In 2012 we will see some important changes with respect to domestic tax rules and tax rules for international businesses. On the domestic side we see restrictions on interest deductions for acquisition debt in a fiscal unity, dividend withholding tax for some cooperatives, amendment of the expat arrangement (30 per cent facility) and extension of dividend withholding tax refund scheme. The major change for international businesses is the more territorial approach for permanent establishments and the coming into force of some new and amended DTA’s. Also we see the introduction of a main purpose test in the relaxation of the substantial interest levy on foreign holders of an interest in a Dutch company.
Restrictions on interest deductions in a fiscal unity
A standard acquisition of a Dutch company is structured by way of a fiscal unity between the acquisition vehicle and the Dutch target company, so that the acquisition interest can be compensated with the target company’s profits. The new rule will restrict this matching of interest expense with target’s profits. The rule prohibits the compensation of parent company interest (related party or third party interest) with the profits of the target. Interest expense can only be compensated with the profits of the parent company. Interest below €1 million will remain deductible. The restriction only applies in case the parent company (often a SPV) is thinly capitalized. A company is thinly capitalized if its debt to equity ratio exceeds 2:1. For purposes of this calculation the total book value of the company’s subsidiaries that qualify for participation exemption will be deducted from the equity. The denied interest expense will be carried forward to later years. As a transitional measure the reduction of the equity will only take place for subsidiaries acquired after 1 January 2012.
Dividend withholding tax for some Cooperatives
The tax package 2012 includes an anti-abuse provision relating to the use of Cooperatives for the avoidance of withholding tax. A distribution of profit by a Cooperative is not subject to withholding tax because a Cooperative has no capital divided into shares. As such a Cooperative can be used to circumvent the dividend withholding tax that would apply to entities with a capital divided into shares. The law now introduces a withholding tax obligation on a profit distribution in the case where (two conditions) the main purpose or one of the main purposes of the use of the Coop is to avoid the withholding tax and where the membership rights of the Coop are not part of the business of the Coop’s member.
30 per cent facility
More strict rules with apply to the ex-pat arrangement (30 per cent facility). The current deduction of 30 per cent of the taxable base is generous. Its application will be restricted. In order to qualify for the facility the employee must have a certain experience and specific competence. Experience and competence are measured at the level of salary. The basic salary must be above €35,000. The duration of the facility is limited to eight years during a review period of 25 years (was ten years). A new requirement is that the employee must have his ordinary residence at least 150 kilometres from the working place.
The profit or loss of a domestic or foreign participation will not be deductible against other profits of the entity under the participation exemption rules. A foreign loss incurred by a permanent establishment is however deductible from the overall profit of the entity because an entity is subject to tax for its global profits, excluding profits from participations. A participation is therefore not treated equal with a permanent establishment. In order to create more unity between an incorporated foreign activity and a non-incorporated foreign activity, the government has amended the code. From 2012 onwards profits of foreign permanent establishment will be treated similar to a foreign participation, it will be objectively exempt from tax. It is the estimation of the government that such a change in the rules on prevention of double taxation will add an amount of €250 million to the budget. Permanent establishments reduce the overall tax base of Dutch companies with €3 billion every year. Under the new rules such deduction will no longer be possible. Upon liquidation of the permanent establishment the losses of the activity can be compensated with profits of the head office, but only then (see CJ EC 15-05-2008, C-414/06 Lidl). Existing tax treaties override the new provision, therefore it is important to verify the articles dealing with avoidance of double taxation when dealing with a p.e.
Substantial interest in a Dutch entity
A foreign company with a substantial interest in a Dutch company (five per cent or more of the issued capital) is subject to a capital gains tax on the sale of the participation and can be taxed for the dividends received. This can occur when the participation is not held by an entity where the holding of the participation is part of the business of the entity. When a DTA applies, the holder is normally relieved from this provision as the profits realised with the alienation of the participation are taxed in the home country under the capital gains article of the treaty (article 13 OECD). In cases were no DTA applies, the shareholder can be subject to this domestic tax levied from foreign shareholders. The new rules for 2012 reduce the application of this provision to those situations where the shares in the Dutch company are not held by the foreign shareholder with the main intention (or one of the main intentions) of avoiding Dutch personal income tax or dividend withholding tax. If the holding of the interest is structured over an offshore entity in order to avoid a higher personal income tax charge, the interposition of the offshore entity could be deemed have the purpose of avoiding Dutch personal income tax. The purpose test reduces the application of the substantial interest levy and may be a relaxation for certain other situations.
During 2011 the revised tax treaties with United Kingdom and japan were approved by parliament. The DTA with Japan will enter into force at 1 January 2012 and will reduce the withholding tax on dividends to zero per cent with a participation of at least 50 per cent and will reduce the withholding tax on royalties from ten per cent to zero per cent. The treaty holds limitation on benefits articles and provisions against back-to back situations.
The DTA with the UK came into force on 25 December 2010. Between UK and Netherlands there will be no withholding tax on dividends provided an investment of at least ten per cent and no withholding on interest and royalties with a limitation on benefits article and a provision against the redomiciliation of companies and dual residence.
The new DTA with Switzerland came into force on 9 November 2011. Other new DTA’s that came into force in 2011 are Panama, Hong Kong and Oman. The treaty with Barbados was changed by protocol of 13 November 2011.Discussions on treaty changes are held with Ethiopia, Ireland, India, Iraq, New Zealand, Mongolia and Peru and continuing with Algeria, Belgium, Brazil, China, Colombia, Germany, France, Indonesia, Kenya, Norway, Check Republic and Turkey. Initial discussions will be held with Angola, Chili, Cyprus, Guernsey, Jersey, Isle of Man, Singapore and Spain.
In the field of information exchange new agreements are in force on 1 January 2012 with Anguilla, Cook-Islands, Gibraltar, Montserrat, Marshall Islands, Saint Lucia, Saint Vincent and Grenadines and Turks- and Caicos Islands.
Leo Neve LL.M
Owner & Managing Partner