Corporate tax in Netherlands

Summary

Corporate Income Tax Rate (%) 25 (a)
Capital Gains Tax Rate (%) 25 (a)
Branch Tax Rate (%) 25 (a)
Withholding Tax (%)
Dividends
15 (b)
Interest 0
Royalties from Patents, Know-how, etc. 0
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 1
Carryforward 9

 

a) A tax rate of 20% applies to the first EUR200,000 of taxable income. An effective tax rate of 5% is available for income related to certain intellectual property (Innovation Box). For details regarding the Innovation Box, see Section B.

b) This rate may be reduced to 0% if the recipient is a parent company estab­lished in a European Union (EU) member state or European Economic Area (EEA) state. In addition, this rate is typically re duc ed under the extensive Dutch tax treaty network (see Section F), to as low as 0%. Under Dutch do­mestic law, dividends paid by a Dutch Cooperative, which is a specific legal entity, are not subject to Dutch dividend withholding tax, provided that cer­tain anti-abuse requirements are met. For corporate income tax purposes, a Dutch Cooperative is similar to a Dutch private limited liability company (besloten vennootschap met beperkte aansprakelijkheid, or BV) but, among other advantages, it may offer more flexibility from a legal perspective. For further details, see Section B.

Taxes on corporate income and gains

Corporate income tax. Corporate income tax is levied on resident and nonresident companies. Resident companies are those incor­porated under Dutch civil law, European Companies (Societas Europaea, or SEs) and European Co-operative Societies (Societas Cooperativa Europaea, or SCEs) established in the Netherlands, even if their management and statutory seat are located abroad. In addition, com panies are resident if incorporated under foreign civil law, but effectively managed and controlled in the Nether­lands. Resident com panies are subject to tax on their worldwide income. Nonres ident companies, primarily branch offices of for­eign companies doing business in the Netherlands, are taxable only on specific income items, such as real estate and business profits generated in the Netherlands.

Tax rates. The standard corporate tax rate is 25%. A tax rate of 20% applies to the first EUR200,000 of taxable income. An effec­tive tax rate of 5% is available for income related to certain intel­lectual property (IP). For details regarding this IP regime, see Innovation Box.

Innovation Box. If certain conditions are met, a taxpayer can elect to apply the Innovation Box. The aim of this box is to encourage innovation and investment in research and development (R&D), including software development.

In the Innovation Box, net income from qualifying intellectual property is effectively taxed at a rate of 5%. The 5% rate applies only to the extent that the net earnings derived from the self-developed intangible assets exceed the development costs. The development costs are deductible at the statutory tax rate of 25% (see Section A) and form the so-called threshold. The Innovation Box regime can be elected with respect to a particular intangible asset; it is not required to include all intangibles. The Innovation Box does not impose a limit on the amount of income from intan­gible assets that can be taxed at the effective 5% rate (that is, no cap exists).

An important condition for the application of the Innovation Box is that the taxpayer must have been granted a patent, a breeder’s right (this right is granted for newly invented seeds) or an R&D declaration from the Netherlands Enterprise Agency (Rijksdienst voor Ondernemend Nederland, or RVO; part of the Ministry of Economic Affairs) for an intangible asset created by or for the risk and account of the taxpayer. Qualifying intangible assets can also include software developed under an R&D declaration. Trade­marks, logos and similar assets do not qualify. Con tract R&D arrangements for qualifying intangible assets are allowed to a certain extent. Ad vance Tax Rulings (ATRs) and Advance Pric ing Agreements (APAs) are available (see Administration).

Foreign royalty withholding tax can normally be credited against Dutch corporate income tax, but the amount of the credit is lim­ited to the Dutch corporate income tax attributable to the relevant net royalty income.

It is expected that during 2016 the Dutch government will propose amendments to further align the Innovation Box with the modi­fied nexus approach developed by the Organisation for Economic Co-operation and Development (OECD). Under the OECD’s modified nexus approach, subject to certain thresholds, taxpayers may be limited in the ability to claim a regime like the Innovation Box if and to the extent the development of qualifying intangible assets (measured by spending) is outsourced to group companies.

R&D tax credit. An employer established in the Netherlands that is performing R&D is eligible for the R&D tax credit (Wet Bevordering Speur-en Ontwikkelingswerk, or WBSO), regardless of its size or industry. The WBSO is a tax incentive, which offers an immediate benefit on wage costs and other costs and expenses for R&D activities. Effective from 1 January 2016, the WBSO and the R&D allowance are integrated into a single tax incentive scheme (WBSO). All R&D cost and expenses will be settled through a reduction of the payroll tax due from an employer.

An R&D declaration must be obtained from the RVO. The benefit from the WBSO can amount up to 40% of the qualifying costs and expenditures. For R&D costs and expenditures that are not labor costs, a company can choose a fixed rate or a calculation of the actual amount of costs and expenses. As a result of the integration of the R&D allowance, start-up companies with little or no taxable profit can more easily benefit from the Dutch R&D incentives.

Capital gains. No distinction is made between capital gains and other income. In certain cases, capital gains are exempt (for exam­ple, if the participation exemption described in Section C applies) or a rollover is available based on case law or under the reinvest­ment reserve (see the discussion in Provisions in Section C).

Administration. The standard tax year is the financial year (as indicated in the articles of association of a taxpayer).

An annual tax return must be filed with the tax authorities within 5 months after the end of the tax year, unless the company applies for an extension (normally, an additional 11 months based on an agreement between the tax advisors and the tax authorities).

Companies must make partial advance payments of corporate in­come tax during the year, based on preliminary assessments. The preliminary assessments are based on the expected final assess­ment. For 2016, assuming the tax year corresponds to the calendar year, the assessments are levied according to the following sched­ule:

  • The first preliminary assessment is generally imposed on 31 Jan uary 2016. The tax administration may estimate the profit by applying a percentage to the average fiscal profit of the previous two years. If the taxpayer can plausibly show that the expected final assessment will be a lower amount, the pre­liminary assessment is based on that amount.
  • The second preliminary assessment is generally imposed at the end of the eighth month of 2016. This preliminary assessment is derived from an estimate made by the taxpayer.

These preliminary assessments may be paid in as many monthly installments as there are months remaining in the year. It is im­portant that taxpayers provide a timely and accurate estimate of the taxable income. If the preliminary corporate income tax lia­bility is understated, this may result in a charge of tax interest when the tax assessment appears to be higher. Tax interest is cal­culated for the period that begins six months after the tax year to which the tax liability relates and is based on the amount of ad­ditional tax due. If the preliminary corporate income tax liability is overstated, this may not result in a tax interest refund when the tax assessment appears to be lower.

The final assessment is made within three years (plus any exten­sions granted) from the time the tax liability arises.

The tax authorities may impose ex officio assessments if the tax­payer fails to file a return or fails to meet the deadline to file a return. Penalties may apply.

Additional assessments may be imposed if, as a result of deliber­ate actions by the taxpayer, insufficient tax has been levied. A penalty of 100% of the additional tax due may be levied. Depend­ing on the degree of wrongdoing, this penalty is normally reduced to 25% or 50%.

Rulings. Rulings are agreements concluded with the tax authori­ties confirming to the Dutch tax consequences of transactions or situations involving Dutch taxpayers. Rulings are based on Dutch tax laws that apply at the time of the request.

For certainty in advance regarding general transfer-pricing mat­ters (see Section E), an APA can be concluded with the tax au­thorities. APAs provide taxpayers with upfront certainty regard­ing the arm’s-length nature of transfer prices. All Dutch APAs are based on OECD transfer-pricing principles and require the tax­payer to file transfer-pricing documentation with the tax authori­ties. APAs can be entered into on a unilateral, bilateral or multi­lateral basis (that is, with several tax administrations). APAs may cover all or part of transactions with related parties, including transactions involving permanent establishments. The Dutch APA program also allows the use of adjustments for the application of the agreed transfer-pricing methodology on a retrospective basis.

For most other matters (for example, the applicability of the par­ticipation exemption) or the existence or nonexistence of a per­manent establishment in the Netherlands or abroad, an ATR can be concluded.

The benefit of an APA or ATR is that companies can obtain cer­tainty in advance regarding their Dutch tax position (for example, before the investment is made).

The ruling process with the tax authorities may require a pre-filing meeting. In general, rulings are concluded for a period of four or five years, but facts and circumstances may allow for a longer or shorter term. If the facts and legislation on which the APA or ATR is based do not change, in principle, the APA or ATR can be renewed indefinitely. No fees are required to be paid when filing an APA or ATR request with the Dutch tax authorities.

The time required for the total process from initiation of the rul­ing process to conclusion of the ruling depends on the circum­stances. However, in general, it takes between 6 to 10 weeks from the date of the filing of the ruling request to obtain the ruling. It is often possible to expedite the process if required from a com­mercial perspective (for example, merger and acquisition trans­actions).

In line with Base Erosion and Profit Shifting (BEPS) Action 5, the Netherlands begins the exchange of (information on) rulings in 2016. In addition, the EU Economic and Financial Affairs Council (ECOFIN) recently adopted a directive on the automatic exchange of (information on) tax rulings, effective from 1 January 2017, and the Netherlands entered into an agreement with Ger­many regarding the mutual spontaneous exchange of information regarding rulings.

Dividend withholding tax. The statutory withholding tax rate for dividends is 15%. However, several exemptions and reductions, as described below, can apply. Under the extensive Dutch treaty network (see Section F), the Dutch dividend withholding tax rate is typically reduced to a rate as low as 0%. Under the participation exemption (see Section C) or within a Dutch fiscal unity (see Section C), dividends paid by resident companies to other resident companies are usually exempt from dividend withholding tax.

The withholding tax exemption is available to EU/EEA member state resident investors (and who are not treated as a resident outside the EU/EEA under a tax treaty between the EU/EEA state and a third state) holding an interest in a Dutch dividend distrib­uting entity that would qualify for participation exemption ben­efits if the investor resided in the Netherlands. For this purpose, the EEA is limited to the countries of Iceland, Liechtenstein and Norway. The withholding tax exemption does not apply if the foreign shareholder fulfills a similar function as a Netherlands fiscal investment company or tax-exempt investment company.

Under Dutch domestic law, members in a Dutch Cooperative are not subject to Dutch dividend withholding tax, provided certain anti-abuse requirements are met. A Dutch Cooperative is similar to a Dutch BV but, among other advantages, can offer more flex­ibility from a legal perspective.

Measures to combat dividend stripping. The Dividend Tax Act provides measures to combat dividend stripping. Under these mea­sures, a reduction of dividend withholding tax is available only if the recipient of the dividends is regarded as the beneficial owner of the dividends. The measures provide that a recipient of divi­dends is generally not regarded as the beneficial owner if the fol­lowing circumstances exist:

  • The dividend recipient entered into a transaction in return for the payment of the dividends as part of a series of transactions.
  • It is likely that the payment of the dividends benefits a person who would have been entitled to a lesser (or no) reduction, ex­emption or refund of dividend tax than the recipient.
  • The person benefiting from the dividends directly or indirectly maintains or acquires an interest in the share capital of the payer of the dividends that is comparable to the person’s position in the share capital before the series of transactions.

