Reduction in the rate of corporate incometax

In 2019, the rate of corporate income tax was reduced by means of the Business Sector Act 2019 (Wet bedrijfsleven 2019). In 2019, the low rate on profits of up to €200,000 was reduced from 20% to 19%. The high rate for profits of €200,000 or above remained at 25%, but was intended to be reduced in subsequent years. In the Tax Plan 2020, it is now being announced that contrary to previous announcements, the high rate will not be reduced in 2020. In addition, the Cabinet is proposing to reduce the high rate of corporate income tax in the structural situation by 1.2 percentage points less. From 2021 onwards, the high rate will become 21.7%, instead of the 20.5% previously announced. The low rate will fall to 16.5% in 2020 and to 15% in 2021. The picture that arises is therefore as follows:

 

Year	Taxable amount	Rate	Taxable amount	Rate
2019	€0 – €200,000	19.0%	> €200,000	25.0%
2020	€0 – €200,000	16.5%	> €200,000	25.0%
2021	€0 – €200,000	15.0%	> €200,000	21.7%

Comment by PKF Wallast

The phased reduction in the rate of corporate income tax means that it may be attractive to postpone profits and bring costs forward (while remaining within the parameters of the tax system, of course).

 

The changes may also affect the tax position in the annual accounts for 2019.

 

Increase of rate applicable to box 2

In order to ensure that the taxation of businesses is the same overall, the reduction of the rate of

corporate income tax will be accompanied by an increase in the rate in box 2, namely of the so-called substantial interest levy. This levy is still set at 25% in 2019 and applies to directors-major shareholders (DGAs) with a substantial interest, that is, a shareholding of 5% or more. In 2020, the rate in box 2 will be increased to 26.25%, rising further to 26.9% in 2021.

 

Year	Rate
2019	25.0%
2020	26.25%
2021	26.9%

This measure was already announced in the Tax Plan 2019.

 

Comment by PKF Wallast

Now that 2019 is the final year before the rate is set to be increased, it may be beneficial from a tax perspective to pay out a dividend before the end of the year. For that reason, always discuss with your adviser before the end of the year, to determine whether paying out a dividend would be desirable in your situation.

 

Revision of the earning stripping order

In short, the earning stripping order is a generic interest deduction restriction that forms part of corporate income tax, which, in principle for all taxpayers, limits the ability to deduct the overall interest payable on balance – that is, the difference between interest payable and interest received from loans and comparable agreements – in so far as that overall interest amount is more than 30% of the EBITDA for tax purposes or a threshold of €1 million. This measure was introduced with effect from 1 January 2019.

 

The application of the earning stripping measure may lead to a situation in which part of the interest payable on balance in a given year may not be deductible when determining the amount of taxable profit for that year. Any non-deductible interest can however be carried forward without restriction. In short, the non-deductible balance of interest will be deducted the following year, assuming that once the earning stripping measure has been applied to the balance of interest for that year, scope for deduction still remains. The tax inspector will determine the balance of interest that is non-deductible/to be carried forward in the form of a decision against which an objection may be lodged. In that regard, two amendments are now being proposed that will make implementing this measure more feasible for the Dutch Tax Authorities.

 

1. A decision about the balance of interest to be carried forward can be revised if any new information becomes available, in cases of bad faith or in the event that an error is made that the taxpayer can reasonably be expected to recognise. The deadline that applies in this regard will be same as the one that applies for the provision of an additional tax assessment in the event that too little tax has been levied.
2. A decision will also be issued in the event that the balance of interest carried forward from a previous year is deducted when determining the profit in a later year.
3.  

Comment by PKF Wallast

As a result of these changes, the Cabinet is logically seeking to ensure that the system more closely resembles the one that applies for the offsetting of losses.

N.B. The measures proposed also apply to decisions relating to interest balances

that have already been given at the time that the measures enter into force.

N.B. Even in the case of deconsolidation interest – in relation to disbanding a fiscal unity – provisions will be included that revision is possible if any new information becomes available, in cases of bad faith or in the event that an error is made that the taxpayer can reasonably be expected to recognise.

 

Legislation already adopted: measure governing the trade in interest-bearing entities

With effect from 1 January 2019, a measure has been introduced that restricts the deduction of interest to 30% of income for interest, tax and depreciations (the EBITDA for tax purposes) or up to a maximum of €1 million if that is higher than 30% of the EBITDA for tax purposes. In principle, this non-deductible interest can be carried forward to the subsequent year, however in order to combat trading in such interest-bearing entities, a measure has been introduced that will enter into force on 1 January 2020. That measure stipulates that the deduction of interest carried forward is not permitted if the shareholding in the taxable entity has changed to a significant degree (namely greater than 30%). An exemption will apply in genuine cases in which no improper use of this facility has been made.

