Dutch Government Proposes Pioneering Amendments to Dutch Corporate Income
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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
- The introduction of an optional box for the taxation of group companies’
- 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
- 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
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.
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
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
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
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
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