2025 Dutch Budget - Tax proposal

On 17 September 2024, the Dutch government published its tax proposals for 2025 and onwards.

In the area of direct taxes the following relevant changes have been proposed or will enter into force (if the legislative proposal has been submitted earlier or the amendment is already included earlier in legislation):

Corporate Income Tax (CIT)

• Concurrence between the compensation of losses and the exemption from debt relief income tax (kwijtscheldingswinstvrijstelling)
• Roll over relief for simplified sister merger
• Increase percentage generic interest deduction limitation from 20% to 25% (earnings stripping rule)
• Preventing the fragmentation of real estate companies for interest deduction purposes (earnings stripping rule)
• Adjustment so called "Subject-to-Tax Tests" in i.a. the participation exemption
• Clarification liquidation loss scheme
• Implementation of General Anti-Abuse Rule (GAAR)
• Legal Entity Qualification Policy Act
• Adjustment transparency rules mutual fund (fonds voor gemene rekening)
• Adjustments fiscal investment institution regime (fiscale beleggingsinstelling)

Personal Income Tax (PIT)

• Reverse increase top rate box 2 (for shareholders with a substantial interest)
• Limitation of tax-deductible donations

Dividend Withholding Tax (DWT)

• Clarification of concurrence article 1a Dividend Withholding Tax Act and transparent entities
• Adjustment dividend withholding tax exemption
• Reversal of abolishing facility for share buyback

Conditional Withholding Tax (CWT)

• New definition of a collaborating group

Pillar 2 / Minimum Taxation Act 2024

• Technical adjustments

Announced proposals in the area of direct taxes:

Wage Tax

• Extraterritorial cost regime (30% rule)

In the area of indirect taxes, the following measures can be relevant:

Value Added Taxes (VAT)

• Abolishment of reduced VAT rates for cultural goods, services and lodging
• Real estate services subject to revision principles as from January 1, 2026

Announced proposals in the area of indirect taxes:

Real Estate Transfer Tax (RETT)

• Decrease in RETT rate for investments in residential real estate to 8% as of January 1, 2026

The final rules are likely to be published at a later moment but the (high-level) main rules from the proposals 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

Corporate Income Tax (CIT)

Concurrence between the compensation of tax losses and the debt relief income tax

As of 1 January 2022, the offsetting of tax losses is limited to EUR1 million and 50% of the taxable proceeds exceeding EUR1 million. The concurrence between the compensation of tax losses and the exemption from debt relief income tax may in certain cases result in these entities facing a CIT liability on their debt relief income. This is contrary to the objective of the debt relief income tax rules (i.e., facilitating a tax neutral rehabilitation of loss-making corporate taxpaying entities). As such, an adjustment to the exemption from debt relief income removes the obstacles following the aforementioned concurrence. As of 1 January 2025, the new legislation allows the exemption from debt relief income tax to be applied (in full) in cases where the available tax losses exceed EUR1 million.

Roll over relief for simplified sister merger

The legislative change focuses on the roll over relief for the simplified sister merger. This measure will modify the tax regulations for legal mergers to include, where possible, the simplified sister merger under their scope. Currently, the roll over facility (i.e., allowing for a tax neutral reorganisation) does not fully align with this type of merger given that, from a Dutch civil law perspective, no shares are issued in the acquiring entity (which is a requirement for application of the roll over relief. The upcoming change aims to resolve this discrepancy and prevent the practical difficulties caused by the current mismatch. The goal is to ensure that simplified sister mergers are appropriately accommodated within the tax framework similar to other types of mergers (e.g., allowing for a tax neutral merger).

Increase percentage earnings stripping rule (EBITDA rule)

Based on the earnings stripping rule an entity liable to CIT may deduct interest up to the higher of (i) 20% of the adjusted profit (i.e., the EBITDA) and (ii) EUR1 million (i.e., threshold). The percentage of 20% will be increased to 25%, which is more in line with the European average.

Preventing the fragmentation of real estate entities for interest deduction purposes (earnings stripping rule)

From 1 January 2025, new measures will be introduced to prevent the fragmentation of real estate entities in order to maximize interest deductions under the earnings stripping rule (EBITDA rule). Currently, by splitting up a real estate entity with multiple rental properties (leased to third parties) into several entities, it is possible to apply the EUR1 million threshold multiple times (i.e., once for each entity). This allows for greater interest deductions as opposed to the situation where only the interest expenses up to an amount of 20% (2024 rate) of the EBITDA would be deductible.

