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Update on Potential Changes to the Dutch Corporate Income Tax Regime
In recent weeks a number of potential changes to Dutch tax law with regard to the finance regime, leveraged acquisition holding structures and the treatment of foreign permanent establishments has been published. Please note that there is currently no (draft) legislation available on these potential changes and the upcoming change in the administration (after the elections this summer) could delay the process. Taxand Netherlands reviews the situation.
The Dutch Ministry of Finance has abandoned plans to introduce the so-called interest box. On 7 April 2010 a Committee set up by the Dutch Ministry of Finance published its report on possible reforms to the Dutch regime, including the corporate income tax treatment of debt/equity.
In the report the Committee proposes an equity deduction system which has similarities with the Belgian notional interest deduction system. The equity deduction is intended to eliminate the different treatment of payments of dividends (non-deductible) and payments of interest (deductible). The proposal would grant companies a notional deduction based on a percentage of its positive equity, for example 4%. This should provide for an effective (group) financing regime provided that the Dutch company is financed with equity. The (tax book) value of subsidiaries will be deducted from the amount of the equity. A notional addition to taxable income will be added if a company's equity is negative (following the deduction of the value of subsidiaries). This could effectively deny debt-financed companies part of their interest deduction. Under this system, all other limits on the deductibility of interest such as thin capitalisation rules and anti-abuse rules may be removed.
We expect that draft legislation will not be published before next year and implementation will not occur before 2012.
Leveraged acquisition holding structures
In previous communications the Dutch Ministry of Finance proposed to introduce new limits on the deductibility of interest for leveraged acquisition holdings. The new limit intends to address perceived tax base erosion by a measure which entails that, after the formation of a fiscal unity, the interest on the debt at the level of the acquisition company cannot be set off against the profits of the target company in the same fiscal unity.
The report of the Committee does not address this potential new rule. The Ministry of Finance may however decide to implement this new rule as of 2011 as a temporary measure prior to the introduction of a new finance regime.
Treatment of permanent establishments
The Dutch State Secretary of Finance and the Committee also proposed a change to the treatment of foreign permanent establishments in order to treat them similar to foreign subsidiaries, i.e. profits are exempt and losses are non-deductible.
Dutch companies can set off losses of foreign permanent establishments against their Dutch profits. The foreign losses are subsequently recaptured if the foreign permanent establishment generates profits in later years. Therefore this should in principle be merely a timing issue. Tax planning is however available to defer or even avoid the recapture rule. The Ministry of Finance therefore intends to change the treatment of foreign permanent establishments in order to disallow the deduction of foreign losses.
No details are available on the proposed changes at the moment. We expect however that the new rules will be similar to those of the Dutch participation exemption. We expect that draft legislation will be published after the general elections this summer. Depending on the Parliamentary process and the duration of the formation of a new administration the change may be effective as of 1 January 2011.
The Dutch corporate income tax regime has been suffering from numerous changes and proposals in recent years, especially with regard to the financing regime. The potential changes above should be considered carefully by Dutch Parliament before being approved. Unfortunately the current change in administration may not provide sufficient time for detailed review and discussion of the potential changes.
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