Share repurchases. Publicly listed companies are not required to withhold dividends tax when they repurchase their own shares if certain requirements are met. One of these requirements is that the company must not have increased its share capital in the four years preceding the repurchase. This requirement does not apply if the share capital was increased for bona fide business reasons.

Credit for dividend withholding tax. A Dutch intermediate com­pany may credit a portion of the foreign dividend withholding tax imposed on dividends received against any Dutch withholding tax due on its dividend distributions if certain conditions are satis­fied. The credit is generally 3% of the gross amount of qualifying dividends received. However, if the dividends received are not passed on in full by the Dutch intermediate company, the credit is 3% of the dividend distribution made by the Dutch intermediate company.

Foreign tax relief. Under unilateral provisions in the corporate in­come tax act, the Netherlands exempts foreign business profits derived through a permanent establishment, profits from real es­tate located abroad and certain other types of foreign income from corporate income tax. If the income is derived from a tax treaty country, the exemption applies with consideration of the relevant treaty provisions. If such foreign (operational) income is derived

from a non-treaty country, no “subject to tax” requirement ap­plies. To the extent that the foreign business income is negative, this amount does not reduce Dutch taxable income unless the foreign business is terminated (object exemption/territorial sys­tem). A credit is available for profits allocable to low-taxed port­folio investment/passive branches.

Determination of taxable income

General. The fiscal profit is not necessarily calculated on the basis of the annual financial statements. In the Netherlands, all com­mercial accounting methods have to be reviewed to confirm that they are acceptable under fiscal law. The primary feature of tax accounting is the legal concept of “sound business practice.”

Expenses incurred in connection with the conduct of a business are, in principle, deductible. However, certain expenses are not de­ductible, such as fines and penalties, and expenses incurred with respect to a crime. For companies that do not have shareholders with substantial interests, no other restrictions exist, except with respect to the deductibility of related-party interest expense. For other companies, certain expenses are partially deductible, such as meals, drinks, and conferences. If expenses exceed normal arm’s-length charges and are incurred directly or indirectly for the benefit of shareholders or related parties, the excess is considered a non deductible expense (a deemed dividend or informal capital contribution). Restrictions are imposed on the deductibility of certain related-party in terest expense (see Section E).

Functional currency. Taxpayers must calculate their taxable in­come in euros. On request, Dutch corporate tax returns may be calculated in the functional currency of the taxpayer, provided the financial statements of the relevant financial year are prepared in that currency. The financial statements may be expressed in a foreign currency if it is justified by the company’s business or the international nature of the company’s group. If this regime is ap­plied, in principle, the functional currency must be used for at least 10 years. Only currencies listed by the European Central Bank qualify for the regime.

Inventories. Inventories are generally valued at the lower of cost or market value, but the last-in, first-out (LIFO) and the base stock methods of valuation are acceptable if certain conditions are fulfilled. Both of these make it possible to defer taxation of inventory profits. Valuation under the replacement-cost method is not accepted for tax purposes.

Provisions. Dutch law permits the creation of tax-free equalization and reinvestment reserves.

The equalization reserve may be established in anticipation of certain future expenditure that might otherwise vary considerably from year to year, such as ship maintenance, overhauling, pension payments or warranty costs.

If certain conditions are met, the tax book profit arising from the disposal of a tangible or intangible business asset may be carried forward and offset against the acquisition cost of a reinvestment asset. This is known as a reinvestment reserve. The reinvestment asset must be purchased within three years after the year in which the reinvestment reserve was established. If a reinvestment asset is not purchased within three years after the establishment of the reinvest ment reserve, the amount in the reinvestment reserve is included in taxable income for corporate income tax purposes in the third year following the year in which the reinvestment reserve was established. The offset of the book profit may not reduce the book value of the reinvestment asset below the book value of the asset that was sold. An amount that cannot be offset as a result of the rule described in the preceding sentence may continue to be carried forward if the condition of the same economic function for the reinvestment does not apply (see below). If the depreciation period for the reinvestment asset is more than 10 years or if the reinvestment asset is not depreciable, the reinvestment asset must fulfill the same economic function as the asset that was sold. The condition of the same economic function for the reinvestment does not apply to reinvestment assets with a depreciation period of 10 years or less.

Participation exemption. All companies resident in the Nether­lands (except qualified investment companies that are subject to a corporate income tax rate of 0%), including holding companies, are in principle exempt from Dutch corporation tax on all benefits connected with certain qualifying shareholdings (participations). Benefits include cash dividends, dividends-in-kind, bonus shares, “hidden” profit distributions and capital gains realized on dispos­al of the shareholding. A capital loss that might result from the disposal of the shareholding is similarly nondeductible (however, a liquidation loss of a subsidiary company may be deductible under certain circumstances).

The participation exemption applies to all (rights to) interests of 5% or more in the nominal paid-up capital of the subsidiary, un­less the participation is a “portfolio investment” (determined through the motive test; see below). A less than 5% direct share­holding may be a qualifying participation if a related company owns an interest of at least 5% in the same subsidiary. If the shareholding is reduced to less than 5% (for ex ample, as a result of a dilution or another event), the participation exemption may still apply for a period of three years from the date the 5% thresh­old is no longer met. A condition for applying the participation exemption during the three-year period is that the shareholding must have been owned by the Dutch shareholder for more than one year during which the Dutch shareholder was able to fully benefit from the Dutch participation exemption. If the participa­tion can be considered a “portfolio investment” on a particular date, the Dutch shareholder may no longer benefit from the par­ticipation exemption as of such date.

