Dutch Budget Day 2021 – 6 key tax proposals of interest to innovative and cross-border businesses
On the third Tuesday of September the Dutch government released the Dutch 2022 Budget, which includes proposals for Dutch tax law amendments. The proposals will be discussed in the Dutch Parliament and if approved, most will enter into force on 1 January 2022. Below we have outlined some of the main tax-related proposals as presented on Budget Day, in addition with other relevant recent proposals, with a particular focus on innovative and cross-border businesses.
1. Elimination of certain transfer pricing mismatches
Under current legislation in relation to certain transactions between related entities Dutch taxpayers may adjust their taxable profits downwards whether or not a corresponding upward adjustment is included in the tax base of the (foreign) related entity. In some cases, a mismatch can result in double non-taxation. As an example, such a mismatch may arise as a result of an informal capital contribution or a deemed dividend distribution.
According to the legislative proposal, the so-called ‘arms-length principle’, which aims to establish market-based transfer prices between related entities, will be adjusted to neutralize this transfer pricing mismatch. It is proposed that a downward adjustment of profits will be omitted if there is no corresponding upward adjustment at the level of the related entity. However, if the taxpayer demonstrates that a higher deduction is also compensated by a higher income, or that a lower income is compensated by a lower deduction, this measure shall not apply.
This legislative proposal will also apply to the transfer of assets, such as intellectual property and the transfer of debts. A relief is proposed for transfers by so-called hybrid entities resulting in double taxation as well as additional rules regarding the depreciation of assets transferred between 1 July 2019 and 1 January 2022. The depreciation base of these assets will be increased only to the extent that an upward adjustment of the transferred asset would have been omitted in the same manner as in this proposal.
2. Changes to loss compensation rules
As of 1 January 2019, for corporate income tax purposes the maximum period for carry-forward of losses was reduced from 9 years to 6 years. As a result, the carry-back period of losses is currently 1 year and the maximum period for carry-forward of losses is 6 years. Per 1 January 2022 the rules on loss compensation will be further amended. The maximum period for carry-forward of losses will be abolished. Consequently, losses can be carried forward indefinitely. The maximum period for carry-back of losses will remain 1 year.
Simultaneously however, a limitation to the amounts of losses which can be offset annually will be introduced. Losses up to EUR 1,000,000 can be offset against profits in full. Losses above EUR 1,000,000 can only be offset against up to 50% of the taxable profits insofar as the taxable profits exceed the EUR 1,000,000 threshold. This limitation will also apply to the carry-back of losses. Where possible, we advise to optimise the use of tax losses in 2021.
3. Limitation on crediting of dividend withholding tax and betting and gaming tax against corporate income tax
Currently, taxpayers subject to corporate income tax are, in principle, entitled to credit dividend withholding tax and gambling tax levied against their corporate income tax. In addition, if the amount of corporate income tax due in a year does not result in an amount payable, i.e. a positive amount, the dividend withholding tax and betting and gaming tax levied can be refunded. Entities resident outside the Netherlands that are not subject to Dutch corporate income tax, but which are otherwise in a similar position as entities subject to Dutch corporate income tax are not entitled to such a refund.
Following EU case law, the crediting of dividend withholding tax and betting and gaming tax will be limited to the amount of corporate income tax due. Consequently, dividend withholding tax and betting and gaming tax will no longer be refunded.
If (part of) the dividend withholding tax and betting and gaming tax levied in a fiscal year cannot be credited against the corporate income tax, the amounts not qualifying for credit will be carried forward to a later fiscal year. There is no time limit on this carry-forward. Please note that if no corporate income tax is due in future years, the dividend withholding tax and gaming tax carried forward cannot be utilized for crediting against corporate income tax.
The Decree of 26 November 2020 under which, in line with EU case law, the tax inspector may, under certain conditions, grant refunds of dividend withholding tax and betting and gaming tax to non-resident entities that are not subject to Dutch corporate income tax will no longer be in force as of 1 January 2022. Note that there is an important difference between the Decree of 26 November 2020 and the proposed limitation on crediting of dividend withholding tax and betting and gaming tax against corporate income tax. Whereas the Decree of 26 November 2020 provides for an expansion of the refund possibilities, the proposed amendment actually limits the credit possibilities.
