The Netherlands - Taxation of cross-border mergers and acquisitions
Taxation of cross-border mergers and acquisitions for Netherlands.
Taxation of cross-border mergers and acquisitions for Netherlands.
The Dutch tax environment for cross-border mergers and acquisitions (M&A) has undergone some substantial changes in recent years.
These changes affect fundamental decisions that a prospective buyer will face.
- What should be acquired: the target’s shares, or its assets?
- What will be the acquisition vehicle?
- How should the acquisition vehicle be financed?
This summary of recent Dutch tax developments is based on current tax legislation up to and including the Tax Plan 2021, which mainly took effect as of 1 January 2021. This summary also discusses some government plans based on statements as announced in the Tax Plan 2021 and/or during 2020.
Reduction of corporate income tax (CIT) rates
The combined CIT rate has been reduced as of 1 January 2021. The CIT rate for profits up to 245,000 euros (EUR) has been reduced to 15 percent (2020: 16.5 percent through to EUR200,000). The reduction of the general CIT rate from 25 percent to 21.7 percent as of 1 January 2021, which had been adopted in 2019, has been cancelled. The regular CIT rate in excess of EUR245,000 therefore remains at 25 percent in 2021. Additionally, it is planned for 2022 that the first bracket will be extended further to a taxable profit up to EUR395,000. Furthermore, the Dutch government increased the effective Innovation Box rate from 7 percent to 9 percent as per 1 January 2021.
Withholding tax (WHT) on interest and royalties as of 2021
As of 1 January 2021, a WHT of 25 percent (equal to the highest CIT rate) may be applicable to the arm’s length interest and royalty payments made by an entity established in the Netherlands. In short, the WHT applies to interest and royalty payments made by an entity established in the Netherlands, including permanent establishments (PEs), to an affiliated entity established in a low-taxed country (corporate tax rate of less than 9 percent or appearing on the EU list of non-cooperative jurisdictions), to hybrid entities or in abusive situations.
Liquidation and cessation losses
The liquidation and cessation loss schemes are tightened with effect as of 1 January 2021. A liquidation loss of a subsidiary, insofar as it amounts to more than EUR5 million per subsidiary, is only deductible if:
- the taxpayer holds a qualifying interest in the dissolved entity in terms of control (quantitative condition); and
- the dissolved entity is established in the Netherlands, another European Union (EU) member state, the European Economic Area (EEA) or a state with which the EU has concluded a specific association agreement (territorial condition).
In addition, a ring-fencing requirement is applicable. A liquidation loss is only deductible if the liquidation takes place within a period of 3 calendar years after the calendar year in which the business of the subsidiary has totally or almost totally ceased operating or the decision to do so was taken. Rebuttal evidence is possible. The ring-fencing requirement will not be strictly enforced if there is a non-tax reason for not complying with the condition. For subsidiaries not yet liquidated at the time this measure took effect, in principle, no transitional rules will apply with regard to the quantitative and the territorial condition, but, in certain situations, such rules will apply with regard to the ring-fencing requirement. The new scheme also provides for various anti-abuse provisions, such as look-through rules for the liquidation of an intermediate holding company.
Comparable limitations are enacted for the cessation loss scheme for PEs.
Substance requirements and exchange of information concerning service entities
As of 1 January 2021, the Dutch substance requirements — as used in various anti-abuse clauses in Dutch tax law — also play a role in the exchange of information regarding service entities. In short, the substance requirements will have to be met throughout 2021 in order to avoid the exchange information with the respective source countries.
Among others, the substance requirements include a payroll expense criterion of at least EUR100,000 (which must be an actual remuneration for the economic activities performed) and the requirement that during a period of at least 24 months the company must have its own office equipped with the usual facilities for performing its activities.
Preventing an exemption via a specific interest deduction limitation
In 2012, the Dutch Supreme Court ruled that the interest deduction limitation of Section 10a Corporate Income Tax Act 1969 not only leads to the limitation of the deduction of interest, costs and negative foreign exchange results on payables falling under this provision, but also to an exemption of (net) positive elements (negative interest and/or positive foreign exchange results). As a result of a measure in the 2021 Tax Plan, as of financial years commencing on or after 1 January 2021, the balance per ‘10a payable’ will be calculated and a positive balance — for example, due to a change in the foreign exchange rate — will no longer be exempt.
Maximum annual loss set-off and unlimited carryforward
As of 1 January 2022, losses will only be fully available for carryforward and carryback set-off up to an amount of EUR1 million of taxable profit. In the case of a higher profit, the losses will only be able to be set-off up to 50 percent of that higher taxable profit. This rescheduling of the loss set-off is combined with an indefinite carryforward loss set-off (see ‘Tax losses’ later in this report).
