On 21 September 2021, the 2022 Netherlands tax plan ('the tax plan') was presented by the Minister of Finance to the lower house of the Netherlands Parliament.
With no new government in place following the Netherlands' general election on 15 March 2021, the tax plan is briefer than most of its annual predecessors. The current caretaker government has indicated that it is limiting itself to urgent and pressing matters, leaving more substantive changes to the Netherlands tax system for the next government to consider.
However, the caretaker government has announced that it will publish separate legislative proposals on the qualification of entities as either tax transparent or opaque (winter 2021/2022) and the implementation of DAC7 (exchange of information for digital platforms – spring 2022).
The proposed entry into force of the measures outlined below is 1 January 2022. As the plans are not controversial, we do not expect any major changes following the parliamentary discussions.
The tax plan includes the following key corporate tax proposals:
- Deductions resulting from transfer pricing corrections will be denied unless there is a corresponding income inclusion.
- In response to the Sofina case, withholding tax refunds to Netherlands corporate taxpayers will be restricted.
- The implementation of the EU hybrid mismatch rules (ATAD II) will be updated to address reverse hybrid entity mismatches.
- Employees will be allowed to defer the taxable moment (for wage tax purposes) of their employee stock options from the moment they exercise the option to the moment the underlying shares become freely tradeable.
Further details and background are set out below.
Furthermore, the following proposals from last year’s tax plan will come into effect on 1 January 2022:
- Losses can be carried forward indefinitely (currently six years). For annual profits over €1m, loss compensation is capped at 50 per cent of the profits.
- The corporate income tax rate is currently 15 per cent for the first €245,000 of profits and 25 per cent for any profits above that amount. This threshold will rise to €395,000, with the rates staying the same.
Transfer pricing mismatches
Under current transfer pricing rules, any non-arm’s-length prices agreed between affiliated parties are corrected to an arm’s-length price for Netherlands tax purposes, regardless of the tax treatment of the relevant transaction in other jurisdictions. Accordingly, Netherlands taxpayers may be entitled to amortise assets or deduct costs even if the (imputed) purchase price for the asset or the (imputed) costs are not included in the tax base in another jurisdiction.
The caretaker government has now proposed that no transfer pricing adjustments should be made that would lead to additional deductions in the Netherlands without a corresponding (taxable) inclusion (in the Netherlands or abroad). Similarly, a non-arm’s-length purchase price paid for an asset to a non-Netherlands affiliated party is only subject to (upward) transfer pricing adjustments if the same transfer pricing adjustment is made in the other jurisdiction.
Although generally applicable, these rules are aimed at taxpayers transferring IP onshore to create large amortisation deductions, without recognising a gain at the transferor level.
The rules apply to financial years commencing on or after 1 January 2022 but deny deductions for any depreciation of assets that were acquired with a transfer pricing ‘mismatch’ between 1 July 2019 (the date that the tax authorities ceased to provide tax rulings on structures that effectively exploited transfer pricing mismatches) and 1 January 2022. Hence, in practice these rules have retrospective effect.
Limitation on withholding tax refunds for loss-making entities (Sofina)
Freshfields represented Sofina, a Belgian investment company, in proceedings before the Court of Justice of the European Union (CJEU) in respect of reclaims of French withholding taxes. In 2018, the CJEU ruled in favour of Sofina and concluded that France was breaching EU law by requiring loss-making foreign shareholders of French companies to pay French dividend withholding tax (DWT) on dividends received from French companies while such a requirement did not apply to or was effectively postponed for French shareholders in a comparable position.
Under the Netherlands’ current rules, Netherlands taxpayers may offset any Netherlands DWT against their Netherlands corporate income tax (CIT) liability. If, in a particular year, the taxpayer is not in a CIT paying position (for example in case of losses), the Netherlands DWT is refunded to the taxpayer. Non-Netherlands-resident shareholders did not have the option of applying for such a refund. However, given the similarities between the existing Netherlands rules and the French rules as addressed by the CJEU in the Sofina judgment, the refund also had to be granted to non-Netherlands shareholders.
Instead of easing the rules for non-resident taxpayers, the government has now proposed to limit Netherlands taxpayers’ ability to offset their DWT liabilities up to the amount of CIT due by them (and they will therefore no longer be entitled to a refund either) in order to ensure equal treatment with non-Netherlands taxpayers.
Netherlands taxpayers may indefinitely carry forward the amount of DWT that was not eligible for set-off. Insofar as a taxpayer is permanently in a loss-making position, this temporary restriction will therefore become permanent.
Hybrid mismatches (ATAD II)
Introduction of tax liability for reverse hybrid entities
The tax plan introduces a tax liability for reverse hybrid entities as part of the Netherlands' implementation of ATAD II. While part of ATAD II has applied since 1 January 2020, EU member states can postpone the implementation of the part regarding reverse hybrid entities until 1 January 2022.
The proposal defines a reverse hybrid entity as a Netherlands partnership considered transparent for tax purposes in the Netherlands and non-transparent by the jurisdiction in which an associated enterprise that directly or indirectly holds at least 50 per cent of the voting rights, capital interests or profit rights in such a partnership, is established.
Under the proposed rules, the Netherlands will treat the partnership as a regular Netherlands taxpayer that is subject to Netherlands CIT, DWT and interest/royalty withholding taxes. A shareholding in a reverse hybrid entity may furthermore also qualify for the application of the participation exemption as long as the conditions for such application are met. Any profits of the reverse hybrid that are included in the tax base of participants in a jurisdiction that treats the partnership as tax transparent are in principle deductible so that such part of the profits of the reverse hybrid will effectively not be taxed in the Netherlands.
A well-known example of a reverse hybrid entity is the limited partnership (commanditaire vennootschap - CV) in a so-called CV/BV structure whereby the CV is regarded as transparent for Netherlands tax purposes, but generally as non-transparent in the jurisdiction where the participants of the CV are located (in practice often the US). From 1 January 2022, the CV in this example will become fully subject to Netherlands tax.
Expansion of the ‘associated’ persons concept
Currently, certain deduction limitations that apply in hybrid mismatch situations are only applicable if the hybrid mismatch arises between the taxpayer and an associated entity. The proposal broadens the scope of the hybrid mismatch rules to also cover cases where the hybrid mismatch arises between the taxpayer and an associated individual. This measure is intended to align the Netherlands' rules with ATAD II.
Employee stock option plans
Stock options granted to employees are currently subject to wage withholding tax and personal income tax at the moment the options are exercised. The tax basis is the fair market value of the shares obtained under the stock option (minus the exercise price of the option and the price paid, if any, for the option).
In practice, this method of taxation leads to dry tax charges in situations where the employee is not able to sell the shares obtained after they exercise the option – for example, where an employee is only allowed to sell non-listed shares to the issuer/employer after a certain period of time or there is a lock-up of listed shares.
To help employers incentivise employees with stock options, the proposal would allow employees to choose to be taxed at the moment either:
- the option is exercised (in line with the current regime); or
- the shares obtained after exercise become freely tradeable.
For listed shares, the taxable moment can be no later than five years after exercise or (if later) an IPO of the issuer. If the taxable moment is deferred, the tax basis would be the sum of the fair market value of the shares at the moment of taxation (minus the exercise price for the options and price paid, if any, for the options) and the amount of any dividends received in the interim period.
The measure is primarily aimed at start-ups and scale-ups, but is not limited to options granted by start-ups and scale-ups.