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International measures - Tax Plan 2022

19 oktober 2021 | Door:  Matthijs van Dorssen

When companies do business internationally, they come up against a number of different tax regimes, which can lead to an undesirable tax burden or tax avoidance. The 2022 Tax Plan contains changes, new schemes and measures aimed at addressing undesirable consequences.

Change to offsetting of advance corporation tax

A Dutch private limited company that holds investments can offset the dividend tax and gambling tax it owes against its corporation tax. Foreign entities are not able to do this. Under pressure from EU law, from January 1st 2021 approval was given to refund dividend tax and gambling tax to foreign portfolio shareholders. Under this arrangement this setoff is capped at the amount of corporation tax owed in a particular year. Any dividend tax that is not offset is carried forward to a subsequent year.

There will be no time limit for this carry-forward, which means that any dividend/gambling tax that has not been offset will not expire. This measure will enter into force on January 1st 2022 and will apply to all taxpayers in the corporation tax.

Arm’s-length principle in cross-border situations

Affiliated companies are obliged to transact with each other on an arm’s-length basis. For any goods and services that they supply to each other they must charge an arm’s-length price, i.e. the price that would have been agreed between independent parties. This applies to both domestic and cross-border situations. If the Tax and Customs Administration does not think this requirement has been met, the transfer price is adjusted until it is an arm’s-length price. This principle means that the Tax and Customs Administration will apply an adjustment even if the tax authorities in the country of the foreign affiliated party do not follow suit. A unilateral adjustment such as this results in tax leakage. To address this effect, a new legislative proposal has been drawn up to ensure that an adjustment to transfer prices in the Netherlands cannot reduce profits without the taxable profit increasing in the foreign country. The proposed law also includes rules on the transfer of assets.

Measure making reverse hybrid entities liable for tax

In the past multinationals have frequently taken advantage of the different classifications used in different countries regarding the treatment of taxpayers. On January 1st 2020 measures were introduced to combat hybrid mismatches. The aim of the current legislative proposal is also to prevent hybrid mismatches that were not already regulated in 2020, so-called reverse situations. These concern a difference in the tax classification of partnerships, e.g. closed CVs (limited partnerships) in ‘CV-BV structures’ (set-ups that involve a limited partnership and private limited company).

In the Netherlands these partnerships are not independently liable for corporation tax. Tax is levied at the level of the participants (fiscal transparency). A difference in classification arises if the participants in the partnership are based in a country that considers the entity non-transparent. Consequently, tax is not levied in either country.

The proposal aims to neutralise such differences in classification by following, under certain conditions, the classification of the partnership used by the country in which the participants are based. This means that a partnership that is fiscally transparent from a Dutch perspective is independently liable for tax in such situations. In practice, such structures are mainly used by American firms, as this mismatch exists between the Netherlands and the United States.

Under pressure from society, a number of countries have come together with a view to coordinating their classifications. After a new law has been introduced, with effect from January 1st 2022, the remaining possibilities for using such mismatches should become a thing of the past.

Sequence for CFC offsetting

The participation exemption in the area of corporation tax ensures that the results of both domestic and foreign subsidiaries are excluded from the profit of the Dutch holding company. However, as a result of international efforts to combat tax avoidance, the participation exemption no longer applies in certain cases.

This is the case for so-called Controlled-Foreign-Company (CFC) participations. These are foreign subsidiaries that are based in a low-tax jurisdiction and are also held with the primary objective of generating passive (investment) income.

If a stake of more than 50% is held in such a participation, the results of the participation still form part of the Dutch holding company’s profit.

To prevent double taxation, under certain conditions the foreign tax on the foreign CFC subsidiary is offset with the corporation tax payable by the holding company in the Netherlands. In the event that several CFC entities are held, the foreign tax to be offset is calculated separately for each CFC entity. However, the amount of the setoff cannot exceed the corporation tax payable in the Netherlands. At present, the law does not prescribe the sequence in which this setoff should take place. In the interests of the workability of the setoff in these specific situations, it is being proposed that a compulsory sequence for the setoff be included in the law (from the smallest to the largest amount of profit tax). If the amounts of profit tax paid by CFCs are the same, the amounts will be offset on a pro-rata basis.

One Stop Shop (OSS) arrangement in the event of negative turnover (import)

Earlier this year new e-commerce rules were implemented. These rules are being relaxed for situations in which negative VAT is declared.

In certain situations a foreign VAT-registered business may realise negative turnover on distance sales to the Netherlands. Such a situation may arise, for example, if a VAT-registered business from another EU Member State carries out distance sales and over the tax period the returns received exceed the goods supplied. In such a case the OSS return would result in a VAT refund.

Until recently it was unclear whether in such situations a refund application also had to be made via the EU portal. The State Secretary for Finance has indicated that this is not the case in the Netherlands. The Dutch Tax and Customs Administration must handle a negative (I)OSS return as a refund application. This will save the foreign business a great deal of administrative hassle, as there will be no need to submit a separate refund application. This relaxation is being introduced with retroactive effect from July 1st 2021.

Please note: The above only applies in a situation where a VAT-registered business from another EU Member State is entitled to a refund of Dutch VAT. Additional attention is always needed in the case of Dutch VAT-registered businesses that end up with a negative figure (refund) in another EU Member State. Not all EU Member States have yet clarified how ‘foreign VAT’ on returns should be reclaimed. This ‘relaxation’ therefore mainly benefits VAT-registered businesses from other EU Member States.