On 10 July 2017, the Dutch Government published a preliminary proposal for consultation to implement the Anti-Tax Avoidance Directive measures (ATAD1) as adopted by the EU in June 2016.
The ATAD measures include an earning stripping rule, exit taxation, Controlled Foreign Companies (CFC) rule and a general anti-abuse rule (GAAR). The internet consultation only covers the first three measures and is open for consultation until 21 August 2017. The introduction of a GAAR is not proposed since the GAAR is already sufficiently embedded in the Dutch abuse of law doctrine. The measures must be implemented by the end of 2018 and the final proposal is anticipated in the first quarter of 2018. Since a new government has not yet been formed, it is uncertain if the choices made in this proposal remain intact. The input received from the internet consultation may also affect the final implementation of ATAD1.
ATAD1 also includes a fifth measure to target hybrid mismatches which rules were expanded to third countries by the adoption of the EU Directive on 29 May 2017 (ATAD2). This measure should be implemented by the end of 2019. Since the Netherlands implements ATAD1 and ATAD2 in line with the ATAD timing, the current proposal does not yet cover a hybrid mismatch measure.
Interest deduction limitation rules
The proposal generally adopts the minimum standards as prescribed by the ATAD which implies that interest expenses are non-deductible insofar as the excess interest expense (i.e. the difference between deductible and taxed interest) exceeds (i) 30% of the earnings before interest, tax, depreciation and amortization (EBITDA) for tax purposes and (ii) an amount of EUR 3 million. Interest income and expenses can be excluded insofar as it is attributable to a foreign permanent establishment. Non-deductible interest can be carried forward indefinitely.
At this stage it is uncertain whether a group ratio escape rule will be introduced in the Netherlands and if so which of the group escape variants will be chosen. The ATAD actually includes two group escape variants. Under the first variant the limitation does not apply if the ratio of equity to the total assets of the taxpayer is at most 2% lower than the corresponding group ratio (“equity escape rule”). Under the second variant, the 30% as it applies in the EBITDA rule is replaced with the ratio of net group interest income to pre-tax results of the group in case that the ratio is more than 30% (“earnings-based worldwide group ratio rule”).
Even though the ATAD allows for specific exemptions for financial institutions and public infrastructure projects, as well as a grandfathering for loans existing before 17 June 2016, no choices have been made by the current government. In addition it is still unclear what effect the introduction of the earning-stripping interest limitation rules will have on the existing interest deduction limitation rules. It is possible that (some of) these existing rules may be reconsidered.
The consultation document considers that the exit taxation measures as prescribed by the ATAD1 are already sufficiently covered in Dutch tax legislation. However, some minor change needs to be made in order to bring to the current deferral period of 10 years for corporate taxpayers in line with the ATAD (i.e. 5 years).
The CFC measure applies to a taxpayer’s controlled foreign entities and permanent establishments. A controlled entity is present if the taxpayer directly or indirectly has a share interest (together or without an affiliated entity or individual) of more than 50% in an entity that is not subject to a profit tax which results in a “realistic levy” according to Dutch standards.
The ATAD provides for two different options for EU Member States to include CFC rules (model A and model B). Based on model A (passive) income of a CFC (e.g. interest, royalties, dividends, capital gains on shares) will be included in the taxable income of the Dutch parent company unless the CFC carries on a substantive economic activity, supported by staff, equipment, assets and premises. Model B (in contrary to model A) is based on the arm’s length principle with a focus on the transaction instead of on the type of income. Based on model B the income of a CFC will only be included in the taxable income of the Dutch parent company in case of artificial allocation of profits to a CFC.
The consultation document has opted to apply Model A, although the documents explicitly request, however, whether the transaction approach of Model B should be adopted instead.
Albeit the proposal is still in a preliminary phase, we do recommend to monitor this development closely since the proposal could have a significant impact on the tax position. We will keep you updated on all relevant developments.