Over the past couple of years, there have been many developments in the area of taxation domestically, at a European Union (EU) level and internationally that are relevant for in-house (tax) lawyers. This contribution highlights a selection these developments based on their relevance for in-house (tax) lawyers.
Additionally, this contribution showcases a number of developments that should be on the radar of in-house (tax) lawyers when working in or with the Netherlands.
Over the past few years, the Netherlands has worked to lose the reputation of perceived tax haven. This has been done by introducing several anti-abuse rules (to a large extent required under EU legislation) and by introducing a more selective ruling policy and increasing scrutiny in case of aggressive tax structures.
Recent developments: domestic
Domestic implementation of BEPS measures
The majority of measures targeting base erosion and profit-shifting (BEPS) introduced by the Netherlands are a result of harmonisation of direct taxes on a EU level, which the authors describe below.
Historically, the Netherlands has not levied withholding tax on interest and royalties. The Netherlands still does not have a generally applicable withholding tax on interest and royalties. However, as of 2021, a withholding tax of 25% applies to interest and royalties paid to group companies (or permanent establishments of group companies) situated in low-tax or non-cooperative jurisdictions1. In addition, this so-called conditional withholding tax applies in certain abusive situations2. For jurisdictions with which the Netherlands has a tax treaty, there is a standstill of a maximum of three years in order to allow for tax treaty renegotiation.
The Netherlands has had a very strong ruling practice spanning multiple decades. As of 1 July 2019, the Dutch ruling policy has been reviewed and amended, in light of the developments in international tax law as regards BEPS.
Where in the past it was possible to obtain a ruling with minimal substance in the Netherlands, more substance is required to obtain a ruling as of 1 July 2019. However, the Dutch tax authorities still remain accommodative, with, for example, a liaison for potential foreign investors who facilitates the entry into the Dutch market.
Recent developments: EU
At the EU level, many BEPS-measures have been introduced by means of directives. Towards the future, the EU is preparing a directive that would reduce debt-equity bias (by introducing a notional interest deduction) and is looking into introducing rules targeting shell companies. Given the Dutch focus on substance over the past years, the Netherlands should already be largely be compliant with future rules, if these were to be introduced by the EU by means of a directive.
EU implementation of BEPS measures
A large number of measures introduced by the Netherlands targeting BEPS are based on rules that had to be implemented by EU member states due to EU directives. This includes measures required under the EU Anti-Tax Avoidance Directive I (ATAD I): controlled foreign company (CFC) rules, rules limiting the deductibility of interest for tax purposes (the so-called EBITDA-rule) and rules on the maximum deferral of payment that can be granted for exit tax. In addition, the EU Anti-Tax Avoidance Directive II (ATAD II) required the Netherlands to implement anti-hybrid rules.
Tax dispute resolution
International tax disputes may arise where two (or more) states interpret or apply a bilateral tax treaty differently. This roughly speaking results in two types of disputes: transfer pricing disputes and disputes on the interpretation of the tax treaty. These disputes generally result in double taxation for the taxpayer caught in the middle of such a dispute.
Transfer pricing disputes arise where one state imposes an upward transfer pricing adjustment, and the other states does not grant a corresponding downward adjustment, due to a difference in the application of the arm’s length principle.
Disputes on the interpretation of the tax treaty generally arise when certain terms in the tax treaty are interpreted different by each of the states party to the tax treaty, resulting in a different allocation of taxing rights. Such different interpretation of the tax treaty can also result in double taxation.
Due to increasing attention of tax authorities for transfer pricing due to the evolution of the arm’s length principle (and the OECD guidance on how to apply the arm’s length principle), the number of transfer pricing disputes has been on the rise over the last couple of years.
In addition, the ever increasing number of general and specific anti-abuse provisions that interact with bilateral tax treaties result in an increasing number of disputes on the interpretation or application of tax treaties. A common example is the beneficial ownership requirement for the entitlement to reduced withholding tax rates.
In light of the foregoing, it is positive for taxpayers that the Netherlands is committed to ensure effective tax dispute resolution mechanisms for international tax disputes. Since the 1980s the Netherlands has included (generally optional) arbitration provisions in its bilateral tax treaties. Since the 2008 update to the OECD Model Tax Convention, the Netherlands has included mandatory and binding arbitration in its bilateral tax treaties. Also by means of the Multilateral Instrument, the Netherlands has introduced mandatory and binding arbitration in a large number of its bilateral tax treaties. The arbitration mechanisms in Dutch bilateral tax treaties generally cover both transfer pricing disputes and disputes on the interpretation of the tax treaty.
At an EU level, there are the EU Arbitration Convention (which has been around since 1990), which only covers transfer pricing disputes, and the EU Dispute Resolution Directive, which covers both transfer pricing disputes and disputes on the interpretation of tax treaties between EU member states.
The Netherlands has fully implemented the EU Dispute Resolution Directive. The rules can be invoked for fiscal years starting on or after 1 January 2018. In this regard the Netherlands is practical as a matter of policy: if the other EU member state(s) involved agrees to apply these rules to fiscal years that started before 1 January 2018, the EU Dispute Resolution Directive can also be applied to such earlier fiscal years.
Recent developments: international
Internationally, the largest development since the original BEPS project of the OECD is the two-pillar approach to the digitalised economy (often referred to as BEPS 2.0).
BEPS 2.0 – Pillar One and Pillar Two
BEPS 2.0 consists of two ‘pillars’. Pillar One provides for the reallocation of taxing rights on 25% of the residual profits from certain highly profitable very large multinational enterprises3. Pillar Two introduces a global minimum effective tax rate of 15%, and has a much wider scope4.
The OECD is currently further developing both Pillar One and Pillar Two, with the intention to implement both pillars as of 2023.
In order to implement Pillar One, the OECD intends to introduce a multilateral convention that would facilitate the assignment of taxing rights to the States party to the multilateral convention, without the need for a bilateral tax treaty between those States. The OECD will also publish model rules for domestic legislation necessary to implement Pillar One.
In order to implement Pillar Two, the OECD intends to publish model rules States need to implement in their domestic laws in order to implement Pillar Two. In addition, the OECD intends to add a model treaty provision to give effect to the subject to tax rule (STTR) for future treaties and to introduce a multilateral instrument to implement the STTR in relevant existing bilateral tax treaties. Ultimately, the OECD is considering introducing a multilateral convention that would co-ordinate the implementation of Pillar Two.
Key items to monitor for in-house lawyers
2022 Budget Plans
On 21 September 2021, the Dutch government put forward its 2022 Tax Plan package. Most notably the package contains a proposal implementing the reverse hybrid taxpayer rule from ATAD II as of 1 January 2022, a proposal changing the moment Dutch payroll taxes have to be paid on employee stock options for (currently) private companies and a proposal abolishing unilateral downward transfer pricing adjustments (if there is no corresponding upward transfer pricing adjustment).
The proposal changing the moment Dutch payroll taxes have to be paid on employee stock options is intended to improve the liquidity of (mainly) startups and scale-ups. Under the proposal, Dutch payroll taxes would not be due on the exercise of employee stock options, which is currently the case and often results in disputes with the tax authorities on the valuation of the shares received by the employee. The proposal would allow for taxation at the moment the shares acquired by exercising the employee stock option become ‘tradeable’. The proposal allows for a lock-up period of a maximum of five years, after which the shares will be considered tradeable, regardless of whether or not the employee can sell his or her shares. Certain aspects of the proposal, such as when the acquired shares are considered tradeable, are still being further clarified by the Dutch Ministry of Finance.
The proposal that would abolish unilateral downward transfer pricing adjustments was already expected by the market, as the Dutch government released a draft of the proposal for public consultation. The proposal would see unilateral downward adjustments abolished in cases where there are transfer pricing mismatches5. This would be the case if, for example, assets are sold below fair market value and the state of the transferor does not impose an upward adjustment or if assets are contributed, for example by means of a share premium contribution, and the state of the transferor does not impose an upward adjustment or an exit tax on the contribution of the assets. The proposal may also affect taxpayers that have transferred assets in fiscal years starting on or after 1 July 2019. Starting 1 January 2022, the depreciation of such acquired assets may be limited (based on the value taken into account in the state of the transferor, instead of the fair market value). There is a lot of criticism on this last point, as it sorts some form of retroactive effect.
The proposals are currently being debated in the Dutch House of Representatives and may still be amended by the government or members of the House of Representatives. Votes are scheduled for 11 November 2021, after which the proposals will be debated and voted on by the Dutch Senate. We expect the proposals to be law by 31 December 2021.
Pillar One and Pillar Two
Pillar One and Pillar Two are still in development, and over the next year, the OECD is expected to come out with model domestic rules to implement both pillars, a multilateral convention to implement Pillar One and a multilateral instrument to implement Pillar Two in existing tax treaties.
The most recent OECD publications indicate that there is agreement that in-scope multinational enterprises can manage the Amount A Pillar One filing obligations through a single entity. In this regard, the Netherlands may be an attractive jurisdiction due to the capacity, expertise and accommodativeness of the Dutch tax authorities.
- The Dutch government publishes a list of these jurisdictions annually. The current (2021) list contains: American Samoa, American Virgin Islands, Anguilla, Bahamas, Bahrain, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Fiji, Guam, Guernsey, Isle of Man, Jersey, Oman, Samoa, Turkmenistan, Turks and Caicos Islands, Trinidad and Tobago, United Arab Emirates and Vanuatu. The list consists of jurisdictions with a statutory tax rate of less than 9% as of October 1 of each year and the jurisdictions listed as non-cooperative on the EU list of non-cooperative jurisdictions at the moment of publication of the Dutch list.
- In case of the use of conduit companies, with the interest or royalty income ending in a blacklisted jurisdiction and in certain situations involving hybrid entities.
- Annual turnover in excess of €20bn and profitability (profit before tax) in excess of 10%.
- Annual turnover in excess of €750m, similar to the threshold for country-by-country reporting.
- This is the case if the jurisdiction of the transferor recognises a lower fair market value than the Netherlands.