Dutch Tax Plan 2019
On 18 September 2018, the Dutch government published its Tax Plan 2019 and various related proposals. In this news item, Intaxify shares a summary of the key changes and practical recommendations.
On 18 September 2018, also the Anti Tax Avoidance Directive I (ATAD I) implementation proposal was released. Although this formally is not part of the Dutch Tax Plan 2019, Intaxify also covers this in this new item as various references to this proposal are included in the Tax Plan 2019 documentation. For efficiency’s sake, Intaxify refers to all these documents jointly as the “Tax Plan 2019”.
You can find the original documents here.
At a glance
- Various changes in tax rates (income tax, corporate tax, VAT);
- Limitation loss carry forward period to six years for corporates and substantial shareholders;
- Implementation of ATAD I: New interest deduction limitation rule (earning stripping rule);
- Implementation of ATAD I: New rules for controlled foreign companies (CFC);
- Real estate depreciation limitations;
- Real estate investment restrictions for FBI’s;
- Abolishment of dividend withholding tax;
- Introduction of new withholding tax on dividends, interest and royalties in specific situations;
- Limitations on allowances and deductions for personal income tax;
- Changes to the 30% ruling duration for expats working in the Netherlands;
- VAT changes for e-commerce for small entrepreneurs (EU Directive).
I. Corporate Tax
Tax rate
The standard corporate tax rate will be gradually reduced from 25% to 22,25% as per 2019. In 2019, the rate will be 24,3%, in 2020 the rate will be 23,9% and in 2021 the rate will be 22,25%.
The lower bracket rate of 20% that is currently applicable to profits up to EUR 200,000 will also gradually decrease. In 2019, the rate will be 19%, in 2020 the rate will be 17,5% and in 2021 it will be 16%.
In the Tax Plan 2017, it was proposed to gradually increase the threshold for the lower bracket from EUR 200,000 to EUR 350,000. However, this measure is now cancelled and the threshold will remain EUR 200,000.
Loss carry forward rules for corporates
Under the current corporate income tax regime, tax losses can be carried forward for nine years. This period will be reduced to six years as per 2019. The carry back period of one year remains unchanged.
For existing losses, grandfathering law has been proposed. This means that for losses incurred before 2019 that have not been utilized yet, the nine-year period will remain applicable.
Recommendations
Taxpayers should consider optimizing their loss utilization to avoid that unutilized losses forego, for example by triggering certain unrealized reserves. This should of course always be tailored to the position of the respective taxpayer.
Depreciation limit for real estate
The Tax Plan also includes two significant measures relating to real estate. The first measure relates to the depreciation limit for real estate. Currently, taxpayers that own a building for their own use are allowed to depreciate this (gradually) to 50% of the so-called WOZ Value (value of property under the Valuation of Immovable Property Act). Once property has been depreciated to this value, no further tax depreciation is allowed.
Under the new rule, the depreciation limit will increase to 100% of the WOZ value as per 2019. This will have a significant impact.
Example
If you own a building that was acquired for EUR 1,1 million with a WOZ value of EUR 1 million, you were allowed to depreciate the building down to EUR 500,000 (i.e. 50% of the WOZ value) and therefore incur EUR 600,000 in total as tax deductible depreciation expenses. Under the new rules, depreciation is only allowed until a book value EUR 1 million has been reached (i.e. 100% of the WOZ value). Over multiple years, this will therefore result in EUR 500,000 of additional taxable income as you are now only allowed to depreciate the difference between the acquisition price (EUR 1,1 million) and 100% of the WOZ value (EUR 1 million).
Investment restrictions for FBI’s in real estate
The second measure relating to real estate is the newly proposed investment restriction for Dutch fiscal investment institutions (FBI). An FBI is a special investment vehicle taxed against 0% corporate income tax in case certain strict requirements are met. One of these requirements is the re-distribution requirement which requires FBI’s to re-distribute their income to their shareholders within eight months after the year-end. These distributions are in principle subject to Dutch dividend withholding tax and may create taxable income at the level of the participants in the FBI (depending on the type and jurisdiction of the participant). Overall, investments in real estate via an FBI are taxed once, i.e. at the level of the level of the participant and not at the level of the investment vehicle. This facilitates a tax neutral investment via an investment vehicle which can have several benefits compared to a direct investment, such as risk spreading etc.
