On September 21, 2021, the Dutch government released its tax proposals for 2022 and beyond.
In the area of ââdirect taxes, the following measures may be relevant:
- COVID-19 support measures;
- Rules relating to employee stock options;
- Credit rating of controlled foreign companies;
- Modification of the rules for reimbursement of withholding tax on dividends;
- Reverse the hybrid mismatch rules;
- Modification of the application of the arm’s length principle to avoid mismatches
In addition, the introduction of new rules regarding the qualification of legal entity for tax purposes has been announced, but are not included in the Dutch budget plan 2022. The final rules will probably be published at a later time, but the rules main (high level) of the proposal are already included below (potentially subject to change).
Currently, the tax proposals are subject to discussion in the Dutch House of Representatives (Tweede Kamer der Staten General).
Measures proposed in the field of direct taxes
COVID-19 support measures
Work-related expenses scheme
In 2021, the Dutch government allowed a higher tax-free allowance for work-related expenses from employers to their employees. Normally 1.7% of the total salary amount up to EUR 400,000 can be paid to employees tax free. However, in 2020 and 2021, 3% of the total salary amount up to 400,000 euros could be paid tax free. This support measure was not yet codified for 2021 (this was done by means of a decree), so it will be the case with the 2022 Budget Plan.
For the total amount of salary over 400,000 euros, 1.18% can be paid tax free. This percentage has not been changed by the COVID-19 support measures.
The Dutch government has introduced a specific exemption for allowances of up to 2 euros per day related to home work. A flat-rate can be paid if the employee works at home for more than 128 days per calendar year, provided that the flat-rate does not exceed 248 euros. Accordingly, if the employer pays compensation to the employee to cover the costs of teleworking, this does not affect the amount that can be paid under the work-related expenses scheme (as described above).
To support businesses during the COVID-19 pandemic, the Dutch government introduced a grant to cover the fixed costs of affected businesses and to support the financing of small and medium-sized businesses. Budget Plan 2022 proposes a rule that exempts these subsidies from income tax.
Rules relating to employee stock options
The Dutch government is proposing to postpone the timing of the taxation of employee stock options to provide more flexibility. Currently, a more flexible regime is already in place specifically for start-ups and scale-ups. The new rules aim to broaden the scope to ensure efficiency.
Under the new rules, employee stock options will be taxed i) when the option right is exercised, ii) when the shares received by exercising the stock option are considered negotiable or iii) if the option is sold. The taxable amount is always determined by the fair market value at the time of taxation.
In the event that the shares received during the exercise of the stock option are not negotiable due to a contractual agreement between the principal of the option and the employee (for example, a period of ‘unavailability), this contractual agreement is respected for a maximum of 5 years after the initial public offer. After 5 years, the shares are considered negotiable and the contractual arrangement is no longer respected. Only if the shares are not negotiable by law, the shares are not considered to be negotiable after 5 years.
Classification of CFC income credits
The Dutch government offers a fixed ranking with respect to the imputation of taxes on CFC income that have already been imposed in the CFC country. The ranking determines that smaller amounts should be considered before larger amounts.
Limitation of withholding tax credits on dividends
On the basis of the judgment of the Court of Justice of the European Union (CJEU) in case C-575/17 Sofina SA and others, the Dutch government proposes a limitation of the possibility of obtaining a refund due the imputation of withholding tax on dividends to the company income tax. The withholding tax on dividends due can be set off against the amount of corporation tax due in that year, but cannot give rise to a refund. Indeed, this is not possible for some non-resident taxpayers, which, according to the Dutch government, could be considered discriminatory. Withholding tax on dividends, which cannot be credited due to this rule, can be used in subsequent years.
