On 17 September 2019, the Dutch Ministry of Finance presented the 2020 Dutch Budget to parliament.
Below, we will highlight the key legislative proposals and announcements.
Corporate income tax
Introduction conditional withholding tax interest and royalties
The Budget includes the previously announced legislative proposal to introduce a conditional withholding tax on interest and royalty payments as of 1 January 2021. The conditional withholding tax will only be due on interest or royalty payments to related entities in low-tax or EU blacklisted jurisdictions, or in cases of abuse.
In case interest or a royalty is paid to a jurisdiction which is not considered low-tax or EU blacklisted, anti-abuse rules may result in the conditional withholding tax to apply. This is the case if an additional recipient has been interposed, whereas the main purpose or one of the main purposes is to avoid the conditional withholding tax at the level of the ultimate recipient, while no genuine economic activities are performed by the recipient of the interest or royalty. Genuine economic activities in the Netherlands or in the low-tax or EU blacklisted jurisdiction do not prevent the conditional withholding tax in case the payment is made directly to the low-tax or EU blacklisted jurisdiction.
In relation to low-tax jurisdictions, with whom the Netherlands has concluded a tax treaty (such as Bahrein, Kuwait, Qatar, Saudi-Arabia and the UAE), the conditional withholding tax will only become effective as from 2024. In the meantime, the Netherlands will start to renegotiate the respective tax treaties.
Please note that the interest or royalty payment may be considered non-deductible under e.g. Dutch anti-hybrid rules while also subject the conditional withholding tax.
Substance requirements are no longer a “safe harbor”
Following recent case law of the European Court of Justice (the “Danish case”), the list of substance requirements will no longer be considered a “safe harbor”. The substance requirements remain relevant, but their relevance shifts to a discussion regarding the burden of proof. If taxpayers meet the substance requirements, the burden of proof to demonstrate that a structure should nevertheless be qualified as abusive shifts to the Dutch Tax Authorities. If the substance requirements are not met, the taxpayer can still prove there are sound business motives. The foregoing is relevant for purposes of: (i) the aforementioned conditional withholding tax, (ii) the domestic dividend withholding tax exemption, (iii) CFC-legislation and (iv) the foreign substantial ownership regulations. The changes will apply as of 2020 for items (ii) to (iv) and are included in the proposal for the conditional withholding tax.
Corporate income tax rates
The decrease of the corporate income tax rate will be less than previously announced. Following the 2020 Budget, the highest corporate income tax rate will remain 25% in 2020 and will decrease to 21,7% in 2021. Profits up to EUR 200,000 will be taxed against 15% as of 2021.
Permanent establishment and permanent representative
A definition of permanent establishment and permanent representative will be added to the Dutch corporate income tax act in line with the OECD Model Convention (and commentary) and the Multilateral Instrument. Under the definitions, commissionaire structures will be considered a permanent representative. Please note that the Netherlands has made a full reservation to this clause in the Multilateral Instrument. The impact of adding the definitions should be (very) limited.
Increase tax rate under innovation box regime to 9%
The government has announced to increase the effective tax rate under the innovation box regime from 7% to 9%.
Changes to loss deduction for participations and permanent establishments
The government will propose new rules in relation to the loss deduction rules for participations and permanent establishments. This proposal is linked to the public discussion on the tax position of Dutch multinationals. The proposed changes will limit the possibilities to claim a loss at the level of the Dutch taxpayer in relation to a participation or permanent establishment.
Personal income tax
Taxation of income derived from savings and investments
On 6 September 2019, the Dutch State Secretary of Finance presented a proposal to change the taxation of income from savings and investments (so-called: “box 3 income”). Box 3 income is based on a fictitious return on savings and investments. The current system is criticized as the fictitious return is considered to be unfair due to the low interest rates. Following a ruling of the Dutch Supreme Court, minor adjustments to the box 3 system were introduced in 2017 to reflect the lower actual returns.
The proposal of the Dutch Secretary of Finance entails a box 3 taxation system to better reflect the actual returns on savings and investments. The main differences as opposed to the current system are as follows. The first difference is the starting point for the calculation of the taxable income. Under the new system, the “capital mix” at the level of the taxpayer serves as a starting point. In this regard, the system distinguishes between three elements: (i) savings, (ii) other assets and (iii) debts, whereas each asset has its own fixed return. A second notable difference is that assets and debts are no longer balanced. Furthermore, if the taxable box 3 income exceeds the tax-free amount (currently EUR 30,360 (2019)), all income is in principle subject to tax (i.e. under the current rules only the surplus is taken into account).
The legislative proposal is expected to be presented to Dutch Parliament mid-2020. In short, the proposed changes are as follows:
- The taxable income is the deemed box 3 income (D) minus the tax-free income of EUR 400 per taxpayer.
- The deemed box 3 income (D) is calculated as A + B – C, where
- = savings: 0.09% fixed return
- = other assets (e.g. investments, shares and real estate): 5.33% fixed return
- = debt: 3.03% fixed return
- The tax rate is increased from 30% to 33%.
Real estate transfer tax
It is intended to increase the real estate transfer tax rate for commercial real estate from 6% to 7% in 2021.
For the relevant changes for VAT, please follow this link.
For more information, please contact:
Jimmie van der Zwaan, Partner Transfer Pricing
Gerriët Nagelhout, Senior Associate
Maud Kallen, Associate
Martijn Jaegers, Partner Indirect Tax