Budget Day Special
Tax Plan 2022 | Overview of key proposals (part 2)
6 October 2021
21 September 2021
On Budget Day (Prinsjesdag), the Dutch Ministry of Finance presents its tax plans (“Tax Plan”) for the coming year.We briefly summarised the most relevant proposals in our previous News Update of 21 September. In this News Update, we will elaborate on the proposals in more detail. If adopted, most of the bills will enter into force on 1 January 2022.
CORPORATE INCOME TAX1. ATAD2: Reverse hybrids
The Netherlands already implemented various anti-abuse rules with respect to hybrid entities and instruments. On 1 January 2022, these rules will be extended, i.e. by targeting "reverse hybrid entities". A reverse hybrid is typically a partnership that is established in accordance with Dutch law or located in the Netherlands and that is treated as tax transparent from a Dutch tax perspective, but as opaque (non-transparent) from the perspective of the jurisdiction(s) of one or more of its related participants.
Currently tax mismatches on the income of these partnerships may occur. From a Dutch tax perspective, it is possible that the income is deemed to be realised by the partnership's participants, whereas that income is not actually picked up in the jurisdiction(s) in which its participants are treated as tax resident. In such a case, the new rules envisage that the partnership becomes fully liable to Dutch corporate income tax (''CIT'') on income realised by the partnership. The rule applies if there are participants that:
- are entities (i.e. not individuals);
- have a qualifying interest in the partnership (typically if the participants own at least 50% of the profit, capital or voting rights in the partnership);
- are tax resident in a jurisdiction that treats the partnership as opaque (non-transparent); and
- are not certain qualifying investment vehicles (i.e. regulated investment funds).
Partnerships that become liable to CIT in the Netherlands may deduct income from their taxable base that is attributable to participants that reside in jurisdictions that do consider the partnership as tax transparent (and hence take into account that income for tax purposes). As a result, the partnership is effectively only subject to CIT to the extent that it realises income that is not picked up in other jurisdictions.
In addition, the partnership (reverse hybrid) that is targeted by the new rules may also become liable to withhold Dutch dividend withholding tax and Dutch withholding tax on interest and royalties paid by the partnership. Furthermore, specific rules ensure that withholding taxes are levied on payments made by other Dutch tax resident entities to the partnership if these payments are:
- attributable to participants that are tax residents in jurisdictions that consider the partnership tax transparent; and
- no withholding tax exemption would have applied had the distribution or payment been made directly to these participants.
Taxpayers are required to keep documents on file that prove to what extent the anti-abuse rules, including the aforementioned rules against hybrid entities, could apply. In addition, there are various other technical points that may arise concerning hybrid entities that are targeted by these extended anti-abuse rules. Therefore, we advise to closely assess the impact of the expanded anti-abuse rules on each hybrid entity.
2. Tightening the earnings stripping rules and increase the corporate income tax rate
Following discussions of the Tax Plan in the Dutch Parliament, it was announced that there will be a tightening of the existing earnings stripping rule. Under this rule, taxpayers are allowed to deduct interest expenses up to a certain percentage of their EBITDA. Based on information available to date, it is possible that the deductible EBITDA percentage will decrease from 30% to 20% as of 1 January 2022.
Furthermore, the lower bracket of the CIT rate will increase to EUR 395,000 in 2022 (instead of EUR 245,000 in 2021). In addition, the CIT of the second bracket (i.e. profits exceeding an amount of EUR 245,000 and EUR 395,000 if the lower bracket threshold is increased) will increase from 25% to 25.8% if adopted by the Dutch parliament.
3. Changes to the tax loss carry-forward mechanism
Currently, the period during which historical tax losses can be carried forward is limited to six years (nine years for losses incurred prior to 2019). As of 1 January 2022, losses can be carried forward indefinitely. Please note that the new rules will be accompanied by additional restrictions, meaning that losses may be offset in full against profits up to EUR 1 million, whereas the set-off will be limited to 50% for profits in excess of the EUR 1 million threshold. There are no adjustments on loss carry back (i.e. tax losses can be carried back one year).