The motive test is applied to determine whether a participation is a “portfolio investment.” In general, the motive test is met if the shares in the subsidiary are not merely held for the return that can be expected from normal asset management. In a limited number of specific situations, the participation is deemed to be held as a portfolio investment, which is generally determined based on the function and assets of the subsidiary. However, even if the motive test is not met, the Dutch taxpayer may still benefit from the participation exemption if the reasonable tax test or the asset test is met.

The reasonable tax test is satisfied if the direct subsidiary is sub­ject to a profit tax that results in a reasonable levy of profit tax in accordance with Dutch tax standards. Based on the parliamentary history, in principle, the local tax system needs to be compared with the Dutch tax system. The primary elements that are taken into account for this assessment are the tax base and the local statu tory corporate income tax rate. In general, a statutory profit tax rate of at least 10% qualifies as a reasonable levy if no signifi­cant deviations exist between the local tax system and the Dutch tax system. Such significant deviations include, among others, a tax holiday, a cost-plus tax base with a limited cost base and the ab sence of limitation provisions with respect to the interest deduction.

The asset test is satisfied if less than half of the assets of the direct subsidiary usually consist of, directly or indirectly, low-taxed “free” portfolio investments on an aggregated basis. The portfolio investments are considered “free” if the investments are not used in the course of the business of the company. Real estate and rights directly or indirectly related to real estate are excluded from the definition of a portfolio investment. As a result, the par­ticipation exemption normally applies to benefits from real estate participations.

Subject to prior approval of the Dutch tax authorities, a taxpayer can apply the participation exemption to the foreign-exchange results relating to financial instruments that hedge the foreign-exchange exposure on qualifying participations.

Partitioning reserve. Under rules that were introduced in 2013, companies claiming exemption from corporate income tax (under the 2007 revised participation exemption rules) for dividends re­ceived from foreign subsidiaries must apportion the income to the year in which it originated. The change applies retroactively to 14 June 2013, when the proposed rules were first announced. It prevents companies from claiming the exemption on income originating from a non-exempt period (so-called compartmental­ization rules). Under these rules, a taxpayer must create a fiscal “partitioning reserve” if it holds a (share) interest in a company to which the participation exemption no longer applies and if the participation exemption did apply until that moment (and vice versa). Taxpayers should consult their Dutch tax advisors to ob­tain further details regarding these rules.

Hybrid loans. Effective from 1 January 2016, the participation exemption is no longer available for certain benefits derived from so-called hybrid loans. Under this amendment, the participation exemption does not apply to income derived from participations to the extent that the corresponding payments are, directly or in­directly, deductible at the level of the participation. No compart­mentalization can be applied to benefits that relate to the period before 1 January 2016, but are paid or accrued after that date.

Tax depreciation. In principle, depreciation is based on historical cost, the service life of the asset and the residual value. Deprecia­tion is limited on buildings, goodwill and other assets.

Buildings. Buildings (including the land and surroundings on which they were erected) can be de preciated only for as long as the tax book value does not drop below the threshold value. Buildings may not be depreciated to a tax book value lower than the thresh­old value. The threshold value of buildings held as a portfolio in­vestment equals the value provided in the Law on Valuation of Real Estate (Wet Waardering Onroerende Zaken), known as the WOZ value. The threshold value of buildings used in the taxpay-er’s business or a related party’s business equals 50% of the WOZ value. In principle, the WOZ value approximates the fair market value of the real estate. The local municipality determines annu­ally the WOZ value. If the threshold value increases, tax deprecia­tion that had been previously claimed is not recaptured.

Goodwill and other assets. Goodwill must be depreciated over a period of at least 10 years. As a result, the maximum annual depreciation rate is 10%. If the goodwill is useful for a longer period, this period must be taken into account. For other assets such as inventory, cars and computers, the depreciation is limited to an annual rate of 20% of historical cost.

Groups of companies. Under the Dutch fiscal unity regime, a group of companies can be treated as one taxpayer for Dutch tax pur­poses. The fiscal unity regime has the following characteristics:

  • To elect a fiscal unity, among other requirements, a parent com­pany must own at least 95% of the shares of a subsidiary.
  • Both Dutch and foreign companies may be included in a fiscal unity if their place of effective management is located in the Netherlands, and if the foreign company is comparable to a Dutch BV or naamloze vennootschap (NV).
  • A permanent establishment in the Netherlands of a company with its effective management abroad may be included in, or can be the parent of, a fiscal unity.
  • A subsidiary may be included in the fiscal unity from the date of acquisition.

Advantages of such group treatment include the following:

  • Losses of one subsidiary may be offset against profits of other members of the group.
  • Reorganizations, including transfers of assets with hidden re­serves from one company to another, have no direct fiscal con­sequences.
  • Intercompany profits between members of a Dutch fiscal unity may be fully deferred.

Further to decisions of the Court of Justice of the European Union, the Dutch State Secretary of Finance issued a decree on 16 December 2014, which provides that it is possible to form a fiscal unity between Dutch companies that are linked through a company that resides in another member state. Draft legislation has been proposed to codify this possibility in the Dutch Corpo­rate Income Tax Act in 2016. As a result of this decree and the draft legislation, it is possible to form a fiscal unity that includes the following:

  • A Dutch parent and a Dutch second-tier subsidiary that is held by an intermediate company in another EU member state
  • Two Dutch subsidiary (sister) companies held by a parent com­pany in another member state

Fiscal unity requests that cover the above situations and that are filed with the Dutch tax authorities before adoption of the pro­posed legislation are assessed on the basis of the above decree.