4. Change of rules applying to so-called reverse hybrid entities
As of 1 January 2020, the anti-hybrid mismatch rules from the EU Anti-Tax Avoidance Directive 2 (ATAD 2) entered into force in the Netherlands. These rules address tax avoidance involving the use of qualification differences between different jurisdictions. The anti-hybrid mismatch rules from ATAD 2 are currently only applicable if the hybrid mismatch arises between the taxpayer and an affiliated entity. It is proposed to extend the scope of these rules as of 1 January 2022 to situations in which the hybrid mismatch occurs between the taxpayer and an affiliated private individual.
In addition to the regular anti-hybrid mismatch rules, ATAD 2 includes rules that directly address the source of the hybrid mismatch. These rules relate to reverse hybrid entities and will be implemented as of 1 January 2022. Reverse hybrid entities are partnerships that are considered transparent for tax purposes by the jurisdiction under whose laws these partnerships are entered into or in which they are established but are considered non-transparent by the jurisdiction in which one or more affiliated entities are established that hold a participation of at least 50% in the reverse hybrid entity.
To the extent that part of the profits of the reverse hybrid entity do not accrue to participants resident in a jurisdiction that regards the reverse hybrid entity as non-transparent, but rather directly to participants resident in a jurisdiction that regards the reverse hybrid entity as transparent, a deduction for tax purposes may be available. As a result, part of the profits of the reverse hybrid entity are not taxed in the Netherlands to the extent that these profits are included in the taxable base of the participants.
The anti-reverse hybrid mismatch rules ensure that under certain circumstances the jurisdiction of establishment of the partnership follows the qualification of the jurisdiction in which the participants are established. If applicable, the reverse hybrid entity is treated as fully subject to tax in the Netherlands and may therefore, for example, also be entitled to tax treaty benefits or be eligible for the participation exemption. Please note that the applicability of the participation exemption is subject to conditions. Furthermore, the participants in the reverse hybrid may also qualify for the participation exemption. The reverse hybrid entity may also become subject to dividend withholding tax and the conditional withholding tax on interest and royalties.
5. Amendment of the bracket of the corporate income tax rate
The lower tax bracket, which is currently EUR 245,000, will be increased to EUR 395,000. The tax rates will remain the same, i.e. profits up to EUR 395,000 will be subject to a 15% corporate income tax rate and excess profits will be subject to a 25% corporate income tax rate. In addition, please note that the tax rate applicable for the innovation box remains 9%.
6. Beneficial amendment to taxation of employee stock option rights
Under current legislation, employee stock option rights are taxed with Dutch payroll tax at the moment the employee exercises or alienates the stock option right. The taxable benefit arising when the stock option rights are exercised or alienated equals the difference between the fair market value of the shares on the date of exercise and the exercise price of the stock option rights. If the employee paid a contribution in relation to the grant of the stock option rights, the taxable benefit will be reduced with the same amount. Therefore, only the actual benefit for the employee is subject to payroll tax.
In practice, the moment of taxation under the current rules is considered quite unbeneficial, as tax is due at a time when the employee may not have sufficient cash available to pay the tax. After all, upon exercise of stock option rights, the employee will only receive shares. Moreover, due to contractual obligations, the employee may be prohibited from selling these shares. Especially innovative start-ups and scale-ups, that often reward their employees with stock option rights, have drawn attention to this issue and argued for a more favourable tax treatment of stock option rights. The Dutch Secretary of Finance responded by publishing a legislative proposal to meet the needs of employers and employees by moving the taxable moment for payroll tax purposes to a later moment.
According to the legislative proposal, the taxable moment may shift from the moment of exercise to the moment at which the acquired shares become tradable (main rule). The acquired shares from the exercised stock option rights become tradable when they can be sold, which is the moment at which the contractual restrictions on alienation are lifted. It is irrelevant whether or not the employee actually sells the shares once the shares become tradable. Like the current legislation, the moment of alienation of the stock option rights will still be a taxable event.
If the employee is not allowed to sell the shares acquired upon exercise of the stock option rights due to a contractual restriction, the moment of taxation will be postponed for a maximum period of five years after (i) the IPO of the company in which the shares are held or (ii) if this company is already listed when the stock option rights are exercised, for a maximum period of five years after the exercise of the stock option rights. After this five-year period, the shares will be deemed to have become tradable which means that the shares will be taxed on that moment.
The Dutch State Secretary of Finance has given the employee a choice to be taxed when exercising the stock option rights. Therefore, in principle payroll tax becomes due when the shares received upon exercise of the stock option rights become tradable, but the employee can also opt for taxation upon exercise of the stock option right. This can be beneficial in case a high increase of value of the shares is expected in the time between the moment of exercise and the moment when the shares acquired become tradable and the employee has enough liquidity to pay the taxes due at that moment.