applied when a Dutch
parent or Dutch permanent establishment of a foreign parent company holds more
than 5% of the share capital of a subsidiary and certain other conditions are met as
well. Aside from certain anti-abuse regulations, these other conditions currently are:
a.
The shares in the subsidiary may not be held as inventory;
b.
The shares may not be held as a passive investment;
c.
The profit of the subsidiary should be subject to a tax on income.
Condition (b) does not apply to NL subsidiaries and foreign EU subsidiaries in which
the NL parent has a more than 20% interest and which meet certain other conditions.
Condition (c) in practice only applies to foreign subsidiaries.
It is because of this participation exemption that The Netherlands is frequently used in
international structures. As, when properly structured, capital gains and dividends are
exempt, the participation exemption gives international structures amongst others the
required flexibility.
Through time, however, the current regulations concerning the participation
exemption has become a proliferation of conditions and exceptions in order to avoid
abuse of the regulations, especially in international settings. Certain of those antiabuse regulations, however, appeared not EU proof, as a result of which new
regulations were introduced specifically intended to meet EU legal requirements. Also
that development did not add to an easy implementation and understanding of this
exemption.
The Bill aims in simplifying the regulations applicable to the participation exemption
and making this exemption EU proof. Most eye-catching amendments are:
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The general subject to a profit condition is eliminated;
The passive investment condition is eliminated.
Instead, if a subsidiary is not a low taxed passive investment, then the participation
exemption will in principle apply, even if the profits of that subsidiary are not subject
to a tax.
The Bill contains regulations stipulating when a subsidiary is deemed to be a passive
investment. If the subsidiary qualifies as a passive investment, then still the
participation exemption may be invoked, however, the NL parent should then
demonstrate that the subsidiary is subject to a tax on profits which results in a tax levy
of at least 10% on profits determined according to Netherlands tax standards.
If such 10% levy does not take place, then the participation exemption will not apply.
However in that case the NL parent company obtains a credit against the Netherlands
corporate income tax due on the profits of the subsidiary. The Bill contains
regulations how the credit should be calculated.