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TAX NEWS - march 2010

Netherlands Tax: Update on proposed corporate income tax and 2010 budget measures

The Dutch State Secretary of Finance recently discussed with the finance commission of the lower house of parliament planned amendments to the Corporate Income Tax Act as published in the Finance Secretary's letter of 5 December 2009.

The Finance Secretary has clarified a number of measures proposed in the letter, but has indicated that certain measures will be reconsidered. Specifically, in light of an upcoming change in administration and the appointment of a new Treasury Secretary, measures that would restrict the deductibility of interest expenses incurred on acquisitions and disallow the use of losses of permanent establishments (PEs) of foreign companies in the Netherlands could be delayed. In a separate development, the 2010 budget measures, which became law on 1 January 2010, include favorable changes to the participation exemption rules and the introduction of an "innovation box."


Finance commission discussions

Finance regime -
The State Secretary of Finance indicated during the discussion with the finance commission that a special tax finance regime, the "interest box," under which intragroup interest expenses / income would be deductible / taxable at an effective rate of 5%, will not be introduced in the foreseeable future.

The State Secretary has, however, proposed an "acquisition holding measure" designed to prevent excessive (third party) debt financing and reduce related base erosion. In general, under current law, interest payments on third party debt are fully deductible as a regular business expense for Dutch tax purposes. This general rule has led to some Dutch operating companies being excessively debt financed on acquisition, which erodes the tax base of such operations in the Netherlands.

The proposed measure would limit the deductibility of interest costs related to acquisitions that are excessively debt financed by third parties where the Dutch acquiring company and the Dutch operating company are joined in a fiscal unity.

"Excessively debt financed" for these purposes likely will catch financing where a 3:1 debt-to-equity ratio is exceeded, although it may be possible to take goodwill into account for purposes of this calculation, which would benefit taxpayers because it would allow them to "boost" their equity. The existing caps on interest limitation will remain in place (i.e. both the general thin capitalization rules on intragroup debt and the transaction-based rules applying to intragroup debt).


Permanent establishments - A proposed technical change to the exemption rules for foreign PEs would result in foreign permanent establishments (PEs) being treated for tax purposes in a manner similar to that of foreign subsidiaries (i.e. profits would be exempt and losses would be nondeductible). This change would eliminate the ability to (temporarily) import foreign permanent establishment losses into the Netherlands, but could make it possible to obtain an exemption for passive permanent establishment (PE) income, although anti-abuse provisions in this respect should not be ruled out.

Although formal legislation on both proposals is expected to be drafted in the course of FY 2010, with the new rules to become effective on 1 January 2011, as noted above, the upcoming change in administration could delay this process.


2010 budget measures

Participation exemption -
As from 1 January 2010, the rules governing the application of the participation exemption are significantly relaxed and brought in line with the underlying intention of the initial FY 2007 overhaul of the participation exemption regime.

In principle, the participation exemption should apply if the taxpayer does not hold its participation as a portfolio investment ("portfolio test"). The portfolio test generally is met if the operating activities of the subsidiary (and those of lower tier subsidiaries) in which the participation is held are in line with, or complimentary to, the activities of the Dutch company holding the participation or the activities of the (indirect) parent of the Dutch company. If a company fails to meet the portfolio test, it can still qualify for the participation exemption by meeting the "asset" or "subject to tax" tests, which remain in place but have been significantly relaxed. This is an enormous improvement compared to the old rules and should attract more holding activities to the Netherlands.

Innovation box regime - A new intellectual property (IP) regime, the "innovation box," applies as from 1 January 2022 to replace the "patent box" that was introduced in 2007 to encourage R&D activities and ensure that the Netherlands remains an attractive country for innovative companies. The innovation box regime is broader in scope than the patent box. Under the new regime, qualifying income from intangible assets that exceeds the related deductible R&D costs of developing the intellectual property is taxed at a reduced effective rate of 5% (although the effective rate can be reduced even lower through additional planning). Acquired IP that is further developed in the Netherlands also should qualify. Although applying for the innovation box is straightforward and no advance ruling is required, because the regime is new and to ensure the IP concerned qualifies, taxpayers should discuss their position and needs with the tax authorities in advance of making an application. It should be noted in this context that the Netherlands also grants significant payroll and social security incentives to companies carrying on qualifying R&D activities.
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