News Update Tax

28 April 2020

A Parliamentary Advisory Committee (the "Committee") assessed potential measures for a fairer taxation of multinationals' profits. Their findings resulted in a 145-page report.

The Committee identified a number of bottlenecks in the Dutch corporation income tax ("CIT") system contributing to an imbalance in the taxation of multinationals. Although the Committee notes that many of the fundamental underlying causes should be addressed through international cooperation, the Committee recommends to implement a "basic option" of seven measures for the purpose of broadening the CIT base.

Basic option

The proposed measures in the "basic option" aims to achieve the following:

1. Creating a minimum level of CIT for companies conducting a profitable business in the Netherlands (Minimum CIT Level); and
2. Eliminating mismatches with other counties. (Eliminating Mismatches)

The first measure tries to prevent that companies conduct a profitable business in the Netherlands but do not pay sufficient CIT, whereas the second measure targets the imbalances of the Dutch CIT system vis-á-vis that of other countries.

Minimum CIT level
In order to achieve a minimum CIT for companies conducting a profitable business in the Netherlands, the Committee recommends the following measures:

1. Limitation of loss setoff to a maximum of 50% of taxable profits exceeding EUR 1 million combined with an unlimited period for loss carry forward.
2. Limitation of the deductibility of (not on-charged) shareholder expenses to a percentage of the taxable profit in the relevant year in combination with a certain threshold (in order to exclude SMEs).
3. To conduct further research and determine whether the deductibility of excessive intra-group royalties should be limited.
4. Limitation of the deductibility of interest, shareholder expenses and/or royalties to an aggregate amount of e.g. 50% of a uniform tax base (in combination with measures 2 and 3).

Eliminating Mismatches
In order to eliminate mismatches the Committee recommends the following measures:

5. Increasing the effectiveness of the CFC-rules by also taxing distributed profits. As a result, it would no longer be possible to circumvent the application of the CFC rules by having the CFC distribute the CFC-income as dividend before year-end. The report also recommends that the CFC-income should no longer be recalculated in accordance with Dutch tax standards. Furthermore, the exception for substantive economic activity should be amended or abolished as well. Also, they recommend to take into account the effective tax rate rather than the statutory tax rate to determine whether a company is a CFC.
6. Deny the application of the at arm's length principle if the application reduces the taxable profit in the Netherlands (e.g. an imputed deductible expense) while the other country does not include a corresponding upward adjustment in its tax base.
7. Limitation of depreciation of intra-group transferred assets to the extent the step up in value caused by the transfer is not sufficiently taxed at the level of the transferring group company. The Committee targets so called "rate mismatches" by limiting the depreciation of the hidden reserves of these transferred assets.

Status of the report

The report of the Committee was presented by the State Secretary of Finance to the Dutch Parliament on 15 April 2020. The Parliament will consider the report and debate on the recommended measures. We will closely monitor this debate and its outcome. It will be interesting to see what effect COVID-19 will have on the debate.

You can find the report of the Committee here. We will keep you informed on any further developments.