4. Limiting the set-off of dividend withholding tax and tax on games of chance
The Dutch government proposes amending the current credit mechanism for dividend withholding tax and tax on games of chance. This should align Dutch tax law with the Sofina decision of the European Court of Justice.
Currently, entities that are subject to CIT in the Netherlands can fully offset dividend withholding tax and tax on games of chance tax against any CIT payable. This methodology also applies to loss-making taxpayers (or taxpayers that are not paying CIT in the Netherlands because of certain applicable reductions or methods for avoiding double taxation). Dutch taxpayers are entitled to a refund of the withholding taxes, whereas that does not apply to entities that are not subject to CIT in the Netherlands. This potentially results in a difference in treatment between Dutch and foreign taxpayers.
Based on the proposal, the government intends to limit the offsetting capacity of entities that are subject to CIT in the Netherlands. Entities in a loss-making position (or entities that are otherwise not paying CIT in the Netherlands due to certain applicable reductions or methods for avoiding double taxation) are no longer entitled to a refund of dividend withholding tax and tax on games of chance. Instead, the government proposes carrying excess credits (i.e. the difference between the CIT payable – before taking into account the credit – in a specific tax year and the total dividend withholding tax or tax on games of chance levied in that same year) forward to future years. No time limitations apply in relation to carrying forward such excess credits. If adopted, the new credit mechanism will enter into force as of 1 January 2022.
5. Transfer pricing mismatches
The Dutch government also announced to amend the application of the arm's length principle in cross-border mismatches in informal capital structures ("transfer pricing mismatches") as of next year.
In short, new provisions will be introduced to restrict downward adjustments of the Dutch taxable income if a foreign jurisdiction does not make a corresponding upward adjustment. The proposed bill considers the input that has been submitted by interested parties following the internet consultation. Please refer to our April 2021 Transfer Pricing News Update.
The arm's length principle aims to ensure that parties engaged in intercompany transactions agree to the same terms and conditions as unrelated parties in comparable uncontrolled transactions. Under the current Dutch application of the arm's length principle, arm's length expenses are deductible from the taxable profits, regardless of whether the other jurisdiction taxes the income correspondingly.
Applying the arm's length principle results in upward or downward adjustments of the taxable profits when the profits do not correspond with the profits which would be made by a third party. A downward adjustment of the taxable profits in the Netherlands indicates that the Dutch entity reported profits which are higher than it would be entitled to when applying the arm's length principle. This basically means that the company was entitled to a remuneration which was higher than the arm's length price or was, for example, charged against a rate which is lower than the arm's length rate. Any excess profits are often recognised as informal capital for Dutch tax purposes.
A transfer pricing mismatch exists in cases where the foreign jurisdiction involved in the cross-border intercompany transaction does not impose a corresponding upward adjustment, whilst the Dutch taxable income is adjusted downwards. Consequently, a part of the profits remains untaxed. To make sure that profits are taxed at least once, the proposed legislation aims to restrict the downward adjustment in such cases.
The bill also applies to transfer pricing mismatches concerning intercompany transfers of assets, including debts. When a transferring foreign related entity takes into account a lower transfer price for the asset than the fair market value, the proposed measure only allows the Dutch taxpayer to depreciate over the lower price. The Dutch taxpayer claiming a downward adjustment will bear the burden to prove that a corresponding upward adjustment took place at the level of the transferring foreign related entity.
The proposed measure will enter into force on 1 January 2022 if adopted. The measure may have retroactive effect if taxpayers:
- acquired assets from related parties in financial years starting on or after 1 July 2019 (i.e. the entry date of the revised Dutch tax ruling practice) and before 1 January 2022; and
- the acquired assets can still depreciate in financial years starting on or after 1 January 2022.
