After a record of 209 days of negotiations – almost 7 months after elections – it has been announced that a coalition between four parties will form a new Dutch government. This afternoon the government coalition agreement was presented to Dutch Parliament.The agreement includes amongst many other points the following interesting tax topics:
- Dividend withholding tax will be abolished as per January 1, 2020.
- Withholding taxes on interest and royalty payments will be introduced.
- Corporate income tax rates will be reduced and loss compensation will be limited.
Based on the above it is expected that the current legislative proposal to levy Dutch dividend withholding tax from holding cooperatives will not pass the parliament of the Netherlands. This means that the current rules to levy Dutch dividend withholding tax would remain the same until January 1, 2020. As a consequence, also the planned withholding tax exemption as of 2018 for distributions to corporate recipients resident in countries that concluded a tax treaty with the Netherlands may not be implemented. We expect more clarity on this in the next few weeks.
Impact of the abolishment of Dutch dividend withholding tax
In particular Private Equity funds which are not resident in a country that concluded a tax treaty with the Netherlands – e.g. in the Cayman Islands, Jersey and Guernsey – could benefit from this measure. Currently, these funds would either not structure their fund or investment holding companies through the Netherlands or use a tax efficient additional intermediary vehicle including Dutch cooperatives. The latter may no longer be necessary to avoid dividend withholding tax. Further, it may become possible to locate both the fund vehicle – for example a (non-tax transparent/opaque/open-end) Dutch partnership – as well as the holding companies in the Netherlands without suffering any tax either on investment income or on distribution of the investment proceeds. All of this would make life much easier and more efficient which would also save a lot of costs. Although an anti-abuse measure would be introduced as well for recipients in low tax countries, it is expected that Private Equity fund structures will not be considered abusive and hence would not be affected by this.
For individuals not too much would change in the sense that mostly the 15% Dutch dividend withholding tax would be creditable against the personal income tax or wealth tax due in their home country. In addition, individuals with an interest of at least 5% in a Dutch entity would remain subject to Dutch personal income tax with regard to dividend income in connection with such substantial interest. Albeit that often at a reduced tax treaty rate applies with a maximum of 15%. Currently, no Dutch personal income tax would be levied, since already Dutch dividend withholding tax was levied. However, in the future when no longer any Dutch dividend withholding tax would be levied, Dutch personal income tax would be due and hence for individuals the abolishment of Dutch dividend withholding tax may not create significant tax benefits. Although no need to claim a tax credit could be advantageous at the one hand. And at the other hand, being obliged to file a Dutch personal income tax return as individual rather than the distributing company filing a single withholding tax return could be disadvantageous.
Impact of the introduction of Dutch withholding tax on interest and royalty payments
Probably simultaneously with the abolishment of Dutch dividend withholding tax as per January 1, 2020, interest and royalty payments by Dutch corporate taxpayers to recipients in countries with very low tax on income will become subject to a withholding tax of which the rate yet is still unknown. In particular non-treaty resident recipients of these kind of payments would suffer from this new withholding tax, since most tax treaties concluded by the Netherlands would not allow the Netherlands to tax interest and royalty payments made by Dutch tax residents to tax residents of treaty partner countries. Moreover, based on the EU Interest and Royalty Directive, the Netherlands would not be allowed to tax intra-group interest and royalty payments made by Dutch tax residents to EU residents. Hence, it is expected that this new rule will mostly impact intra-group payments to tax havens.
Given the abolishment of Dutch dividend withholding tax and introduction in the Netherlands of withholding tax interest payments funding Dutch companies with equity may become often more advantageous from a tax perspective than funding with debt.
Impact of the Dutch corporate income tax amendments
Currently, Dutch corporate income tax is levied at a rate of 20% on the first EUR 200,000 of taxable profits and at 25% on any additional profits. For 2019 those rates will be respectively 19% and 24%, for 2020 17.5% and 22.5% and as of 2021 16% and 21%.
Currently, tax losses can be carried back 1 year and forward 9 years to set off against taxable profits of such other financial years. The 9 year carry forward term will be limited to 6 years.
As the above is based on a government coalition agreement and not a legislative proposal, many details are yet still unknown. Therefore, we suggest awaiting further developments before taking any actions. We will keep you posted on the implementation of the plans of our new government.
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