FBI’s are commonly used in real estate investments. Under the Tax Plan 2019, however, FBI’s will no longer be allowed to invest directly in Dutch real estate as per 2020. Indirect investments in Dutch real estate and investments in foreign real estate remain allowed.
Investment companies that invest directly in real estate will therefore no longer meet the FBI requirements and become subject to the regular corporate tax regime. This measure coincides with the abolishment of the Dutch dividend tax (see below).
The argument to restrict real estate investments is that foreign participants in FBI’s would otherwise be able to invest in Dutch real estate while the Netherlands would not be able to impose tax at any level of this investment. After all, the FBI is subject to 0% tax (i.e. no taxation at the level of the FBI) and distributions to the participants in the FBI will no longer be subject to Dutch dividend tax, while generally, these foreign participants are not subject to Dutch corporate or income tax either (i.e. no taxation at the level of the participant).
Considering the material impact this measure may have, the Netherlands will liaise with representatives of FBI’s investing in Dutch real estate to monitor the exact impact.
II. Withholding Tax
Dividend withholding tax
This topic has been extensively discussed – the abolishment of the Dutch dividend tax. In the Tax Plan 2019, it has been proposed to abolish the dividend withholding tax as per 2020. However, in two types of situations, dividend withholding tax will remain applicable.
Exception for low-taxed recipients
Dividend distributions to recipients in low-taxed jurisdictions will remain subject to withholding tax. This dividend taxation will apply on distributions to affiliates (in general: shareholders or participants who have at least 50% control / voting power in the distributing company). Jurisdictions will be considered low-taxed if the statutory corporate tax rate is lower than 7%. The Netherlands will annually publish a list with jurisdictions that qualify as “low-taxed” under the new measures.
Exception for tax abusive structures
In addition, dividend withholding tax will remain applicable in case of tax abusive situations (wholly artificial arrangements with the sole purpose of avoiding taxation).
Tax base
The tax base for the new dividend withholding tax will be similar to the existing dividend withholding tax base. However, the tax base has been extended to cover certain tax avoidance schemes. In the first place, repayments of capital by companies who have “profit reserves” will be subject to withholding tax. “Profit reserves” should be understood as the reserves in the company exceeding the formal share capital. Secondly, shareholders of companies who build up their reserves (and not distribute it to their low-taxed shareholders) will face withholding tax on the capital gains when such subsidiary is sold. The aim here is to avoid that these reserves flow to the shareholder in another form (i.e. as capital gains) without withholding tax.
Withholding tax on interest and royalties
As per 2021, a new withholding tax will be introduced for interest and royalty payments from the Netherlands to recipients in low-taxed jurisdictions. Similar as to the withholding tax on dividends, the withholding tax on interest and royalties will also apply in tax abusive situations.
Tax rate
The new withholding tax rates will correspond with the corporate income tax rates. This means that the dividend withholding tax rate will be 23,9% in 2020 and 22,25% as per 2021. The withholding tax rate for interest and royalties will be 22,25% as per 2021.
International impact for double tax treaties
It is possible that jurisdictions with whom the Netherlands concluded a double tax treaty will meet the criteria of “low-taxed jurisdictions”. In that case, the Netherlands and the respective treaty partner have not been able to consider the new withholding tax measures (and include appropriate measures in the treaty).
On the one hand, this may mean that the Netherlands is not able to impose the withholding tax, even though the recipient is low-taxed. On the other hand, the Netherlands may be able to impose a withholding tax based on the treaty, while the recipient is not low-taxed. Therefore, the Netherlands aims to reach out to the respective treaty partners on the list of low-taxed jurisdictions to re-negotiate the relevant items of the tax treaty (where needed).
Furthermore, it has been proposed that recipients in low-taxed jurisdictions will first become subject to the withholding tax when three years after the first inclusion of the jurisdiction on list with low-taxed jurisdictions have lapsed. This way, the Netherlands and their treaty partners have sufficient time to start treaty negotiations.
