Netherlands: Tax reform committee publishes report

The Tax System Research Committee, set up by the Dutch Ministry of Finance to examine the overall tax system, published its report on possible reforms to the Dutch tax regime on 7 April 2010. The report was preceded by official reports published on 1 April that contained recommendations for potential cutbacks in government expenses. While the reports examine all Dutch taxes, this article focuses on the two major corporate income tax propositions and a change in the VAT system put forward by the Research Committee: the introduction of an "equity deduction," the disallowance of a deduction for losses of foreign permanent establishments (PEs) of Dutch companies and the introduction of a single VAT rate.


Equity deduction

The Research Committee proposal would grant companies a deduction based on a percentage of equity after deducting the value for tax purposes of participations held in subsidiaries from the amount of the equity. Reducing the equity by the value for tax purposes of such participations would prevent equity from being taken into account twice, i.e. once at the level of the parent company and once at the level of the subsidiary. The equity deduction, which is somewhat comparable to the Belgian notional interest deduction, would eliminate the different treatment of payments on account of equity (e.g. dividends, which are nondeductible) and payments on debt (e.g. interest, which is deductible). If a company's equity is negative following the deduction of the value of participations held, a 4% notional addition to equity would be made. This would effectively deny excessively debt-financed companies part of their interest deduction. Under this system, all other limits on the deductibility of interest could technically be removed. Additional limits on the deductibility of interest for participations and acquisition holdings as previously discussed by the Ministry of Finance were not revived in the report.


Tax treatment of PEs

The Research Committee also proposed a change to the exemption rules for foreign PEs of Dutch companies so that such PEs would be treated in a manner similar to that of foreign subsidiaries, i.e. profits would be exempt and losses would be nondeductible. The Ministry of Finance had already floated this plan and the Research Committee now endorses it.


Introduction of single VAT rate

The Research Committee's report, as well as one of the other reports on potential cutbacks, recommends introducing a single VAT rate. The Research Committee recommends introducing a 19% flat rate, with the other report proposing a flat rate of 15%. The flat rate would replace the current system that has a standard rate of 19% and a reduced rate of 6% for necessities and other items.


Conclusion

Although the reports do not actually propose amendments to Dutch tax law, they are expected to play a major role in the parliamentary elections on 9 June 2010 and the subsequent coalition discussions. A bill is not anticipated before a new cabinet is formed.