International measures - 2021 Tax Plan

28 september 2020 | Door:  Matthijs van Dorssen

In some cases the new tax measures proposed in the Dutch Budget Memorandum and 2021 Tax Plan also affect the tax burden on international companies (or companies’ international activities). It is therefore worth taking note of the proposals.

Restriction of interest relief on loans from related persons to be expanded

If a company receives a loan from a related entity or a related natural person (such as a shareholder), under certain circumstances the interest payable on it is not deductible. Such debts with non-deductible interest are known as ‘qualifying debts’.

There are two situations in which interest can be deducted:

• if the borrowing company can demonstrate that the debt was entered into on commercial terms.
• if the recipient of the interest pays tax of at least 10% on the interest paid and the interest is not used to offset losses or for other claims for reduced taxation. Costs and exchange results relating to the loan also fall under ‘interest’.

At present, to determine the level of the excluded interest, all qualifying debts are added together. Interest paid and exchange losses result in a lower profit, while interest received and exchange gains result in a higher profit. If the interest received is higher than the interest paid, this increases the profit. This is the case, for example, if the exchange gain on loan 1 exceeds the interest payable on loans 1 and 2 together. If the deduction of interest is excluded in this case, the company would actually have an exemption for the positive balance.

Under the current legislative proposal it is no longer possible for the restriction of interest relief on the basis of the Corporation Tax Act to result in a lower profit. For each qualifying debt it is necessary to assess whether excluding interest relief results in a lower profit. If the balance of the qualifying debt is positive, no restriction of interest relief applies to this debt and it is therefore left out of the calculation of the combined balance of all qualifying debts. The exemption for the positive balance therefore ceases to apply.

Offsetting of advance corporation tax

Dividend tax and gambling tax are forms of advance corporation tax. You can offset these against the corporation tax payable on your corporation tax return. If your taxable profit is zero or negative, the dividend and/or gambling tax paid will be refunded to you.

On the basis of recent European case-law, failure to refund Dutch dividend and gambling tax to foreign companies may be in breach of European law. That is because foreign entities that are not subject to corporation tax in the Netherlands, but do have to pay Dutch dividend or gambling tax, are not able to offset or reclaim these taxes.

For this reason, from 1 January 2022 the government wants the offsetting of dividend and gambling tax to be limited, in the case of Dutch companies, to the corporation tax owed. It will then no longer be possible to have these taxes refunded.

To prevent a potential conflict with EU law, a policy decision will be published shortly approving the entitlement of foreign entities to a refund of dividend and gambling tax, under certain conditions. This policy decision will be valid until the Act is amended in 2022.

Please note:
Is a foreign entity (e.g. within your group) not subject to corporation tax in the Netherlands, but has it paid dividend and/or gambling tax in the Netherlands in 2020 or previous years? If so, ask your advisor to request a refund of these taxes on your behalf.

Change to arm’s length principle to tackle informal capital structures

Companies that do business with each other within the same group must conduct these transactions on commercial terms that would be employed by independent third parties. Here we are talking about a commercial interest rate on a loan between companies or a commercial (transfer) price for products purchased, for example. This is referred to as the arm’s length principle.

In international contexts in particular the arm’s length principle is important to prevent profit shifting to countries with low corporation tax rates. The Netherlands is planning to tighten up the arm’s length principle to tackle informal capital structures. A separate legislative proposal on this matter will be published by the government in the spring of 2021.

Conditional Withholding Tax on Dividends Act

The Withholding Tax Act 2021 will apply from 1 January 2021. This will be supplemented by the ‘Conditional Withholding Tax on Dividends Act’, which will enter into force from 1 January 2024. Alongside the existing dividend tax, which the government has now definitively decided not to abolish, from 2024 the Netherlands will deduct a withholding tax on dividends paid out within a group to low-tax jurisdictions. A legislative proposal on this matter will also be published in the spring of 2021.

Introduction of Withholding Tax Act 2021

At present the Netherlands does not levy any withholding tax on outgoing interest and royalty flows. As a result, Dutch companies can be used as a conduit to low-tax jurisdictions. The government intends to counter this form of tax avoidance with the proposed introduction of the ‘Withholding Tax Act 2021’. 

If a company is based in a low-tax jurisdiction and receives interest or royalties from an affiliated Dutch party, the receiving company is subject to tax under the Withholding Tax Act 2021. A country is regarded as a low-tax jurisdiction if its tax on profits is lower than 9% of if the country is on the current EU list of non-cooperative jurisdictions for tax purposes. 

The rate of the withholding tax will be the highest applicable corporation tax rate: 25% from 2021.

The company with a qualifying holding in the low-taxed subsidiary is the withholding entity for withholding tax purposes. From 1 January 2021 it must declare the interest and royalties paid to this subsidiary and pay over the withholding tax (by no later than 31 January 2022 for interest and royalties paid in 2021). The Withholding Tax Act will apply in the same way to a foreign branch of a company (a so-called permanent establishment).

Please note:
Contrary to what was announced last year, the general rate of corporation tax will remain at 25% instead of being cut to 21.7%.