III. Anti Tax Avoidance Directive
Interest deduction limitation rules (implementation ATAD I)
In June 2016, the EU Member States agreed on ATAD I. In this Directive, several OECD BEPS Action Items are implemented, including the introduction of a general interest deduction limitation rule (the earning stripping rule) and CFC rules. ATAD I should be implemented by 1 January 2019 in the Dutch legislation.
The Tax Plan 2019 introduces the earning stripping rule as a new interest deduction limitation. Under this rule, interest expenses exceeding 30% of the earnings before interest, taxes, deductions and amortizations (EBITDA) will be non-deductible for tax purposes.
EUR 1 million threshold
However, a threshold of EUR 1 million will be available, meaning that the first EUR 1 million of interest will in principle remain deductible even if this exceeds 30% of the EBITDA.
Carry forward
In case the interest expenses exceed the 30% threshold in one tax year, the excessive interest may be carried forward to future years. In the event that the interest expenses are less than 30% in a future year, the excessive interest from prior years can be deducted in that future year. There are no limitations in terms of the period of carrying forward these expenses.
Anti-abuse measures have been proposed to prevent structures whereby taxpayers with large carry forward interest deductions are sold to other taxpayers who are below the 30% threshold. In case the ultimate ownership in such taxpayer changes for 30% or more, the carry forward interest in principle foregoes. Exceptions may however apply in situations where there is no tax motive. This measure is similar to the anti-abuse rule for carry forward losses.
Abolishment existing interest deduction limitations
As a result of the introduction of this new interest deduction limitation rule, three related measures will be abolished: (i) the interest deduction limitation for excessive participation debt, (ii) the interest deduction limitation for acquisitions holdings and (iii) the limitation of loss utilization for holding and financing companies.
CFC rules (implementation ATAD I)
A second measure following from ATAD I are the CFC rules. This measure aims to avoid profit shifting to foreign low-taxed entities or permanent establishments.
The CFC rule applies in case a taxpayer directly or indirectly owns 50% or more in a CFC. An entity or permanent establishment that is subject to a statutory tax rate on profits of less than 7% can qualify as a CFC. Furthermore, the CFC qualification can apply to an entity that resides in a jurisdiction listed on the EU list of non-cooperative jurisdictions.
The first step is therefore to identify if a taxpayer owns 50% or more on a foreign entity and the second step is to identify if this foreign entity is low-taxed or residing in a jurisdiction on the list.
In case the CFC rule applies, a Dutch taxpayer will be taxed for certain income of the CFC in its Dutch tax base, even when this CFC income has not been distributed formally to the Dutch taxpayer yet. Items of qualifying income are for example interest, royalties and dividends.
Exceptions
There are exceptions to the inclusion of the CFC income at the level of the Dutch taxpayer. In case the CFC has significant economic presence, the foreign income does not have to be included in the Dutch tax base. To determine if the CFC has significant economic presence, the Dutch substance requirement effective as per 1 April 2018 can be used as guidance. This guidelines among others include employee expenses of at least EUR 100,000 and an office space that is suitable and effectively used. Personnel should furthermore have the professional capacity to fulfill their functions and their activities cannot be solely auxiliary.
Income Tax
Tax rate “box 1”
Currently, income allocable to “box 1” (work and home) is taxed in four progressive brackets. In short, income up to EUR 20,142 is taxed against 36,55% (first bracket) going up progressively in two steps (tax rate of 40,85%) to the fourth bracket where income above EUR 68,507 is taxed against 51,95%.
In the Tax Plan 2019, the rates will be limited to only two brackets as per 2021: the first bracket will tax income up to EUR 68,507 against 37,05% and the second bracket will tax all income above EUR 68,507 against 49,5%.
Furthermore, the threshold for the highest bracket will be fixed for the coming years at EUR 68,507, while this was subject to an annual indexation in the past.
Tax deductions under “box 1”
The Dutch income tax regime of “box 1” currently has several deductions. Under the current rate, these are deductible against 51,95% maximum (fourth bracket). Under the new tax rates applicable as per 2021, this will be reduced to 49,5% (the new second and highest bracket).
