International and European measures
The most important international measures are the limitations to the liquidation loss scheme and the introduction of a withholding tax on low-taxed interest and royalty payments. Although the measures will not take effect until 1 January 2021, they are worth your attention now.
Adjustments to liquidation and discontinuation loss scheme
On 16 April 2019, member of the Lower House Snels (GroenLinks) presented a draft private member’s bill for consultation. Taxpayers in the corporate income tax regime can currently – under certain conditions – still limitless deduct losses which result from the dissolution of a subsidiary or the discontinuation of a business activity abroad from the profits they generate in the Netherlands. The proposal is to adjust this so-called liquidation and discontinuation loss scheme in such a way that companies are able to deduct such losses in fewer cases. The aim of these adjustments is to ensure that it is no longer possible to take liquidation and discontinuation losses on participating interests and permanent establishments outside the European Union and the European Economic Area.
For the liquidation and discontinuation losses that are deductible, it is proposed that deduction is only possible if the liquidation is completed no later than in the third calendar year following the calendar year in which the undertaking is fully or substantially fully discontinued by the dissolved body or the decision to do so is taken. This means that it is no longer possible to defer deduction of the losses over the long term by carrying out the liquidation only at a time when the business can use the deductible item, for example because the offsettable losses have been used.
Comment by PKF Wallast
In the letter accompanying the Tax Plan 2020, the Cabinet indicated that the draft private member’s bill will be further developed. The accompanying letter mentions the budgetary revenues as of 2021, so it is evidently the intention for the changes to come into effect on 1 January 2021.
If you have incurred losses abroad and have discontinued those activities, or if you intend to discontinue those activities, it is important to discuss the steps to be taken with your advisor as soon as possible.
Changes to the definition of permanent establishment
If natural or legal persons live or are established in one country and have business premises in another country that have sufficient facilities to function as an independent enterprise, they may have a so-called permanent establishment in that other country. A permanent establishment can lead to income tax liability in the other country. If there is a permanent establishment in another country, the profit generated in that country is generally exempt in the country of residence or establishment on the basis of tax treaties or national arrangements, in order to avoid double taxation.
It has become apparent that different definitions may be used, as a result of which national legislation stipulates that there is no permanent establishment in the country where the activities are performed, while the tax treaty states that profit generated in the other country is indeed exempt in the country of residence or establishment. In cases such as this, tax is not paid anywhere. To combat these situations, as of 1 January 2020 reference will be made to the tax treaty concluded between the Netherlands and the country where the relevant natural or legal person lives or is established for the definition of ‘permanent establishment’ for the purposes of income tax, corporate income tax and payroll tax. For cross-border situations involving a country with which the Netherlands has not concluded a tax treaty, the Personal Income Tax Act (Wet op de inkomstenbelasting), Corporate Income Tax Act (Wet op de vennootschapsbelasting) and Wages and Salaries Tax Act (Wet op de loonbelasting) will be amended to include the criteria for the existence of a permanent establishment.
In general, activities of a preparatory or auxiliary character will not be considered as a permanent establishment. Building sites or construction or installation activities will normally also not be considered permanent establishments if they are of short duration. It has become clear that activities are sometimes distributed across various related parties, or that building projects or construction or installation activities are divided up into short-term projects in order to avoid the tax levied on permanent establishments. As of 1 January 2020, a so-called anti-fragmentation provision will ensure that such activities and projects are combined and are jointly assessed against the criteria for the existence of a permanent establishment.
The lawmakers expect that this measure will result in the recognition of more permanent establishments in the Netherlands.
Comment by PKF Wallast
If you live or have your place of business outside the Netherlands and carry out activities in the Netherlands, it is important to assess whether those activities in the Netherlands, currently or from 1 January 2020, lead to a tax liability in the Netherlands.
If you live or have your place of business in the Netherlands and carry out activities abroad, it is also important to assess where there is a tax liability abroad. In that case, you need to take into account the tax liability abroad and the profit generated abroad will usually be exempt in the Netherlands.