In such cases, the Dutch taxpayer will face a depreciation limitation in financial years starting on or after 1 January 2022 if the transferring foreign related entity takes into account a lower asset value for tax purposes than the fair market value.
It is essential for Dutch taxpayers to be aware of whether transfer pricing adjustments are made. In that respect, maintaining appropriate transfer pricing documentation will become even more key for taxpayers. In addition, an impact analysis of existing intercompany transactions may be needed to assess the effect of the proposed legislation on Dutch taxable profits. Please contact the Houthoff Transfer Pricing Team if you have any further questions.
6. Rules for order of offsetting foreign taxation of Controlled Foreign Companies
On 1 January 2019, the Controlled Foreign Company (''CFC'') regime entered into effect as a result of the implementation of ATAD1 in the Netherlands. If a tax payer that is subject to CIT in the Netherlands as an interest in a controlled foreign entity or a foreign permanent establishment (both a CFC) and this CFC is established in a particular low-taxed jurisdiction, the passive income of that CFC is subject to CIT in the Netherlands.
Under certain conditions, the taxes on profits that the CFC has paid outside the Netherlands can be offset against the CIT that is due in the Netherlands. This offsetting is determined per CFC and cannot exceed the CIT tax due in the Netherlands. In some cases, this leads to a carry forward of offsetable foreign profit taxes to future years.
For taxpayers with multiple CFCs, a mandatory credit order for the CFC’s foreign profit taxes has now been introduced. The mandatory credit order entails that the credit will be calculated based on the ascending order of the size of the CFC’s foreign profit taxes (i.e. the lowest amount of foreign profit taxes is offset first, and the largest amount is offset last).
WAGE TAX7. Changes to tax treatment of stock option rights
Currently, stock option rights are treated as remuneration for wage tax and income tax purposes and are taxable when these options are exercised. According to the bill, taxing these stock option rights may shift to the moment when the shares can be traded (please note that the value at that moment will also be considered). The proposed adjustments are not mandatory but can be opted for by the taxpayer.
The new stock option rights regime will be applicable to both listed and non-listed companies. Please note that following a listing, sale restrictions (e.g. a lock-up period), will in principle be deemed to expire after five years for Dutch tax purposes. The latter may be different if the shares are not tradeable as result of a statutory provision.
This amendment will also put an end to a special tax facility for companies with an R&D statement. As of 1 January 2018, subject to certain conditions and up to a certain maximum, employees were able to only take 75% of the exercise gain of the stock options into consideration.
The new stock option rights regime aims to make it more attractive for employers to provide stock options (to their employees) in combination with a sale restriction. The choice with respect to the taxable moment should be included in the administration of the employer.
8. Work-related expenses scheme (FY 2021)
The headroom for tax free work related expenses (werkkostenregeling) has (officially) been set at 3.0% for the fiscal wage sum up to EUR 400,000 (to be determined per employer) and 1.18% of the remaining wages for FY 2021. This broadening provides employers the opportunity to compensate employees for additional costs during COVID-19.
9. 'Working-from-home' allowance
Various amendments are expected as of 2022 and these include a specific wage tax exemption for the costs of working from home. The exemption will amount to EUR 2 (per employee, per day).
REAL ESTATE TRANSFER TAX10. Changes for individuals
Private individuals (aged 18-35) buying their first home may benefit from a RETT exemption. To apply for this exemption, the value of the acquired property must not exceed EUR 400,000. The government will propose some changes, which are mainly of a technical nature, to curb abusive tax arrangements.
VARIOUS11. Reducing the 'landlord levy'
The rate of the landlord levy (verhuurderheffing) rate will be reduced. Additionally, it is proposed to adjust the system of the landlord levy deductions. For certain qualifying investments, a tax deduction can be obtained through a system of provisional and final investment statements. This amount is deducted from the landlord levy under certain conditions. These levy reductions can be reduced to zero on the first day of each quarter if the budgeted amount has been exceeded. The fact that the amounts can only be adjusted quarterly can lead to substantial budget overruns. The legislative proposal therefore envisages that the levy reductions can in future be reduced to zero at the first day of each month. The government announced that the landlord levy rate will be further reduced in 2022. The formal amendment to the Tax Plan is not yet published.
