Netherlands Tax: Changes proposed to participation exemption, loss carryback and patent box

The 2010 tax plan published by the Netherlands Ministry of Finance on 15 September 2009 includes three important changes to the Corporate Income Tax Act:

- Amendments to the rules to qualify for the participation exemption;
- Extension of the loss carryback period; and
- Introduction of a new "innovation box" scheme to replace the patent box regime.
 
The Dutch Parliament is expected to debate the proposals in the coming months, so that the measures will become effective as from 1 January 2010.


Participation exemption

The changes to the participation exemption would affect participations in low taxed portfolio investment subsidiaries, which currently do not qualify for the exemption. To address the criticisms levelled at these rules, which are considered unclear and difficult to apply in international structures, the portfolio interest rules would be replaced by new rules.

Under the proposed changes, the participation exemption would not apply when shares in a subsidiary are held as a portfolio investment. This rule applied until 2007, but was abolished when the low taxed portfolio investment subsidiary regime was introduced. By way of fiction, participations in subsidiaries with shareholdings of less than 5% in other companies and in subsidiaries with group financing activities are deemed to be held as portfolio investments.

According to the proposal, if shares in a subsidiary are held as a portfolio investment, the participation exemption could apply if a "subject-to-tax test" or an "asset test" was met. Under the subject-to-tax test, the subsidiary itself should be subject to a tax rate of 10% or more. Unlike under the current rules, a statutory tax rate of 10%, in principle, would be sufficient; it would not be necessary to carry out a full recalculation of the tax base of all subsidiaries according to Dutch tax law. The subject-to-tax test would not be met only when there were certain significant differences between the Dutch and the foreign tax regime, resulting in a lower effective tax rate than 10%. Under the asset test, the assets of the subsidiary should not directly or indirectly largely (i.e. more than 50%) consist of low taxed (i.e. less than 10%) portfolio investments. Under this new asset test, taxation at the level of indirect subsidiaries also could be taken into account, meaning that portfolio investments that are subject to sufficient taxation would not affect application of the participation exemption. This is not the case under current rules where only taxation at the level of the subsidiary itself is taken into account.

The new rules would seem to offer much more transparency than the current rules and, if approved by Parliament, should become effective on 1 January 2010.


Loss relief

To help taxpayers improve their cash flow, taxpayers would have the option to request to carry back losses for the years 2009 and 2010 for three years (currently, only a one-year carryback is allowed). The carryback for years 2 and 3 would be limited to EUR 10 million, but the carryback for year 1 would be unlimited. In cases where a taxpayer opts for the extended carryback period, however, the loss carryforward would be limited to six years rather than nine.


Innovation box

The patent box regime would be renamed the innovation box regime and the effective tax rate would be reduced from 10% to 5%. Further, the current patent box applies to qualifying income not exceeding a certain maximum (in some cases EUR 400,000 and in other cases four times the development costs of the patent). These maximums would be eliminated.


Other proposed changes

The proposals also would extend the accelerated depreciation facility in place for 2009 only to investments made in 2010, extend the facilities for R&D activities and amend the tonnage rules for shipping activities.