As of 1 January 2025, the EUR1 million threshold will no longer apply to entities that, in a given year, usually (50% of the time) and mainly (for 70% or more) own and lease real estate to third parties. From 2025, these taxpayers will (under the earnings stripping rule) only be able to deduct interest expenses up to an amount of 25% (2025 rate) of the EBITDA. This may significantly limit the deduction of interest expenses.

Adjustment so called "Subject-to-Tax Tests" in i.a. the participation exemption

The Corporate Income Tax Act contains various provisions that incorporate a Subject-to-Tax Test, such as the participation exemption, the anti-base erosion interest deduction limitation (article 10a CITA) and the object exemption. This test assesses whether a company is adequately taxed on its profits according to Dutch standards. These tests are crucial for determining eligibility for certain tax benefits, such as the participation exemption. With the introduction of the global minimum tax (Pillar 2), an important question has emerged: does this minimum tax count as an adequate tax on profits according to Dutch standards? The budget plan clarifies that this minimum tax indeed counts as an adequate tax on profits according to Dutch standards.

Clarification liquidation loss scheme

The intermediate holding company provision in the liquidation loss scheme prevents an operating loss of a participation or non-deduction loss on a sale of a participation from being converted into a deductible liquidation loss on an intermediate holding company. The Budget Plan 2025 includes a clarification of this provision and is not meant to result in a different outcome, also the Budget Plan 2025 includes a clarified definition of the "sacrificed amount" in light of the liquidation loss rules.

Implementation of General Anti-Abuse Rule (GAAR)

From January 1,2025, the GAAR from the Anti-Tax Avoidance Directive 1 (ATAD1) will be implemented into national law. ATAD1 mandates minimum harmonization to protect the tax bases of EU member states, including provisions like the GAAR. The GAAR is designed to combat artificial arrangements created with the primary aim of avoiding taxation. Although the GAAR will now be formally codified in Dutch law, it does not represent a substantive change compared to the current application of the fraus legis doctrine, which already addresses tax abuse. 

 

Measures already announced in Budget Plan 2024

Legal Entity Qualification Policy Act (WFKR)

Qualification policy

In last year's Budget Plan, an amendment in the qualification policy was already introduced. The policy will be established in the WFKR. Qualification takes place primarily based on the corporate resemblance method (rechtsvormvergelijkingsmethode) but will be complemented by the fixed approach (vaste methode) and symmetrical approach (symmetrische methode).

Abolition "open CV" (opaque limited partnership) as tax subject for CIT purposes

In the Budget Plan 2024, the abolition of the open CV was already announced. Hence, all Dutch limited partnerships are transparent as of January 1, 2025. This measure is intended to reduce hybrid mismatches based on the qualification of entities.

Technical adjustments

During the parliamentary debate on the WFKR, several technical omissions have been acknowledged. These will be fixed before the act will enter into force as of January 1, 2025.

Adjustment transparency rules mutual fund (fonds voor gemene rekening)

In last year's Budget Plan, the adjustment of transparency rules for a mutual fund was already introduced. For completeness's sake, we include a short overview here again.

A fund qualifies as an opaque mutual fund liable to CIT if the fund qualifies as an investment fund (beleggingsfonds) or fund for collective investment in securities (fonds voor collectieve belegging in effecten) as referred to in article 1:1 Financial Supervision Act (Wet op het financieel toezicht) and the certificates of participations in the fund are tradeable.

Adjustments fiscal investment institution (fiscal beleggingsinstelling) regime

As already announced in the Budget Plan 2024, as of January 1, 2025, fiscal investment institutions (FBIs) will no longer be allowed to directly invest in real estate located in the Netherlands. This change ensures that income from Dutch real estate is always subject to Dutch CIT, even when investments are made through FBIs from abroad. Moving forward, FBIs that directly invest in Dutch real estate will be subject to the standard CIT rate of up to 25.8% (2024). However, FBIs can still indirectly invest in Dutch real estate through a non-transparent subsidiary.