Reverse the rule of hybrid mismatches
On the basis of the obligation to fully implement the EU Anti-Tax Avoidance Directive II (ATAD 2), the Dutch government proposes the introduction of a tax obligation for reverse hybrid entities
For these rules, reverse hybrid entities are (i) incorporated under Dutch law and (ii) qualify as transparent for Dutch tax purposes, but (iii) are dealt with by the jurisdiction of a shareholder who owns at least 50% of capital, voting rights or rights to profits (iv) as being opaque. If an entity qualifies as a reverse hybrid entity, it will be considered opaque for Dutch tax purposes and will be subject to corporate tax in the Netherlands. Profits that are taxed at participant level can be deducted from the Dutch tax base.
Modification of the application of the arm’s length principle to avoid mismatches
The Dutch government proposes to ban downward transfer pricing adjustments (downward adjustments) in the Netherlands in case there is no corresponding taxable adjustment (corresponding adjustment) at the related party level (called âinformal capitalâ). In addition, an increase is refused if a taxpayer acquires a business asset through a capital contribution, profit distribution, repayment of paid-up capital, liquidation distribution or a similar (legal) action if the increase is greater than the amount taken. into account. account for tax purposes with the related party transferring the assets of the business, the same applies mutatis mutandis to debt transfer.
According to the proposal, a corresponding taxable adjustment or increase will only be allowed if the related party is subject to corporation tax and includes the adjustment in its tax base for corporate tax purposes. It is important to note that based on the legislative proposal, it is irrelevant which (effective) tax rate will ultimately be applied. The burden of proof regarding the corresponding adjustment or taxation of profits lies with the taxpayer.
The new rules are expected to come into force for fiscal years beginning on or after January 1, 2022 and will have no retroactive effect. However, an effective partial retroactive effect will apply to goodwill acquired during fiscal years starting on or after July 1, 2019 and before the fiscal year starting on January 1, 2022, under the following conditions:
- at the start of the financial year from January 1, 2022, depreciation of the asset is still possible; and
- the asset would have a lower book value if the proposal had been in effect at the time of the arm’s length adjustment.
Financial years open before July 1, 2019 do not fall within the scope of this measure.
Measures announced in the field of direct taxes
Modification of the qualification of legal person for tax purposes
General rules for the qualification of legal persons
Under the Dutch qualification rules published for public consultation, the general rule that certain characteristics of foreign legal forms should be compared with the same characteristics of Dutch legal forms remains. If it is not possible to find a Dutch legal form similar to the legal entity concerned:
- A fixed approach will apply in the event that this foreign legal entity is a tax resident of the Netherlands. This means that the foreign legal person will always be treated as a taxpayer (in other words: as opaque for Dutch tax purposes).
- A symmetrical approach will apply to entities which are not tax residents of the Netherlands. This means that the foreign legal person will be treated in the same way as in their state of residence.
The qualification (i.e. opaque or transparent for Dutch tax purposes) of a mutual fund is currently determined by whether all participants must accept the membership or replacement of participants in the (transparent) fund or not (opaque). According to the rules published for public consultation, the tax transparency of a mutual is determined on the basis of its admission to a regulated market or a similar trading platform or the fund having a legal obligation (under the conditions of the fund) to redeem stakes in the fund. The exception to this rule is the family mutual fund, these funds are always transparent.
Under the Dutch qualification rules published for public consultation, open CVs (Dutch limited partnerships treated as a taxpayer) will cease to exist as of January 1, 2022. Any open CVs existing immediately before this time will be deemed to have been transferred. its assets at fair market value to the partners, when the partners are deemed to have transferred their partnership interests and claims on the open CV at fair market value.
This transfer results in an âexit taxâ for existing open CVs. There are several transitional measures that mitigate the effects of this exit tax:
- For open CVs where all the partners are companies (i.e. legal persons subject to corporation tax), there will be a mechanism for reducing turnover, under certain conditions.
- For open CVs where the partner is an individual, there will be an action-for-action merge mechanism.
- If the two aforementioned facilities cannot be applied, it is possible to pay the tax in ten equal installments.
- Finally, for people who make assets available for such an open CV, there is also a recovery mechanism.
Please note that the qualification rules published for the public consultation can be significantly changed, given the large number of (usually negative) responses to the public consultation.