Introduction of withholding tax on interest and royalty payments
As of 1 January 2021, a withholding tax of 21.7% (highest rate of corporate income tax in 2021) will be introduced on interest and royalty payments payable by entities established in the Netherlands to affiliated entities established in low-tax jurisdictions (tax rate of less than 9%) and jurisdictions included in the EU list of non-cooperative jurisdictions for tax purposes. Each year the State Secretary for Finance prepares a list of countries that have low tax regimes or are non-cooperative for tax purposes. This blacklist currently includes:
American Samoa, Anguilla, Bahamas, Bahrain, Belize, Bermuda, British Virgin Islands, Cayman Islands, Guam, Guernsey, Isle of Man, Jersey, Kuwait, Qatar, Samoa, Saudi Arabia, Trinidad and Tobago, Turks and Caicos Islands, Vanuatu, United Arab Emirates and United States Virgin Islands
The withholding tax will also be levied if the interest or royalty payment is non-deductible in the Netherlands. If the withholding tax is not collected or recovered, grossing up will be necessary. If, for example, 100 worth of interest is paid to an affiliated entity in Saudi Arabia and no withholding tax is collected, the Dutch entity would have to pay more than 27.7 in withholding tax (127.7 -/- 21.7% withholding tax = approximately 100 net). For the sake of completeness, it should be noted that the withholding tax is not deductible.
The definition of interest in this regard is broad. It also includes costs relating to loans, such as arrangement fees, financing costs, intermediation costs, costs of preparing the loan agreement, handling fees, underwriting commissions and default interest. If no arm’s length interest rate is calculated, the tax will be levied on the adjusted arm’s length interest rate. Accumulating interest is also covered by this withholding tax. Financial lease and hire purchase agreements also fall within the scope of the withholding tax.
The term royalty payments includes payments for the use of, or for the right to use, copyright on a literary, artistic or scientific work – including cinema films and software – a patent, an industrial or commercial trade mark, a drawing or design, a plan or a secret formula or process. Payments for information regarding experience in the field of industry, trade or science are also covered by the concept of royalty payments.
A royalty payment will often be in the form of a periodic payment where the amount of the payment depends on the extent of the actual use of the property or rights mentioned above. A one-off payment is also a royalty payment if it applies to the use of the property or rights mentioned above and is not a payment for the acquisition thereof.
The withholding tax applies only to interest and royalty payments payable to affiliated entities established in blacklisted countries.
In this context, affiliated is understood to mean that one entity can – directly or indirectly – exercise such a decision-making influence that this can determine the activities of the other entity. In any event, this is the case if the direct or indirect interest represents more than 50% statutory voting rights. The entities are also affiliated if the Dutch entity and the entity established in a blacklisted country have a joint parent company. If there is a group of companies that, individually speaking, do not have a qualifying interest but that have made a coordinated investment in cooperation with one another, the entity in which the investment was made and the entities forming part of the cooperating group are affiliated.
The tax liability applies primarily to direct payments made to affiliated entities established in blacklisted countries. However, the withholding tax also needs to be levied in the case of payments to entities that are not established in a blacklisted country but which allocate interest or royalty income to a permanent establishment in a blacklisted country. The withholding tax will also need to be collected in the case of artificial structures with intermediaries that are designed to avoid the withholding tax.
Comment by PKF Wallast
Many Dutch companies do business in countries which are on the blacklist even though they are not considered tax havens. This includes countries like Kuwait, Qatar, Saudi Arabia and United Arab Emirates. It is advisable to quickly review the direct or indirect payments to affiliated entities in those countries, in order to avoid the need to deduct a withholding tax of 21.7% as of 1 January 2021.
N.B. The measure also applies if the paying entity and the receiving entity have a real presence – sufficient substance - in the Netherlands and the other country, respectively.
Currently, certain anti-abuse provisions in the corporate income tax and dividend tax regimes include so-called substance criteria that function as a safe harbour. It is now proposed to introduce a rebuttal scheme for the inspector in the case of these measures, under the influence of European law. This would mean that the inspector is able to demonstrate that there is indeed abuse even if the substance criteria have been met. The anti-abuse provision will then also apply in these cases. On the other hand, the taxpayer will also be able to demonstrate that there is no abuse even if the substance criteria have not been met. These measures will come into effect on 1 January 2020.