Relief for losses. Losses of a company may be carried back one year and carried forward nine years.

Restrictions on loss relief apply to holding and financing compa­nies. The restrictions apply to a company if holding activities and direct or indirect financing of related parties account for at least 90% of the company’s activities during at least 90% of the finan­cial year.

A company meeting the above condition may offset losses from a financial year against profits earned in another financial year only if its activities in both financial years consist of (or almost exclusive ly consist of) holding activities and the direct or indirect financing of related parties. This rule is designed to prevent com­panies from offsetting losses incurred in years in which they pri­marily engaged in holding and financing activities against profits of other activities that are subsequently commenced or acquired.

A second restriction provides that the balance of the related-party receivables and the related-party payables of the company during the financial year in which the profits are realized may not exceed this balance in the financial year in which the losses were in cur-r ed. This rule is designed to prevent companies from using losses by increasing the profitable finance activities. However, the com­pany may make a case that the balance of the receivables and payables has increased for business reasons and not only for the purpose of using the loss carryforwards. If a taxpayer has at least 25 employees engaged in activities other than holding or financ­ing, this ring-fencing rule does not apply.

The Corporate Income Tax Act contains specific rules to combat the trade in so-called “loss companies.” If 30% or more of the ultimate interests in a Dutch taxpayer changes among ultimate shareholders or is transferred to new shareholders, in principle, the losses of the company may not be offset against future prof­its. However, many exceptions to this rule exist (for example, the going-concern exception). The company has the burden of proof with respect to the applicability of the exemptions. A similar rule applies to companies with a reinvestment reserve and other attri­butes (such as tax credit carryforwards).

Value-added tax

Value-added tax is imposed on goods delivered and services ren­dered in the Netherlands other than exempt goods and services. The general rate is 21%. Other rates are 0% and 6%.

Miscellaneous matters

Dutch intermediate companies. The Netherlands may be used as a base for intermediate companies. These are primarily finance companies, licensing companies and leasing companies. Compa­nies that perform these activities within a group must bear a certain level of risk with respect to these activities. A safe-harbor test involving a requirement with respect to minimum equity at risk determines whether sufficient risk is involved.

The Netherlands does not impose withholding tax on interest and royalty payments (see Section A). In addition, dividend with­holding tax is typically reduced to 0% (see Section B). Because of the participation exemption (see Section C), a Dutch interme­diate company is usually exempt from Dutch corporate tax on dividends from, and capital gains connected with, a foreign shareholding.

Effective from 1 January 2014, Dutch tax law contains substance requirements for companies principally engaged in intercompany financing and/or licensing activities. Dutch companies that claim the benefits of a tax treaty or EU Directive (treaty benefits) must now declare in their annual corporate income tax return whether the taxpayer meets a defined set of substance requirements. If one or more of these requirements are not met and if the company has claimed the benefits of a tax treaty, the Dutch tax authorities no­tify the foreign tax authorities. This is a simple notification. It is up to the foreign tax authorities to take action regarding this no­tification. Taxpayers should consult their Dutch tax advisors to discuss these rules in more detail.

Foreign-exchange controls. No real restrictions are imposed on the movement of funds into and out of the Netherlands.

Debt-to-equity rules and other restrictions on deductibility of interest

Statutory thin-capitalization rules. Effective from 1 January 2013, the statutory thin-capitalization rules were abolished.

Other anti-base erosion provisions. The deduction of interest paid, including related costs and currency exchange results, by a Dutch company on a related-party loan is disallowed to the extent that the loan relates to one of the following transactions:

  • Dividend distributions or repayments of capital by the taxpayer or by a related Dutch company to a related company or a relat­ed individual resident in the Netherlands
  • Capital contributions by the taxpayer, by a related Dutch com­pany or by a related individual resident in the Netherlands into a related company
  • The acquisition or extension of an interest by the taxpayer, by a related Dutch company or by a related individual resident in the Netherlands in a company that is related to the taxpayer after this acquisition or extension

This interest deduction limitation does not apply if either of the following conditions is satisfied:

  • The loan and the related transaction are primarily based on business considerations.
  • At the level of the creditor, the interest on the loan is subject to a tax on income or profits that results in a levy of at least 10% on a tax base determined under Dutch standards, disregarding the Innovation Box (see Section B). In addition, such interest income may not be set off against losses incurred in prior years or benefit from other forms or types of relief that were available when the loan was obtained. In addition, the loan may not be obtained in anticipation of losses or other types of relief that arise in the year in which the loan was granted or in the near future. Even if the income is subject to a levy of at least 10% on a tax base determined under Dutch standards at the level of the creditor, interest payments are not deductible if the tax authori­ties can dem on strate it to be likely that the loan or the related transaction is not primarily based on business considerations.

The measure describ ed in the preceding sentence applies to loans that were in existence on 1 January 2008, with no grand-fathering.

Hybrid loans. Interest expense incurred on loans that are (deemed) to function as equity for Dutch tax purposes is not deductible and may be subject to Dutch dividend withholding tax.

