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Update on Proposed Changes to the Dutch Corporate Income Tax
On 5 December 2009 the Dutch State Secretary of Finance published a letter to the Dutch Parliament on the current status of proposed legislative changes in the Dutch Corporate Income Tax Act. In this letter the State Secretary refers to possible changes to the treatment of interest which were originally published in June 2009. Taxand Netherlands reviews the latest changes.
Firstly and most importantly, the State Secretary announced that the Dutch group interest box will not be introduced on 1 January 2010, due to a number of uncertainties and disadvantages. As such, the original proposal will be reconsidered. The group interest box was meant as an innovative regime for group financing activities of multinationals. The proposed effective corporate income tax rate on group interest income would have been 5%.
Secondly, the State Secretary announced that he intends to introduce a restriction on the deduction of interest by Dutch fiscal unities relating to leveraged acquisitions. Interest deductions will only be denied if the debt/equity ratio exceeds a certain threshold post acquisition.
Thirdly, the State Secretary is considering changing the treatment of foreign permanent establishments by disallowing the inclusion of foreign losses of a permanent establishment in the Dutch taxable income.
Lastly, specific rules on limiting the deduction of interest due to the acquisition of participation and earning stripping rules, as also originally proposed, will not be introduced as of 1 January 2010.
The newly introduced measures (further interest deduction restrictions and PE losses) will at the earliest be enacted from 1 January 2011 and first need to be approved by Dutch Parliament.
The group interest box would have provided a beneficial and innovative regime for group financing activities of multinationals. In its proposed form, it did however also have a number of downsides. As such, the proposed regime will be deferred. Existing group financing regimes in for example Belgium, Switzerland and Luxembourg will therefore still provide attractive alternatives for Dutch and foreign multinationals. The current Dutch system however does allow for a number of specific planning structures which can be as beneficial or even more beneficial in specific circumstances.
The restriction of the deduction of interest by fiscal unities relating to acquisitions could have a significant impact on current and future acquisition structures. Unfortunately, details are not yet available on, for example grandfathering rules for existing structures.
The change in the treatment of permanent establishments by disallowing the inclusion of foreign losses of a permanent establishment in the Dutch taxable income comes as a surprise and its impact is not yet clear.
The proposed measures will at the earliest be introduced as of 1 January 2011 but will be much discussed and changes are to be expected. Multinationals are urged to keep abreast and plan for the anticipated changes.
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