FBIs may continue to directly invest in foreign real estate, with the existing financing requirement remaining unchanged. Specifically, the use of debt financing for foreign real estate investments is capped at 60% of the property’s book value. For other types of investments, debt financing cannot exceed 20% of the book value.

Additionally, FBIs are allowed to remain involved in managing real estate entities associated with them.

These changes ensure that real estate income derived from properties in the Netherlands is properly taxed, without drastically altering the broader FBI-framework for foreign real estate investments and management activities.

 

Personal Income Tax (PIT)

Reverse increase in top rate box 2

During the parliamentary debate on Budget Plan 2024, an amendment was adopted which increased the top rate in box 2 from 31% to 33% as of January 1, 2024. The government proposes to reverse this increase in the Budget Plan 2025, which means the top rate decreased to 31%.

Limitation of tax-deductible donations

As of January 1, 2025, the Dutch government proposes to abolish tax deductibility of charitable donations for corporate tax payers, as part of a phased reform of the tax treatment of deductible donations. The goal is to simplify the system in such a way that by 2028 the deduction of donations is standardized, treating periodic and one-time donations equally. This change aims to promote fiscal fairness, though it may impact the stability of donations to charitable organizations.

 

Dividend Withholding Tax (DWT)

Clarification of concurrence article 1a Dividend Withholding Tax Act (DWTA) and transparent entities

Liable to DWT is the beneficiary to the income of shares in companies limited by shares. Article 1a of the DWTA further defines this beneficiary in the case of listed shares. The Budget Plan 2025 includes a clarification regarding the concurrence between this definition and transparent entities. The aforementioned clarification is not intended to make a material change but is intended to legislate the existing practice for listed shares.

Adjustment DWT exemption

From January 1, 2025, the DWT exemption will change from optional to mandatory for domestic situations that meet the requirements of the DWT exemption. The DWT exemption already was applied mandatory in cross-border situations that meet the relevant requirements. By making the application of the DWT exemption mandatory for the withholding agent, it is ensured that shareholders or beneficiaries can object against the withholding of DWT on dividends. As a result, they have direct access to tax courts (i.e., without interference of the withholding agent) in case of a disputed withholding of dividend tax.

Reversal of abolishing facility for share buyback

Following the debate on last year's Budget Plan, a legislative amendment was adopted that would abolish the Dutch dividend withholding tax facility in respect of share buybacks for listed / quoted companies (i.e., Article 4c of the Dutch DWTA 1965) as of January 1, 2025.

The new Dutch government wishes to focus its efforts to materially improve the Dutch investment climate. In line with that intention, the prior decision to abolish the buyback facility is reversed in this year's Budget Plan. This means that the current buy-back facility shall remain in force and can still be applied by listed / quoted companies after January 1, 2025, ensuring that the Dutch tax treatment of a buy-back remains in line with the tax treatment in other comparable jurisdictions.

 

Conditional Withholding Tax (CWT)

New definition of a collaborating group

Dutch (conditional) withholding taxes on dividends, interest payments and royalty payments apply in cases where a Dutch entity makes payments to a "related entity" in a (i) "low-tax" or (ii) "non-cooperative" jurisdiction – as those transactions are generally deemed to be "abusive" in nature.

Entities are "related" if a "qualifying interest" exists between the payor and the payee. Whether that is the case is to currently be determined by consolidating the interest of entities that form a "collaborating group".

Some unclarity surrounded the "collaborating group" concept – often preventing the Dutch tax authorities from providing certainty on application in specific cases upfront. The current legislation also contains over-kill where transactions are in scope that are not considered to be "abusive" – especially when read in conjunction with the "hybrid entity" provisions in these rules (e.g., affecting joint investments by pension funds, or larger groups of investors through a "hybrid entity").  Now that the dust has settled on the initial implementation of these anti-abuse rules, and to address the above concerns, a new (and more clearly defined) "collaborating group" concept is introduced.

In that respect, the Budget Day plans introduce the concept of a "qualifying unity" – which pertains to instances in which parties (i) act jointly, (ii) with the main purpose or one of the main purposes to avoid taxation at the level of at least one of those parties. This should result in improved legal certainty (as this creates room for the Dutch tax authorities to provide advance certainty) and reduced scoping of these rules to actually abusive cases. The burden of proof in relation to the existence of a qualifying unity shall remain with the Dutch tax authorities.