Acquisition interest limitation. Effective from 1 January 2012, the deduction of interest expense related to the acquisitions of a Dutch company that is subsequently included in a fiscal unity with its Dutch acquirer (or merged) is restricted. In such a transaction, the interest expense incurred by the Dutch acquirer with respect to the acquisition is tax deductible without limitation only if the acquirer has “stand-alone” taxable income. If the acquirer does not have sufficient “stand-alone” taxable income, limitations to the amount of deductible acquisition interest expense may apply. This is the case if the acquisition interest exceeds an amount of EUR1 million and if the fiscal unity has “excess liabilities.” To determine wheth­er the fiscal unity has “excess liabilities,” the amount of outstand­ing liabilities related to an acquisition, expressed as a percentage of the initial purchase price, is reviewed annually. In the first year, “excess liabilities” are recognized only if more than 60% of the purchase price is financed with (any) debt, and the deductibility of interest expenses is limited to the amount of the “excess liabili­ties.” This percentage is reduced by 5% per year. Taxpayers should consult their Dutch tax advisors to discuss these rules in more detail. The restriction was introduced with a grandfathering provi­sion. Under this provision, if the target is included in a fiscal unity with the acquirer before 15 November 2011 or if it was merged before that date, the limitations do not apply.

Participation interest limitation. The participation interest limita­tion applies to fiscal years beginning on or after 1 January 2013. It seeks to limit the deduction of “excessive interest” paid by a Dutch corporate taxpayer with respect to “participation debt,” which is debt (deemed to be) used to finance assets generating income that is exempt under the Dutch participation exemption. Such assets primarily include participations (such as share inter­ests of at least 5%). The rule applies only if the interest exceeds EUR750,000 (only the excess above EUR750,000 would poten­tially be limited).

Under the rule, “participation debt” exists if the average cost price (that is, the combined amount of the purchase prices of the sub­sidiaries held by the Dutch taxpayer) of a Dutch taxpayer’s par­ticipations exceeds the taxpayer’s equity for Dutch tax purposes. Excess interest is calculated using the following formula:

Excess interest = Total interest and                 Participation debt

costs at the level x               Total amount

of the taxpayer                       of debt

Certain exceptions exist. The cost price of a subsidiary is not taken into account for purposes of calculating the participation debt (that is, a purchase price is excluded from the combined amount of purchase prices of the subsidiaries held by the Dutch taxpayer) if and to the extent that the interest held in an operational subsid­iary can be considered an expansion of the operational activities

of the group (expansion investment escape). This exception does not apply in certain situations that the legislation deems abusive. Taxpayers should consult Dutch tax advisors to discuss these rules in more detail.

A grandfathering rule applies for subsidiaries held by the Dutch taxpayer on or before 1 January 2006. These subsidiaries are deemed to be an expansion investment for 90%. The Dutch tax­payer can still substantiate that the subsidiary should be consid­ered an expansion investment for 100%.

Another exception is made for active financing activities. When calculating the excess interest, the interest and costs relating to payables held with respect to active financing are excluded from the total amount of interest and costs. In addition, payables that relate to active financing lower the average total debt that is needed to calculate the excessive amount of interest. For this ac­tive financing rule to apply, a taxpayer must demonstrate that the payables as well as the receivables connected thereto are held with respect to the active financing activities. This is subject to specific criteria.

Transfer pricing. The Dutch tax law includes the arm’s-length prin­ciple (codified in the Corporate Income Tax Act) and contains specific transfer-pricing documentation requirements. Transactions between associated enterprises (controlled transactions) must be documented. Such documentation should include a description of the terms of the controlled transactions, the entities (and perma­nent establishments) involved and a thorough analysis of the so-called five comparability factors (both from the perspective of the controlled transactions and companies and uncontrolled transac­tions and companies), of which the functional analysis is the most important. The documentation must establish how transfer prices were determin ed and provide a basis for determining whether the terms of the intercompany transactions would have been adopted if the parties were unrelated. If such information is not available on request in the case of an audit or litigation, the burden of proof with respect to the arm’s-length nature of the transfer prices shifts to the taxpayer. As a result, the taxpayer is exposed to possible non­compliance penalty charges. Taxpayers can use the Dutch transfer-pricing decrees for guidance. These decrees provide the Dutch interpretation of the OECD transfer-pricing guidelines.

Effective from 1 January 2016, additional transfer-pricing re­quirements are included in the Dutch tax law. In line with the OECD’s report on Action Point 13 of the BEPS plan, new stan­dards for transfer-pricing documentation are introduced. These new standards consist of a three-tiered structure for transfer-pricing documentation that includes a master file, a local file and a template for a Country-by-Country (CbC) Report.

The CbC Report applies to Dutch tax resident entities that are members of a multinational enterprise (MNE) group with con­solidated group turnover exceeding EUR750 million in the tax year preceding the tax year to which the CbC Report applies. In addition, Dutch tax resident entities of a MNE group also have to prepare a master file and a local file if the group has consoli­dated group turnover exceeding EUR50 million in the tax year preceding the tax year for which the tax return applies.

At the time of writing, the Dutch government had not yet issued further guidance on the specific implementation of the master, local file and CbC reporting requirements. This guidance will be issued through Ministerial Regulations. Taxpayers should consult their Dutch tax advisors to discuss these rules in more detail.

APAs can be concluded with the Dutch tax authorities with re­spect to transfer pricing (see Section B).

Treaty withholding tax rates

The rates reflect the lower of the treaty rate and the rate under Dutch domestic law.