Previously announced tax measures
In order to combat international tax avoidance, the Cabinet wishes to bring an end to structures that allow businesses to avoid tax by exploiting the differences in the tax systems of various countries, known as hybrid mismatches. Hybrid mismatches mean, for example, that a payment is deductible in one country, but the corresponding amount received in the other country is not taxed, or that a single payment is deductible in several countries. The measures to combat this sort of structure are elaborated in the bill transposing ATAD 2 (EU Anti-Tax Avoidance Directive 2) and will also be introduced in other European countries.
- Most of these measures will enter into force on 1 January 2020.
- The measures apply to hybrid mismatches in affiliated relationships (qualified as interests of at least 25%).
- The proposal applies to relationships between EU Member States, but also between EU Member States and third countries.
- Differences in the application of internal transfer pricing rules will not be affected by ATAD 2.
- Differences in tax treatment other than hybrid mismatches (for example due to differing definitions of tax liability or objective exemption) will not be affected by ATAD 2.
- The Netherlands will also need to introduce a tax liability for entities that currently still qualify as fiscally transparent entities but which qualify as so-called reverse hybrid entities under these measures. This tax liability measure must enter into force by 2022.
If there is a hybrid mismatch, the directive provides a primary and a secondary measure for two situations in order to counteract the effect of the mismatch.
- On the basis of the primary measure, the payer will follow the tax classification of the recipient. If the payment is not taxed at the level of the recipient, the payment cannot be deducted by the payer. The secondary measure is a safety net in case the primary measure does not work or does not offer a solution. The secondary measure states that if the payment is deductible at the level of the payer, the payment is taxed at the level of the recipient.
- In the case of an advantage due to double deduction, the primary measure is that deduction must be denied in one of the two countries. Primarily the country from which the payment originates may allow deduction. If this rule does not work or does not offer a solution, the secondary measure is that the country from which the payment originates must deny the deduction.
In the case of a partial mismatch, the measures should only apply to that part of the payment. Taxpayers will very likely also be obliged to include details in their accounts of why the hybrid mismatch measures do not apply to them and/or which measures have been used to neutralise the advantages (additional documentation requirement).
Comment by PKF Wallast
If group companies within your organisation are subject to different tax classifications in two countries, it is important to discuss the potential impact of ATAD 2 with your advisor as soon as possible. This advice also applies if your organisation has loans between entities in different countries or other financial instruments that are subjected to different tax treatment in two countries. Other topics to be dealt with in a similar way include hybrid situations involving (i) permanent establishments, (ii) transfers and (iii) dual resident situations.
The Mandatory Disclosure Act
On 25 May 2018, the European Council adopted a directive on ‘mandatory disclosure’. In brief, this directive sets down an active reporting obligation for taxpayers and intermediaries such as PKF Wallast in the case of cross-border, potentially aggressive tax arrangements. Member States must implement the directive by 1 January 2020. The bill relating to this directive was submitted to the Lower House on 12 July 2019 by State Secretary Snel (Finance).
As of 1 July 2020, application of the provisions will be mandatory. However, even though the first reports do not need to be made until the end of August 2020, the directive essentially already applies to arrangements in respect of which the first implementation step was taken between 25 June 2018 and 1 July 2020.
The bill does not contain a strict definition of a reportable cross-border arrangement. An arrangement can be seen as a reportable cross-border arrangement if it involves certain ‘hallmarks’ that will be described in detail. These are the features and elements of arrangements that present a strong indication of tax avoidance. The reporting obligation applies primarily to the intermediary. This is any person that designs, markets, organises, makes available for implementation or manages the implementation of a reportable cross-border arrangement. Tax advisors certainly fall under this definition. If an undertaking designs and implements a tax arrangement internally, thus without the involvement of any advisors, the obligation rests with the undertaking itself. Failing to comply with the reporting obligation can lead to a maximum fine of as much as EUR 830,000 or criminal prosecution.
Comment by PKF Wallast
Cross-border arrangements that have been designed and tailored for a specific taxpayer but are ultimately not implemented do not need to be reported. International arrangements that have been implemented – even if the implementation is not yet complete on 1 July 2020 – need to be mapped out. We advise you to assess such arrangements against the reporting obligation rules in consultation with your advisor.