 

Modification tax interest on corporate income tax assessments

The Cabinet wishes to abolish the ability to charge interest on tax to a taxpayer that has submitted its tax return in time. At the moment, tax on interest can be charged if a tax return is submitted correctly and in time, (usually) between the dates of 1 April and 1 June. For that reason, it is proposed that the tax interest scheme be amended with regard to that particular point, so that no tax interest is charged if the corporate income tax return is submitted before the first day of the sixth month following the period in which the tax is levied (usually 1 June) and the tax assessment is determined in accordance with the return that was submitted.

 

Exemptions for public-sector enterprises

Public-sector enterprises have been subject to corporate income tax since 1 January 2016, notwithstanding a number of exemptions. In the case of three of those exemptions, it has been found upon closer inspection that the form of these is too restrictive and that they unintentionally lead to tax being levied in certain situations.

• The exemption for the education sector (for education and research) applies to bodies that exclusively or almost exclusively deliver publicly funded education. This is the case if the education concerned is primarily financed from public funds or from specifically defined contributions, such as statutory tuition fees or statutory school fees. In that regard, it was found that insufficient account had been taken of the method of funding that applies in the case of government-funded schools with an international department. The compulsory parental contributions to be admitted to the international department of a school will be granted the same status as statutory tuition fees and statutory school fees. This means that institutions with an international department will also fulfil the funding requirement and will be able to benefit from the exemption.
• In certain cases, the exemption that applies to internal activities and the quasi-internal procurement exemption was not applied due to the legal structure of certain government departments. If a legal entity under public law outsources tasks to a legal entity under private law (such as a fully owned subsidiary), the activity can be exempted from corporate income tax. Strangely, however, if that task is carried out by another legal entity under public law, that exemption does not apply. The proposed amendment to the law will rectify that unintentional difference.

The amendments will apply retroactively, as from the date on which corporate income tax for publicly funded enterprises was introduced in 2016.

 

Minimum capital rules for banks and insurers

The minimum capital rule (minimumkapitaalregel) for banks and insurers is a highly technical and complex measure that applies only to designated banks and insurers. This measure is not relevant to other taxpayers.

 

The Cabinet wishes to facilitate a more equal treatment of equity capital and loan capital from a tax perspective, and is attempting to achieve this by restricting the tax deductibility of interest. In that context, a minimum capital rule is being introduced for banks and insurers. This is because banks and insurers are hardly affected, if at all, by already existing interest deduction restrictions, such as the earnings stripping measure (see above). In the case of banks and insurers, there is often no interest due on balance at the tax group level. This is why they are normally not affected by the earnings stripping measure.

 

In order to limit the tax advantage of debt financing for banks and

insurers, this bill proposes a minimum capital rule for banks and insurers

that limits the deduction of the interest due in cases where the loan capital

amounts to more than 92% of the balance sheet total. In this case, the Cabinet has decided not to relate the percentage to the commercial balance sheet total, but to seek to link it to the uniform

supervisory frameworks for banks and insurers. This measure is expected to come into effect on 1 January 2020.

 

Who will the measure apply to?

The minimum capital rule will apply specifically to banks and insurers. In order to define the banks and insurers falling under the proposed minimum capital rule, use will be made of the admission system under the Financial Supervision Act (Wft). In short, the measure will thus apply to domestic and foreign taxable bodies with a permit or a copy of a notice for conducting the business of a bank or insurer in the Netherlands. This means that the minimum capital rule will also apply to banks and insurers that have their registered office outside the Netherlands and are active in the Netherlands by means of a permanent establishment.

 

What will the deduction restriction apply to?

The restriction will operate as follows. In so far as the leverage ratio or capital ratio on 31 December of the previous year is less than 8%, the interest due and cost of loans in the previous year will be excluded from deduction. It is therefore clear that this is an ‘in so far’ provision; not all interest will be excluded from deduction. In this case, the concept of interest in respect of loans is in principle based on the definitions used in the context of the earnings stripping measure, with only the interest in respect of received loans being relevant for the application of the minimum capital rule.

 

N.B. Unlike in the case of the earnings stripping measure, currency results (on the interest) in respect of loans and results on hedges of interest and currency results (on the interest) in respect of loans are not covered by the definition of interest in this context.

N.B. The minimum capital scheme could conceivably overlap with the earnings stripping measure. In order to prevent an overlap, a prevention measure applies in those situations whereby, if the deduction of interest in respect of loans is restricted on the basis of the earnings stripping measure, the interest deduction restriction arising from the minimum capital rule will be reduced in line with the restriction arising from the application of the earnings stripping measure.

 

Measure combating excessive borrowing by directors and major shareholders (DGA)

The Cabinet wishes to combat excessive borrowing by directors and major shareholders from their own private limited companies (BV). This measure will be elaborated on in the Excessive Borrowing from Own Company Bill (wetsvoorstel excessief lenen bij de eigen vennootschap). The measure entails that directors and major shareholders can borrow up to €500,000 from their own companies. The excess will be designated as a notional dividend payment and thus taxed at the applicable rate for the substantial interest levy. The measures applies to all types of loans from the individual’s own company, with the exception of loans taken out for the purpose of owner-occupied property. With this measure, the Cabinet intends to discourage the deferral and avoidance of box 2 personal income tax.