Dividends (a)

%

Interest

%

Royalties

%

Albania 0/5 (b)(t) 0 0
Argentina 10 (b) 0 0
Armenia 0/5 (c)(u) 0 0
Aruba 5/7.5 (b)(aa) 0 0
Australia 15 0 0
Austria 0/5 (b)(g) 0 0
Azerbaijan 5/10 (b)(s) 0 0
Bahrain 0 (c) 0 0
Bangladesh 10 (c) 0 0
Barbados 0 (c) 0 0
Belarus 0/5 (b)(p) 0 0
Belgium 0/5 (c)(g) 0 0
Bonaire, St. Eustatius and Saba
(BES-Islands) 0 (c) 0 0
Brazil 15 0 0
Bulgaria 0/5 (b)(g) 0 0
Canada 5 (b) 0 0
China 5 (b) 0 0
Croatia 0 (c) 0 0
Curaçao 0/5/15 (c)(bb) 0 0
Czech Republic 0 (b)(g) 0 0
Denmark 0 (c)(g) 0 0
Egypt 0 (b) 0 0
Estonia 0/5 (b)(g) 0 0
Ethiopia (cc) 15 0 0
Finland 0 (f)(g) 0 0
France 0/5 (b)(g) 0 0
Georgia 0/5 (c)(o) 0 0
Germany (dd) 0/5 (c)(g) 0 0
Ghana 5 (c) 0 0
Greece 0/5 (b)(g) 0 0
Hong Kong SAR 0/10 (q) 0 0
Hungary 0/5 (b)(g) 0 0
Iceland 0 (c)(g) 0 0
India 5/10/15 (c)(k) 0 0
Indonesia 10 0 0
Ireland 0 (b)(g) 0 0
Israel 5 (b) 0 0
Italy 0/5/10 (c)(g) 0 0
Japan 0/5 (c)(v) 0 0
Jordan 0/5 (c)(l) 0 0
Kazakhstan 0/5 (c)(v) 0 0

 

Korea (South) 10 (b) 0 0
Kuwait 0 (c) 0 0
Latvia 0/5 (b)(g) 0 0
Lithuania 0/5 (b)(g) 0 0
Luxembourg 0/2.5 (b)(g) 0 0
Macedonia 0 (c) 0 0
Malaysia 0 (b) 0 0
Malta 0/5 (b)(g) 0 0
Mexico 5 (c) 0 0
Moldova 0/5 (b)(r) 0 0
Morocco 10 (b) 0 0
New Zealand 15 0 0
Nigeria 12.5 (c) 0 0
Norway 0 (b)(g) 0 0
Oman 0 (c) 0 0
Pakistan 10 (b) 0 0
Panama 0/15 (e) 0 0
Philippines 10 (c) 0 0
Poland 0/5 (c)(g) 0 0
Portugal 0/10 (g) 0 0
Qatar 0 (h) 0 0
Romania 0/5 (c)(g) 0 0
Russian Federation 5/15 (b)(m) 0 0
Saudi Arabia 5 (c) 0 0
Singapore 0 (b) 0 0
Sint Maarten 8.3/15 (b)(bb) 0 0
Slovak Republic 0 (b)(g) 0 0
Slovenia 0/5 (c)(g) 0 0
South Africa 0/5 (c)(ee) 0 0
Spain 0/5 (b)(g) 0 0
Sri Lanka 10 (b) 0 0
Suriname 7.5 (b) 0 0
Sweden 0 (b)(g) 0 0
Switzerland 0 (c) 0 0
Taiwan 10 0 0
Thailand 5 (b) 0 0
Tunisia 0 (c) 0 0
Turkey 5 (b) 0 0
Uganda 0/5 (z) 0 0
Ukraine 0/5 (d)(r) 0 0
USSR (i) 15 0 0
United Arab
Emirates 5 (c) 0 0
United Kingdom 0 (c)(g) 0 0
United States 0/5 (c)(y) 0 0
Uzbekistan 0/5 (b)(x) 0 0
Venezuela 0/10 (b)(w) 0 0
Vietnam 5/7 (b)(n) 0 0
Yugoslavia (j) 5 (b) 0 0
Zambia 5 (b) 0 0
Zimbabwe 10 (b) 0 0
Non-treaty countries 15 0 0

a) The dividend withholding tax rates in this table are based on the lowest available treaty rates.

b) The rate is increased to 15% (China, Slovak Republic and Venezuela, 10%) if the recipient is not a corporation owning at least 25% of the distributing company.

c) The rate is increased to 15% (or other rate as indicated below) if the recipient is not a corporation owning at least 10% of the distributing company.

Bahrain 10%        Kuwait         10%       South Africa          10%

Ghana 10%          Oman           10%       United Arab Emirates 10%

Japan     10%       Saudi Arabia 10%

d) The treaty withholding rate is increased to 15% if the recipient is not a corpo­ration owning at least 20% of the distributing company.

e) The treaty withholding rate is increased to 15% if the recipient is not a cor­poration owning at least 15% of the distributing company and if other condi­tions are met.

f) The treaty withholding rate is increased to 15% if the recipient is not a cor­poration owning at least 5% of the distributing company.

g) A dividend withholding tax exemption is available to EU/EEA member state resident investors (who are not treated as a resident outside the EU/EEA under a tax treaty between the EU/EEA state and a third state) holding an interest in a Dutch dividend distributing entity that would qualify for partici­pation exemption benefits. For this purpose, the EEA is limited to the coun­tries of Iceland, Liechtenstein and Norway. The withholding tax exemption does not apply if the foreign shareholder fulfills a similar function as a Netherlands fiscal investment company or tax-exempt investment company. No minimum holding period applies.

h) The treaty withholding rate is increased to 10% if the recipient is not a cor­poration owning at least 7.5% of the distributing company.

i) The former USSR tax treaty continues to apply to Kyrgyzstan, Tajikistan and Turkmenistan.

j) The former Yugoslavia tax treaty continues to apply to Bosnia and Herze­govina, Kosovo, Montenegro and Serbia.

k) The treaty withholding rate is 15% but contains a most-favorite-nation clause. The 10% rate is based on the treaty withholding rate with Germany. The 5% rate is based on the treaty withholding rate with Slovenia and requires owner­ship of at least 10% of the distributing company.