12. Avoidance of double taxation for energy storage
The Dutch energy tax (energiebelasting) is a consumption-based taxation. Under the current rules, the energy storage (through batteries) by energy companies is subject to energy tax as it is regarded as the consumption of energy. In addition, the subsequent energy supply to the final user is also subject to tax. As a result, the energy tax is levied twice whilst there is only one final user. New legislation is introduced that aims to avoid double taxation by means of applying the existing exemptions on the storage of energy. Under the proposed new rules, the supply of energy to an energy company is no longer subject to energy tax if it stores the energy in a battery. Only the energy supply to the final user is taxed. Please note that the operator of the energy storage facility is still subject to tax for its own consumption.
13. Simplifying the VAT one-stop shop for e-commerce transactions
The One-Stop-Shop ("OSS") system for e-commerce will be simplified by means of an administrative easement. Entrepreneurs that make use of the One-Stop-Shop system for e-commerce only submit 'OSS' VAT returns in the Member State where they are registered for VAT purposes. That Member State distributes the VAT due among the Member States where the entrepreneur realised turnover. In the 'OSS' VAT returns, the entrepreneur can also declare corrections relating to an earlier tax period, for example, due to goods taken back. In certain cases, the VAT return can become negative in the Member State for which the sales correction is processed. With retroactive effect as of 1 July 2021, the Netherlands will therefore consider a negative VAT return automatically as a request for refund so that the entrepreneur does not have to file a separate request.
14. Simplifying the WBSO application system
The Dutch government also announced various amendments to the research and development ("R&D") tax credit scheme. This scheme is beneficial to employers, as it lowers the amount that needs to be remitted for Dutch wage tax/social security contribution purposes.
The various amendments include:
- a simplification of the request of a R&D declaration;
- more flexibility regarding the use of credits; and
- certain clarifications, which basically provide that only costs and expenses can be declared in the credit scheme if an R&D statement has been issued.
The R&D tax credit percentages are 32% (start-ups may be eligible to a rate of 40%) for the first EUR 350,000 of R&D wage costs and 16% for the excess amount.
15. Changes to rate Environmental Investment Allowance
The Environmental Investment Allowance ("MIA") aims to facilitate investments in environmentally friendly assets, entitling taxpayers to a tax allowance. The MIA facility has been reviewed and following evaluation, the government proposes to increase the MIA's rate to further stimulate investments in assets that are environmental friendly.
The incentive provided is dependent upon the nature of the investment. The current rate of 13.5%, 27% and 36% will increase to 27%, 36% and 45% respectively as of 1 January 2022.
OTHER DEVELOPMENTSThe government is currently also working on other bills, which are explained below. Updates on these matters are expected to follow in the next couple of months or in early 2022.
16. Dutch tax qualification of partnerships
Earlier this year, an internet consultation regarding the Dutch tax qualification of partnerships was launched. To tackle mismatches, the proposals suggested that Dutch limited partnerships and foreign partnerships that are comparable to a Dutch partnership should be treated as tax transparent for Dutch tax purposes going forward. We refer to our April 2021 Tax News Update.
The initial consultation document also proposed changes to the tax regime for transparent and non-transparent mutual funds (fonds voor gemene rekening). In July of this year, the Dutch government already announced that no adjustments will be made to the tax regime applicable to mutual funds and that this regime will be reviewed at a later stage. Furthermore, it has been announced that the draft bill regarding the tax qualification of partnerships will be introduced in the winter of 2021/2022.
Earlier this year, the European Commission adopted DAC7. DAC7 introduces new reporting obligations for digital platforms and should be implemented on 31 December 2022 latest. The Netherlands plans to present the bill (incorporating DAC7 in Dutch law) in the spring of 2022.