17 September 2020

Dutch 2021 budget increases tax burden on large corporate taxpayers

On 15 September 2020, the Dutch government published its 2021 budget. The tax measures in the 2021 budget were largely as anticipated and, where corporate taxes are concerned, will generally result in an increase of the tax burden experienced by multinational businesses. Two further initiatives were announced. One is a proposed bill that will change the arm's length principle. Under the bill, a downward adjustment of income may only be made if the adjustment is taxed elsewhere. The bill, which is expected to be submitted to parliament in the spring of 2021, is part of the Dutch government's efforts to combat aggressive tax planning and will undoubtedly severely limit the attractiveness of the "informal capital" structures. The other initiative is a study for the more equal treatment of debt and equity by further limiting the deductibility of interest on debt (beyond the current 30% EBITDA rule) in combination with a notional deduction on equity.

Changed political climate

The 2021 budget is the last budget of the third coalition government led by prime minister Mark Rutte. National elections are scheduled to take place on 17 March 2021. At the beginning of the Rutte era, many predicted that the multinational business community's tax interests would be well anchored with a government led by the right-wing liberal party. As the government is nearing the end of its term, however, that appears to have played out differently. Forced by international developments (OECD/BEPS), as well as a changed political and public perception of the contributions (tax and otherwise), of multinational businesses, successive Rutte governments have had to enact legislation that was not always regarded favourably by businesses. With the additional impact of the coronavirus crisis on government finances as an additional factor, the 2021 budget is no exception to this trend. Here are the main tax measures that will affect multinational businesses in 2021 and beyond.

Tax rate increases

The top corporate tax rate will stay at 25% instead of being reduced to 21.7%%, as set out in the 2019 budget (the reduction of the tax rate in the first bracket to 15% will remain in place). Income from R&D activities will be taxed at 9% (up from the current 7% rate). Three measures are introduced to compensate for the budgetary effect of a Dutch Supreme court ruling that interest on "AT1" instruments is deductible:
  • The minimum capital for banks will increase from 8% to 9% (below this threshold, interest is not deductible).
  • AT1 capital will be treated as debt when calculating minimum capital.
  • For 2021 only the bank levy will increase from 0.044% to 0.066% (short-term debt) and from 0.022% to 0.044% (long-term debt).
The transfer tax rate for commercial real estate will increase from 6% to 8%, instead of to 7%, as initially announced.

Restrictions on the use of NOLs

A proposal will be submitted providing that, as of 2022, the amount of net operating losses that may be offset will be limited to 50% of the taxable profit in excess of EUR 1 million; these net operating losses may be carried forward indefinitely (currently, the carry forward is limited to six years).

Announcement of future initiatives

In the spring of 2021, the government will submit a bill adjusting the application of the arm's length principle: a downward adjustment of taxable income will only be allowed if there is a corresponding taxable pick-up elsewhere. This measure is part of the government's efforts to combat aggressive tax planning and is likely to significantly limit the attractiveness of "informal capital" structures. These have mainly been employed by US multinationals to shelter income from valuable intangibles, from current taxation. The government will launch a study on measures aimed at treating debt and equity more equally for tax purposes by introducing a notional deduction on equity, to be financed by a further limitation of the deductibility of interest on debt. In response to the Sofina judgment of the European Court of Justice, Dutch dividend withholding tax incurred by Dutch corporate taxpayers in excess of corporate income tax actually due, will no longer be refundable as of 2022. Excess dividend withholding tax may be carried forward as a credit to future years. In anticipation and in deviation of this measure, a temporary decree will be introduced that will allow foreign companies to apply for a refund of the Dutch dividend withholding tax charged in excess of their foreign corporate income tax due. The government has responded to the Danish beneficial ownership judgments of the European Court of Justice (see here and here) by conducting a study on whether the Dutch participation exemption should be amended. It now wants to further investigate a proposal to automatically exchange information with third countries relating to Dutch holding companies that benefit from the Dutch participation exemption but without meeting the Dutch substance requirements.

Coronavirus-related measures

Taxpayers will be allowed to form a tax reserve in 2019 for losses expected in 2020 (the "corona reserve"). Enterprises making capital investments will be allowed to credit a yet to be determined percentage of the investment costs against wage tax withheld from salaries paid to employees.

Other measures

A carbon emission tax will be introduced at a rate of EUR 30 per tonne in 2021, increasing to EUR 125 per tonne in 2030. Currency gains and negative interest on debt will be taxable where the interest on the debt is not deductible under article 10a of the Corporate Tax Act 1969.

Restriction on deductibility of liquidation losses

Separate from the 2021 budget, the government has submitted a bill to parliament that will limit the possibility to deduct losses from the liquidation of subsidiaries. Under the bill, the deduction of losses in excess of EUR 5 million is generally limited to liquidation losses on 50% or more owned subsidiaries that are resident in the EU or EEA, or in designated jurisdictions with an association agreement with the EU. The loss must be claimed within three calendar years after that in which the subsidiary's business was terminated. The same limitations will apply to losses resulting from the termination of a foreign permanent establishment.