l) The 0% rate applies if the recipient is exempt from tax on the dividend.

m) The 5% rate applies if the recipient has invested at least EUR75,000 in the capital of the distributing company and has an interest of at least 25% in the distributing company.

n) The 5% rate applies if the beneficial owner of the dividends is a company that holds directly or indirectly at least 50% of the distributing company or has invested more than USD10 million, or the equivalent in local currency, in the distributing company. The 7% rate applies if the beneficial owner of the divi­dends is a company that holds directly or indirectly at least 25% but less than 50% of the distributing company and if, under the provisions of the Nether­lands Corporate Income Tax Act and future amendments thereto, a company that is a resident of the Netherlands is not charged to Netherlands corporate income tax with respect to dividends received by the company from a com­pany that is a resident of Vietnam.

o) The 0% rate applies if the beneficial owner of the dividends is a company that holds directly or indirectly at least 50% of the distributing company and has invested more than USD2 million or the equivalent in euro or Georgian cur­rency in the capital of the distributing company.

p) The 0% rate applies if the recipient is a corporation that owns at least 50% of the distributing company and has invested EUR250,000 in the share capital of the distributing company or if the recipient is a corporation owning at least 25% of the shares of the distributing company and the capital of the distribut­ing company is guaranteed or insured by the government.

q) The 0% rate applies if the beneficial owner of the dividends is a company that holds directly at least 10% of the distributing company and if certain other conditions are met. Please consult your Dutch tax advisor for further details.

r) The 0% rate applies if the recipient of the dividends owns at least 50% of the distributing company and the recipient has invested at least USD300,000, or the equivalent in local currency, in the capital of the distributing company.

s) The 5% rate applies if the recipient has invested at least EUR200,000 in the capital of the distributing company.

t) The 0% rate applies if the recipient has invested more than USD250,000 in the capital of the distributing company.

u) The 0% rate applies if the profits out of which the dividends are paid have been effectively taxed at the normal rate for profits tax and if the dividends are exempt from tax in the hands of the company receiving such dividends.

v) The 0% rate applies if the beneficial owner is a company that has directly or indirectly owned shares representing at least 50% of the voting power of the distributing company for the six-month period ending on the date on which entitlement to the dividends is determined and if other conditions are met.

w) The 10% rate applies if, according to the law in force in Venezuela, taxation of the dividends in Venezuela results in a tax burden of less than 10% of the gross amount of the dividends.

x) The 0% rate applies if under the provisions of the Netherlands Company Tax Act and the future amendments thereto, a company that is a resident of the Netherlands is not charged to Netherlands company tax with respect to divi­dends the company receives from a company that is a resident of Uzbekistan.

y) The 0% rate applies if the recipient is a company that directly owns shares representing 80% or more of the voting power in the payer of the dividends and if other conditions are met. The 5% rate applies if the recipient is a company that holds directly at least 10% of the voting power of the payer of the dividends.

z) The 0% rate applies if the recipient is a company owning at least 50% of the distributing company with respect to investments made, including increases of investments, after the entry into force of this treaty on 10 September 2006. The 5% rate applies if the recipient is a company that owns less than 50% of the distributing company. The competent authorities of the contracting states regulate in an agreement the application of the reduced rates.

(aa) The 5% rate applies if the recipient of the dividend is subject to profit taxa­tion of at least 5.5%.

(bb) Dividends paid by a resident of the Netherlands to a resident of Curaçao or Sint Maarten are subject to Dutch dividend withholding tax at a rate of 15%. Under application of the new bilateral tax arrangement between the Nether­lands and Curaçao, which is effective from January 2016, a reduced rate of 0% is available if certain requirements are met. If the conditions are not met, a 15% withholding tax rate should apply. However, under grandfathering rules, a 5% withholding tax rate will apply for existing situations until the end of the 2019 financial year.

(cc) On 10 August 2012, the Netherlands and Ethiopia signed a new tax treaty. When ratified, the new tax treaty provides for a reduced treaty withholding rate of 5% if certain requirements are met.

(dd) On 12 April 2012, the Netherlands and Germany signed a new treaty. This new treaty was ratified on 20 October 2015 and is effective from 1 January 2016. Under the new treaty, a reduced treaty withholding rate of 5% applies to dividends if certain requirements are met. Under transition rules, a tax­payer may opt to apply the old treaty for one more year after the new treaty has entered into force (that is, until 1 January 2017).

(ee) The treaty withholding rate is 5% but contains a most-favorite-nation clause. The 0% rate is based on a ruling from a Dutch district court and the Nether­lands’ treaties with Kuwait and Sweden. The court ruling provides an oppor­tunity to apply a dividend withholding tax exemption under the Netherlands-South Africa tax treaty if the corporate shareholder holds at least 10% of the capital of the company paying the dividends.

The Netherlands is in continuous negotiations with other coun­tries to conclude new tax treaties or amend existing ones. During 2015, the Netherlands continued discussions with Algeria, Australia, Belgium, Brazil, Canada, Chile, Colombia, Cyprus, France, Guernsey, India, Indonesia, Iraq, Ireland, Isle of Man, Jersey, Kenya, Korea (South), Malawi, Mongolia, Poland, South Africa, Spain, Tajikistan, Tanzania and Uruguay. In addition, in 2015, the Netherlands contacted Bangladesh, Bulgaria, Cyprus, Egypt, Georgia, Ghana, Kyrgyzstan, Moldova, Morocco, New Zealand, Pakistan, Philippines, Russia, Sri Lanka, Uzbekistan, Vietnam, Zambia and Zimbabwe to begin tax treaty negotiations or renegotiate existing treaties.