As of 2020, several of these deductions will subsequently be further limited gradually with 3% per year (and 2,95% in 2023). As of 2023, deductions will therefore effectively take place against the first bracket rate of 37,05%.
Tax rate “box 2”
Individuals owning a so-called substantial shareholding in a company (5% ownership) are currently taxed for income deriving from this shareholding (such as dividends or capital gains) against 25% in “box 2”.
Under the Tax Plan 2019, this tax rate will gradually increase to 26,25% in 2020 and to 26,9% in 2021. In previous discussions, a top rate of 28,5% was considered, but in the Tax Plan 2019, a lower top rate was proposed. This tax rate increase coincides with the decrease of the corporate tax rate for companies.
Recommendation
Shareholders who have (large) undistributed reserves in their companies may consider to distribute this during 2018 or 2019. After all, these reserves have historically been taxed against 25% corporate tax at the level of the company (and would have been taxed against 25% at the level of the shareholder under the current rates). Future income will be taxed against a lower corporate tax rate at the level of the company (22,25%) and a higher tax rate at the level of the shareholder (26,9%). However, “old” undistributed reserves that have been taxed against the “high” corporate rate (25%) will become subject to the “high” income tax rate (26,9%) as well if these are only distributed after the new increased income tax rates become applicable. No grandfathering rules have been proposed.
Loss carry forward rules for substantial shareholders
Under the current tax regime for substantial shareholders, tax losses originated from a substantial shareholding can be carried forward for nine years. This period will be reduced to six years as per 2019, similar as the limitation proposed for corporate entities (see above). The carry back period of one year remains unchanged and similar grandfathering rules will be put in place for losses originated before 2019 (i.e. these can be offset for nine years).
IV. Wage Tax
30% ruling for expats
Foreign employees who move to the Netherlands to work in the Netherlands are often confronted with extra costs. To attract qualified personnel from abroad, employers are allowed to provide 30% of the wages tax free to qualifying employees when certain requirements are met (the 30% ruling). Currently, this tax-free allowance can be granted by employers for eight years.
Under the Tax Plan 2019, this period is reduced to five years as per 2019. This reduction will apply to both new and existing rulings. This means that employees whose ruling was to end between 2019 and 2021, will now already end as per 2019. No grandfathering law has been proposed.
V. VAT
Tax rate
The reduced VAT rate in the Netherlands is currently 6% (this rate for example applies to food, water, art, etc.). Under the Tax Plan 2019, this rate will increase to 9%.
E-Commerce
Part of the EU Directive 2017/2455 (E-commerce Directive), should be implemented in Dutch legislation as per 2019. The Dutch Tax Plan 2019 therefore includes a new facility for small entrepreneurs who provide digital services abroad.
As per 2015, digital services provided to consumers within the EU are subject to VAT in the jurisdiction of the consumer to whom the services are provided, against the local VAT rate. In case an entrepreneur provides these services to consumers in multiple jurisdictions, this would in principle mean that the entrepreneur would need to register in all these EU jurisdictions for VAT purposes.
To reduce the administrative burden, entrepreneurs can elect to apply the so-called mini One-Stop Shop System (MOSS). Under the MOSS, the entrepreneur remits the foreign VAT to its own tax office and this tax office subsequently settles this with the local tax offices of the jurisdictions where the digital services are provided. Although the MOSS has significantly reduced the administrative burden, there are still some practical issues, especially for small entrepreneurs. For example, entrepreneurs may sometimes face difficulties in establishing the jurisdiction of residence of their clients. Furthermore, taxpayers need to submit a separate MOSS return in addition to the regular VAT return.
For very small entrepreneurs (crossborder revenue of less than EUR 10,000) who are only present in one jurisdiction, a new measure will now be incorporated in the Dutch VAT Act. As of 2019, these entrepreneurs may elect to remit the VAT on crossborder digital services in their own jurisdiction, without having to report this via the MOSS.
More info?
Please feel free to reach out to Intaxify at info@intaxify.nl in case you would like to know more about the Tax Plan 2019 and its impact.