 

Pillar 2 / Minimum Taxation Act 2024

Technical adjustments

The government has proposed several technical adjustments to the Minimum Taxation Act 2024, based on the OESO administrative guidelines published in December 2023. These adjustments concern detailed application of the act.

 

Announced Proposals in the Area of Direct Taxes

Extraterritorial cost regime (30% rule)

The Budget Plan 2025 announces that the proposal for amendment of the 30% rule should be published soon. The proposal is expected to entail an increase of the maximum tax-free remuneration to (i) 30% for all qualifying employees in 2025 and 2026 and (ii) 27% for all qualifying employees as of 2027. The decrease of the tax-free remuneration as is currently in place ("30-20-10 rule"), should no longer apply under the proposed rule.

 

Proposed measures in the area of indirect taxes

Value added tax (VAT)

Abolishment of reduced VAT rates for cultural goods, services and lodging

Part of the Budget Day plans as presented today have confirmed that the government plans to increase the VAT rate for most cultural, media, sports and hotel services which previously were taxed at a lowered VAT rate of 9% to a (whopping) 21% rate as of January 1, 2026. As suppliers of these types of services cater largely to consumers, who mostly cannot deduct or reclaim VAT, the likely effect of the increased VAT rates is such services will become (much) more expensive.

The lower VAT rate of 9% for camping grounds, cinemas and theme parks will not be increased to 21%.  We expect these new rules may trigger discussions on the scope of the above categories.

Real estate services subject to revision principles as from January 1, 2026

The Budget Day plans as presented today have confirmed that the Netherlands indeed intends to implement VAT revision principles on real estate services.

This plan has been announced before in 2017, but at the time was put on hold as it encountered a lot of criticism from stakeholders for being far too complex and imposing an undue administrative burden. Earlier this year, a slightly updated version of the 2017 plans were publicized for consultation. Main difference: a threshold of EUR30,000 (excluding VAT) is now included. The proposed legislation includes a grace period up to January 1, 2026, to allow stakeholders time to implement necessary compliance procedures.    

Even though the plans were first introduced to disincentivize undue use of VAT legislation specifically for new built residential real estate, the rules apply to real estate in general and are likely to hit commercial real estate (specifically office spaces) as an asset class hardest.

The plans as presented now still entail a significant increase of compliance obligations. They require any party that incurs costs exceeding EUR30,000 for real estate services (for instance a property owner incurring costs for property renovation or maintenance) to monitor the use of that (part of the) property for four years following the year in which the works have been first taken into use. If the use changes from VAT-taxed use to VAT-exempt use or vice versa, a (partial) correction of previously deducted VAT may be in order.

This means that property owners, especially if they own larger properties, will likely have to monitor a multitude of VAT revision periods per (parts of) their properties.

For some commercial asset classes, such as distribution centers, the new rules are unlikely in practice to be truly cumbersome as these properties are mostly let out subject to VAT and therefore any potential revision is unlikely to take place. For other types of commercial real estate however, the new rules may be expected to lead to a real increase in administrative burden and (tax-wise) more complex transactions going forward. 

A recent ruling from the European Court of Justice implies the proposed new measures as set out above may be in violation of the European VAT directive as their scope is (far) too wide. As these measures still need to be discussed in the Dutch House of Representatives (Tweede Kamer der Staten Generaal) followed by discussions in the Dutch Senate (Eerste Kamer), amendments may be proposed to align the proposed measures with European VAT rules. 

 

Announced proposals in the area of indirect tax

Real estate transfer tax (RETT)

Decrease in RETT rate for investments in residential real estate to 8% as of January 1, 2026

Budget Day plans include a proposal to decrease the RETT rate for investors in residential real estate from the current 10.4% rate to a new to be included 8% rate per January 1, 2026. This is contrary to recent years where the RETT rate has been trending upwards from 2% to the current rate of 10.4%, this implies a welcome turnaround for investors in residential real estate. 

Current rates available to individuals buying a home as their primary residence remain unchanged. The scope of the RETT exemption for private individuals acquiring their first primary residence is expanded and now also includes the acquisition of beneficial ownership.

This means that acquisitions of residential real estate by investors whereby the legal transfer takes place on or after January 1, 2026 are taxed at a lower rate. Since RETT is a non-recoverable this directly positively impacts return on investment.

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