To date, the Netherlands has no withholding tax on interest and royalty payments made by Dutch entities (companies and institutions) to foreign entities. This is going to change. The Cabinet wants to put an end to the undesirable use of these. The Netherlands has many tax treaties on the basis of which interest and royalties can be paid to a Dutch entity without levy, after which the Dutch entity can transfer the payments without withholding tax to a entity in a tax haven (low-tax country). The Cabinet wants to introduce a withholding tax on outgoing interest and royalty payments to such countries by 2021. The withholding tax will also apply in various abuse situations. It will not only apply to letterbox companies. This measure is also an attempt to prevent the transfer of profits to low-tax countries. Therefore, entities with real activities in the Netherlands are also covered and can become subject to withholding tax. However, they must be affiliated parties, parties that are linked to each other in such a way that the activities of one body can be determined by the other body. This is in any case the case if more than 50% of the statutory voting rights are represented. The rate is as high as the highest corporate income tax rate. The law will enter into force on 1 January 2021. A number of abuse provisions will already apply as from 1 January 2020.
Further interpretation of the concept of permanent establishment
The presence of a permanent establishment (e.g. a branch) is one of the starting points for a State to tax a non-resident company or entrepreneur. There are possibilities for artificially circumventing the qualification as a permanent establishment. The new interpretation of the concept of permanent establishment addresses this form of tax avoidance. In treaty situations, national legislation (payroll tax, income tax and corporation tax) refers to the definition of permanent establishment in the specifically applicable tax treaty. In this way, it is prevented that there is no permanent establishment on the basis of national law, whereas under a tax treaty the tax law does accrue to the Netherlands. In non-treaty situations, the inclusion of the definition in national legislation is in line with the most recent version of the OECD Model Convention and the associated international anti-abuse measures under the BEPS project.
Revision of earnings stripping measure
The legislator proposes that the inspector may revise a decision issued with regard to the balance of interest to be passed on in the event of a new fact, bad faith or a mistake that is reasonably foreseeable to the taxpayer. This will be subject to the same time limit as for post-clearance recovery of insufficient tax. In addition, the inspector may issue a decision in the event that the balance of interest to be passed on from a previous year is deducted when determining the profit of a year. These measures contribute to legal certainty for taxpayers and supervision of the scheme by the Tax and Customs Administration.
Liquidation and cessation loss scheme
Companies can now deduct unlimited losses from their Dutch profits in the event of the dissolution of a subsidiary or the cessation of a business activity abroad. It has been proposed that, as from 2021, the liquidation and cessation loss scheme should be adjusted in such a way that a loss can be deducted less frequently. The aim is to make it impossible to take a liquidation and cessation loss on participations and permanent establishments outside the EU and the EEA and to limit the plannability of the liquidation and cessation loss.