HVK Stevens
28/05/2018 HVK Stevens

Update: ATAD 1 and CIT fiscal unity regime

Earlier we informed you about the government’s plans to implement the European Anti-Tax Avoidance Directive 1 (“ATAD 1”) in an effort to mitigate tax avoidance and evasion. We also informed you about the decision of the European Court of Justice of February, 22, 2018 in which the ECJ decided that the Dutch fiscal unity regime, in certain circumstances, conflicts with European law and that for that reason the Dutch government has proposed remedial measures in the Dutch fiscal unity regime. For our previous newsletters on the above topics, see message 1, message 2 and message 3. As described in our newsletters, these developments will have far-reaching consequences for the Dutch corporate income tax (“CIT”), specifically for:

  • interest deduction;
  • application of the participation exemption; and
  • the Dutch fiscal unity regime.

Subsequently these developments will have a profound impact on the CIT position of both multinationals and middle/small businesses.

In this regard on May 9 the Dutch Undersecretary of Finance gave answers (on behalf of the parliament) on questions from both the Dutch Senate and the House of Representatives with important explanations on these issues. We can summarize these explanations as follows.

ATAD 1

With effect of January, 1, 2019, ATAD 1 will have to be implemented. On May 9, the Dutch Undersecretary discussed, among others, the following elements of ATAD 1:

The earnings stripping rules (further limitation of interest deduction)

With effect of January, 1, 2019, net intercompany and third-party interest expenses will no longer be deductible if and insofar as this net interest exceeds 30% of the EBITDA (i.e. profit before interest, tax, depreciation, amortization and write-downs).

ATAD 1 offers the possibility to make certain exceptions and mitigations to the main rule. In his explanations the Dutch State Secretary announced the following position with respect to these exceptions and mitigations:

  • Like the previous government, the current government also intends to introduce a threshold of EUR 1 million in net interest that is excluded from this measure, whereas ATAD 1 allows for a threshold of EUR 3 million.
  • The current government also does not intend to introduce a group exemption on the basis of which interest would only be disallowed if and insofar as the debt-to-equity ratio of a Dutch company exceeds the same ratio of the consolidated group to which that company belongs.
  • Also the current government does not intend to grandfather loans existing on June, 17, 2016.
  • The basis for calculating the interest deduction limitation remains EBITDA and not EBIT. Subtracting depreciations, amortizations and write-downs from this basis would be particularly detrimental to capital-intensive companies with high depreciation, amortization and/or write-downs (such as industrial and real estate companies).
  • As mentioned earlier, as from January, 1, 2019, the specific interest deduction limitation aimed at excessive take-over interest will be cancelled. However the specific interest deduction limitation aimed at base erosion (Article 10a of the 1969 Dutch Corporate Income Tax Act) will continue to exist. The intentions for other specific interest deduction limitations will be announced on Budget Day 2018.
  • ATAD 1 offers the possibility to make an exception for long-term public infrastructure projects. The Dutch Undersecretary reports that the government is still considering whether or not to make use of this possibility.

Controlled Foreign Companies (limitation of the Dutch participation exemption)

The measure in ATAD 1 against controlled foreign companies (“CFCs”) obliges the Netherlands, in short, to tax either (unpaid) specifically described passive income (e.g. interest and royalties) generated abroad directly in the Netherlands (Model A), or to tax income generated abroad in the Netherlands by means of profit adjustments if the arm’s length principle gives rise to these adjustments Model B).

In this regard the Dutch Undersecretary has announced that the Netherlands will implement Model B. Model A will be applied with regard to income generated in countries with a low statutory tax rate or in non-cooperative countries. The determination if and when a country has a low statutory tax rate will be further clarified in the formal legislative proposal to implement ATAD 1. Furthermore, Model A has an exception if there is a ‘substantial economic activity’ conducted in the low-taxed or non-cooperative country. As mentioned earlier, this will be determined based on the stricter substance requirements as applicable since this year for the Dutch dividend withholding tax purposes.

Dutch Fiscal Unity Regime

As announced, the emergency repair measures for the CIT fiscal unity regime will, as previously reported, be aimed at the most vulnerable elements of the fiscal unity regime. The Dutch Undersecretary reports that the design of a new, future-proof corporate tax group regime is a major project and that he strives to come to a formal legislative proposal by the end of the term of the current Dutch government. This means that the announced intermediate emergency repair measures will certainly remain  in force for a number of years to come.

Concluding

The Undersecretary aims  to send the legislative proposals for implementation of both the European ATAD 1 and the fiscal unity emergency repair measures to the Dutch House of Representatives before the upcoming summer break. We advise you to keep monitoring this development closely and will also provide you with further information at that time.

Further we would like to point out that we are organizing a round table on the topic “Intercompany Finance & Governance” on July, 11, at our office in Amsterdam. At the round table we will comprehensive describe the impact of the aforementioned developments on the fiscal position of your company. If you  are interested to hear more, please let us know.

 

For more information on the aforementioned developments and on the Round Table of July 11, please contact:

For more information please contact: