2022 Dutch Budget Plan – Tax Proposals

On 21 September 2021, the Dutch government published its tax proposals for 2022 and onwards.

In the area of direct taxes the following measures can be relevant:

• COVID-19 support measures;
• Employee stock option rules;
• Controlled foreign company credit ranking;
• Amendment of dividend withholding tax refund rules;
• Reverse hybrid mismatches rules;
• Amendment of the application of the arm’s length principle to prevent mismatches

Additionally, the introduction of new rules regarding the legal entity qualification for tax purposes have been announced, but are not included in the 2022 Dutch Budget Plan package. The final rules are likely to be published at a later moment but the (high-level) main rules from the proposal are already included below (potentially subject to change).

Currently, the tax proposals are subject to discussion in the Dutch House of Representatives (Tweede Kamer der Staten Generaal).

Proposed measures in the area of direct taxes

COVID-19 support measures

Work related expenses scheme

In 2021, the Dutch government allowed a higher tax-free allowance for work related expenses by employers to their employees. Normally 1,7% of the total wage sum up to EUR400,000 can be paid to the employees free of taxes. However in 2020 and 2021 3% of the total wage sum up to EUR400,000 could be paid tax free. This support measure was not yet codified for 2021 (this was done by means of a Decree), so this will be done by the 2022 Budget Plan.

For the total wage sum exceeding EUR400,000, 1,18% can be paid tax free. This percentage was not amended by the COVID-19 support measures.

Homeworking allowance

The Dutch government introduced a specific exemption for allowances up to EUR2 per day related to working from home. A fixed fee may be provided if the employee works from home for more than 128 days per calendar year, provided that the fixed fee does not exceed EUR248. As a result, if the employer pays an allowance to the employee to cover costs related to working from home, this does not affect the amount that can be paid under the work related expenses scheme (as described above).

Exemption for subsidies

To support businesses during the COVID-19 pandemic, the Dutch government introduced a subsidy to cover the fix costs of affected businesses and to support the financing of small and medium sized enterprises. The 2022 Budget Plan proposes a rule that exempts these subsidies from taxation on profits.

Employee stock option rules

The Dutch government proposes a deferral of the taxation moment of employee stock options to provide more flexibility. Currently a more flexible regime is already in place specifically for start-ups and scale-ups. The new rules aim to widen the scope to ensure effectiveness.

Under the new rules employee stock options will be taxed i) at the moment of exercising the option right, ii) when the shares received by exercising the stock option are considered tradable or iii) in case of a sale of the option. The taxable amount is still determined by the fair market value at the moment of taxation.

In case the shares received by exercising the stock option are not tradeable due to a contractual agreement between the granter of the option and the employee (e.g., a lock-up period), this contractual agreement is respected for a maximum of 5 years after the initial public offering. After 5 years, the shares are considered tradeable and the contractual arrangement is no longer respected. Only if the shares are not tradeable by law, the shares are not considered tradeable after 5 years.

CFC income credit ranking

The Dutch government proposes a fixed ranking with regard to the crediting of the taxes on CFC income that has already been taxed in the country of the CFC. The ranking determines that smaller amounts must be taken into account before larger amounts.

Limitation of dividend withholding tax credits

Based on the Court of Justice of the European Union (CJEU) judgment in case C-575/17 Sofina SA and Others, the Dutch government proposes a limitation of the possibility to obtain a refund due to the crediting of dividend withholding tax against the corporate income tax. The dividend withholding tax due can be credited against the amount of corporate income tax due in that year, but cannot result in a refund. This is because this is not possible for certain non-resident taxpayers which, according to the Dutch government, could be considered discriminatory. Dividend withholding tax that cannot be credited due to this rule, can be used in following years.

Reverse hybrid mismatches rule

Based on the obligation to fully implement the EU Anti-Tax Avoidance Directive II (ATAD 2), the Dutch government proposes the introduction of tax liability for reverse hybrid entities

For these rules, reverse hybrid entities are (i) incorporated under Dutch law and (ii) are qualified as transparent for Dutch tax purposes, but (iii) are treated by the jurisdiction of a shareholder which holds at least 50% of the capital, voting rights or profit rights (iv) as being opaque. If an entity qualifies as such reverse hybrid entity, it will be considered opaque for Dutch tax purposes and be liable to corporate income tax in the Netherlands. Profit that are taxed at the level of the participants can be deducted from the Dutch taxable base.

Amendment of the application of the arm’s length principle to avoid mismatches

The Dutch government proposes to disallow downward transfer pricing adjustments (downward adjustments) in the Netherlands in case there is no corresponding taxable adjustment (corresponding adjustment) at the level of the related party (so-called “informal capital”). Additionally, a step-up is denied if a taxpayer acquires a business asset by a capital contribution, profit distribution, repayment of paid-up capital, liquidation distribution or similar (legal) action if the step-up is higher than the amount taken into account for tax purposes at the related party that transfers the business asset, the same applies mutatis mutandis to the transfer of debt.

Pursuant to the proposal a corresponding taxable adjustment or step-up will only be allowed if the related party is subject to corporate income taxation and it includes the adjustment in its taxable basis for corporate income tax purposes. It is important to note that based on the legislative proposal it is not relevant which (effective) tax rate will ultimately apply. The burden of proof regarding the corresponding adjustment or taxation of profit lies with the taxpayer.

The new rules should take effect for fiscal years starting on or after January 1, 2022 and shall have no retroactive effect. However, an effective partial retroactive effect will apply to business assets acquired in the financial years starting on or after 1 July 2019 and before the financial year starting on or after January 1, 2022, under following conditions:

• at the start of the financial year on or after January 1, 2022 amortization on the asset is still possible; and
• the asset would have a lower book value if the proposal would have been in force at the time of the arm’s length adjustment.

Financial years that started before 1 July 2019 fall out of scope for this measure.

Announced measures in the area of direct taxes

Amendment legal entity qualification for tax purposes

General legal entity qualification rules

Under the Dutch qualification rules published for public consultation, the general rule, under which certain characteristics of foreign legal forms should be compared to the same characteristics of Dutch legal forms, remains. If no Dutch legal form can be found that is similar to the relevant legal entity:

• A fixed approach will apply in case such foreign legal entity is a resident for tax purposes of the Netherlands. This means that the foreign legal entity will always be treated as a taxpayer (in other words: as opaque for Dutch tax purposes).
• A symmetrical approach will apply to entities that are not a resident for tax purposes of the Netherlands. This means that the foreign legal entity will be treated the same as in their state of residence.

Mutual fund

The qualification (i.e. opaque or transparent for Dutch tax purposes) of a mutual fund is currently determined by whether all participants have to agree to accession or replacement of fund participants (transparent) or not (opaque). Under the rules published for public consultation, the tax-transparency of a mutual is determined on the basis of it being admitted to a regulated market or similar trading platform or the fund having a legal obligation (in the fund conditions) to repurchase participations in the fund. The exception to this rule is the family-owned mutual fund, these funds are always transparent.

Open CV

Under the Dutch qualification rules published for public consultation, open CVs (Dutch limited partnerships that are treated as a taxpayer) will cease to exist as of January 1, 2022. Any open CV in existence immediately prior to that moment will be deemed to have transferred its assets at fair market value to the partners, where the partners are deemed to have transferred their partnership interests and receivables on the open CV at fair market value.

This transfer results in an “exit tax” for existing open CVs. There are several transitional measures that mitigate the effects of this exit tax:

• For open CVs where all partners are companies (i.e. legal entities subject to corporate income tax), there will be a rollover relief mechanism, subject to certain conditions.
• For open CVs where the partner is an individual, there will be a share-for-share merger facility.
• If the two abovementioned facilities cannot be applied, it is possible to pay the tax in ten equal annual instalments.
• Finally, for individuals that make available assets to such an open CV, there is also a rollover relief mechanism.

Please note that the qualification rules published for public consultation may be significantly changed, given the large number of (generally negative) responses to the public consultation.

Please contact the authors if you have any questions concerning the proposals.