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GT Alert

Dutch Government Proposes Pioneering Amendments to Dutch Corporate Income Tax System

May 2005

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Recently, the Dutch Ministry of Finance published a press release and a report, “Work on Profit, towards a Lower Rate and a Broad Base,” containing a number of pioneering proposals in the field of Dutch corporate income taxation aimed at significantly increasing the Dutch investment climate and further promoting the Netherlands as a tax efficient location.

Although the proposals contained in the report must be enacted by the Dutch parliament in order to become effective as of 2007, they can be considered ground-breaking and may present interesting opportunities for international tax planning purposes. The most significant proposals include the following:

  • The abolition of the Dutch capital duty
  • The extension of the current fiscal unity regime to foreign subsidiaries
  • Broadening the scope of the Dutch participation exemption
  • A reduction, as of January 1, 2007, in the standard corporate income tax
  • The introduction of an optional box for the taxation of group companies’ interest income
  • In order to finance these measures in a tax-neutral way, the report contains various counter financing measures, such as:
  • Limitations in the possibilities to claim tax losses
  • Shareholdings of less than 5% would not qualify for the participation exemption
  • Limitation of real estate depreciation facilities

Dutch Capital Duty

The capital duty, which currently is levied at a rate of 0.55%, will be abolished effective January 1, 2006. This will make it much easier for corporate restructurings and acquisitions via The Netherlands and equity contributions into Dutch entities. Together with the Dutch tax authorities’ earlier announcement relaxing various requirements of the so-called “fiscal investment institution” (which is subject to corporate income tax at a rate of 0%), the abolition of capital duty will also strengthen the Dutch investment fund industry.

Cross Border Loss Compensation

The report proposes to allow non-Dutch resident group companies to be included in a Dutch fiscal unity. The effect is that a foreign group company will be treated as a foreign branch, which means that foreign branch losses will be deductible from the Dutch tax base while foreign branch profits will be exempt from Dutch taxation. In order to be able to manage the risks connected with cross border loss compensation, certain limitations and anti-abuse measures are proposed e.g., (i) only for EU group companies, (ii) recapture of foreign losses and replacement of the per country method with the overall method, (iii) fiscal unity on an all in/all out basis, and (iv) opting in and out of the fiscal unity will be bound to certain time limits.

Participation Exemption

Under the new proposals, the Dutch participation exemption will apply only to participation of at least 5% in a Netherlands or foreign company, irrespective of whether such participation is held as inventory or portfolio. Furthermore, the subject-to-tax clause will be abolished.

However, in order to prevent structures that utilize low-tax jurisdictions, one important exception to this principal rule is suggested. With respect to a subsidiary conducting so-called passive activities such as a passive group financing company or a passive investment company, the participation exemption will apply only if the profits of the subsidiary are adequately taxed, which, according to the report, will be the case in regular EU relations. Otherwise a credit system, instead of the participation exemption, will apply.

Reduction of Corporate Income Tax Rate

In the Tax Plan 2005, it was announced that the general corporate income tax rate would be reduced to 30% in 2007. It is now proposed to further reduce the tax rate to 26.9%. This rate is lower than the average rate of the old 15 EU member states (30.3%) and approaches the average tax rate of 26.5% of all EU-member states.

The rate in the first tax bracket will be reduced to 20%. The first tax bracket will be extended to apply to profits up to s 41,000 (currently c 22,689).

Optional Inter-Company Interest Box

Also proposed is the introduction of an inter-company interest box, whereby the balance of interest paid and received on inter-company loans is taxed against a decreased rate which according to the report could be, for instance, 10%. The proceeds of a so-called war chest (i.e., acquisition funds) are treated as inter-company interest. The decreased rate is only applicable insofar as the balance of inter-company interest received exceeds the balance of third party interest. The box is optional, so that a negative balance of inter-company interest can be deducted against the general tax rate. One condition is that the entire group makes the same choice for the interest box.

Broadening the Tax Base

In order to finance the measures described above, certain counter-measures are proposed, the most important of which can be summarized as follows.

The loss carry back period will be reduced from three years to one year. The current unlimited loss carry forward period will be limited to eight years. The deduction of a loss arising from the liquidation of a participation will no longer be allowed, and it is proposed to abolish the deductibility of losses resulting from the depreciation of participations during the first five years after acquisition.

It is also proposed to no longer allow depreciation deductions for real property if the market value of the property (including the land on which it is built) exceeds the book value for tax purposes. If the market value increases, it will not be required to recapture depreciation taken into account in earlier years. The same will apply if the market value exceeds the book value at the time of introduction of the new system.

 

This Alert was written by Boyke Baldewsing of the Amsterdam office. Please contact Mr. Baldewsing at +31 20 301 7300 or your Greenberg Traurig liaison if you have any questions regarding the subject matter of this Alert.

© 2005 Greenberg Traurig


Additional Information:

For more information, please review our Tax Practice description, or feel free to contact one of our attorneys.


This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.