 

Comment by PKF Wallast

The legislative proposal is currently expected to be submitted in the fourth quarter of 2019. The proposal has not yet been included in the Tax Plan 2020, which was presented on Budget Day.

 

Company car addition

The percentages added for the private use of a company car will be further adjusted in 2020. For an explanation of this topic, please see the ‘car measures’ in the greening section.

 

Company bicycle addition

In 2020, an arrangement will come into force that will govern the addition for the private use of a bicycle. This arrangement will apply to both employees and entrepreneurs subject to income tax. The arrangement is explained in further detail under ‘bicycle’ in the greening section.

 

Excluding the deduction of penalties

The Cabinet proposes to exclude the costs and charges associated with administrative penalties from the deduction of the profits with effect from 2020. As part of this arrangement, fines imposed by way of a penalty order will also no longer be deductible. By scrapping this deduction, all fines and penalties will no longer be deductible from profit in their entirety.

 

This proposal relates both to entrepreneurs subject to income tax and to companies that are subject to corporate income tax.

 

Comment by PKF Wallast

Up to and including 2019, some penalties imposed by administrative bodies were deductible from the taxable profit. In principle, it is only possible to deduct costs incurred from a business point of view from the profit. An administrative penalty is of a different nature to a fine, meaning that an administrative penalty can in some cases be seen as a business expense, as a result of which it could be deducted from the taxable profit. This is because an administrative penalty is not intended as a punishment but merely to prevent infringements. Fines imposed as punishment were already excluded from deduction.

 

The Cabinet sees the ability to deduct such penalties from the profit as undesirable. In practice, it may be decided to accept the penalty as the amount can be deducted from the profit. By excluding the deduction of these penalties, the Cabinet is also signalling that socially undesirable behaviour needs to be reduced.

 

Reducing the difference between entrepreneurs subject to income tax and employees

There is currently a considerable difference in the tax treatment of employees and entrepreneurs. An entrepreneur (generally) owes less income tax than an employee. The Cabinet’s proposal is to reduce this difference in order to combat the unfair competition on working conditions between employees and entrepreneurs (self-employed individuals). By this means, the Cabinet is also attempting to combat ‘pseudo self-employment’ on the part of entrepreneurs. This is when someone presents themselves as an entrepreneur but in fact has a (pseudo) employment relationship with the client. In order to reduce the difference in the tax treatment of entrepreneurs and employees, it is proposed to increase the employed person’s tax credit and phase out the tax allowance for self-employed persons.

 

Increase in employed person’s tax credit

The proposal envisages increasing the employed person’s tax credit over the coming years. In 2020, the maximum employed person’s tax credit will be €3,819 and in 2021 this will reach €4,143.

 

Phase-out of tax allowance for self-employed persons

Every entrepreneur subject to income tax is entitled to tax allowance for self-employed persons under certain conditions. One of the conditions, for example, is that the entrepreneur spends 1,225 hours on the undertaking. The tax allowance for self-employed persons is an item that is deductible from the profit. This lowers the tax base and thus generates a tax benefit.

 

Starting in 2020, the tax allowance for self-employed persons will be lowered in eight yearly steps of €250 and one of €280. In 2020, the tax allowance for self-employed persons will be €7,030 and in 2028 it will eventually end up at €5,000.

 

Adjustment of the tonnage tax scheme

The tonnage tax scheme (tonnageregeling) is a tax incentive for the shipping industry. As part of this scheme, the profit from shipping may (under certain conditions) be determined on a flat-rate basis for the purpose of income tax or corporate income tax using the shipping tonnage (which in practice leads to a much lower tax base). At the insistence of the European Commission, the tonnage tax scheme will be amended and/or tightened in respect of the following points as of 1 January 2020:

 

1. There will be an additional condition for vessels operated on a time or voyage charter. This condition relates to the maximum permitted annual share (of 75%) in the net daily tonnages of the vessels operated on time or voyage charters that do not carry the flag of an EU/EEA country compared with all vessels that (potentially) fall within the scope of the tonnage tax scheme (the 75% ceiling).
2. The so-called flag requirement will be adjusted in two respects. As of 1 January 2020, it will be verified when a vessel is commissioned whether at least one of the taxpayer’s vessels qualifying for the tonnage tax scheme carries the flag of an EU/EEA country. Also as of 1 January 2020, so-called ship managers will be required to demonstrate that the vessels they manage meet the (amended) flag requirement. Both amendments will be subject to a transitional provision, entailing that the new requirements will only apply in relation to financial years starting on or after 1 January 2020. For vessels that are already making use of the tonnage tax scheme on 31 December 2019, the new requirements will not apply during the period lasting until the end of the first financial year starting on or after 1 January 2029.
3. The third and final amendment relates to restricting the scope for profit attributable to non-transport activities to be covered by the tonnage tax scheme. The profit arising from non-transport activities may not amount to more than 50% of the total annual profit achieved through exploiting a vessel intended for the transport of goods and persons in international traffic over sea (profit ceiling).