Expansion of WHT on dividends to low tax countries
In 2020, the Deputy Minister of Finance announced that, as of 1 January 2024, dividend flows to low tax jurisdictions will, in principle, be taxed. Measures to realize this are currently worked out in detail; no bill has been proposed yet. It is, however, expected that the bill will have the same tax technical design as the WHT on interest and royalties as introduced per 2021.
Final settlement obligation for dividend WHT purposes
In 2020, the Lower House MP Bart Snels (of the GroenLinks parliamentary party) presented a private member’s bill to the Lower House of Parliament in which he proposes the introduction of a final settlement obligation for dividend WHT purposes for certain types of cross-border relocations of the registered office, cross-border mergers, cross-border divisions and cross-border share mergers to so-called qualifying states. These so-called qualifying states are states that:
- do not have a WHT on dividends that is similar to the Dutch dividend WH
- regard the (deferred) profit reserves as paid-in capital upon arrival (‘step-up countries’).
If the bill is enacted into law, the legislation will have retroactive effect through to 12:00 midday on 18 September 2020.
Not applying the arm’s length principle if this results in a mismatch
In its Tax Plan 2021, the Dutch government announced that a bill will be presented to the Lower House of Parliament during spring 2021, which will ensure that the arm’s length principle is, in effect, not applied if this results in a reduction of the profit, insofar as the other country does not tax the corresponding adjustment.
Investigation into the budget-neutral introduction of a net equity deduction
In its Tax Plan 2021, the Dutch government announced an investigation into the budget-neutral introduction of a net equity deduction, including a further tightening of the earnings-stripping measure.
Investigation into the participation exemption
In the past years, a survey was conducted by the Ministry of Finance into the possibility of exclusion from the participation exemption if a group's presence in the Netherlands is limited to one or more virtually ‘substance-free’ (intermediate) holding companies. A follow-up study is currently executed to come up with regulations by 2022 that provide for the (possibility of) exchange of information concerning Dutch dividend conduit companies that are virtually ‘substance-free’. More in general, a special commission will conduct a research on (the future of) Dutch conduit companies.
Asset purchase or share purchase
From a seller’s perspective, a sale of assets will, in general, trigger Dutch CIT on any resulting gains unless tax relief applies or the gain can be deferred by creating a reinvestment reserve. This reinvestment reserve operates by way of a rollover, which means that the reserve is deducted from the acquisition or production costs of a new operating asset. The reinvestment reserve is subject to various conditions, including a proven intent to reinvest within a certain period and, in some cases, the type of new asset.
Where shares or assets are acquired from an associated party at a price that is not at arm’s length, this generally constitutes a deemed dividend distribution and/or an informal capital contribution for Dutch tax purposes. Capital gains realized on the sale of shares qualifying for the Dutch participation exemption are tax-exempt (see ‘Purchase of shares’ later in this report).
Purchase of assets
When a Dutch company acquires assets, the assets are reported in the acquiring company’s financial statements in accordance with generally accepted accounting principles (GAAP). Any financing costs relating to the acquisition of assets are generally deductible on an accrual basis for Dutch CIT purposes. See, however, the restrictions discussed in ‘Choice of acquisition funding’ later in this report.
Generally, any gain resulting from the sale or other transfer of assets by a Dutch corporate taxpayer/a PE located in the Netherlands is subject to Dutch CIT. The foregoing is subject to an exception in cases where the transaction qualifies for relief in case of a business merger, legal merger or demerger. Furthermore, corporate reorganizations within a Dutch fiscal unity are generally tax-exempt (although clawbacks may apply, see ‘Group relief/consolidation for CIT purposes’).
A business merger essentially involves the transfer of a business (or independent part thereof) by one company to another company in exchange for the issue of new shares to the transferor. The relief consists of an exemption from tax for the transferor and a rollover of the transferor’s existing tax basis in the transferred assets and liabilities to the acquiring company. Any gain is thus effectively deferred.
In principle, the relief by means of a rollover of the tax base is not restricted to resident companies or companies incorporated under Dutch law, but may also apply in respect of EU (or the EEA) companies. The involvement of non-resident companies does, however, bring some practical difficulties. The rollover relief is available automatically or, in some cases, only subject to certain conditions to be satisfied. The latter are based on published standard conditions, designed to protect the Netherlands’ future right to tax. These typically cover matters such as the transfer of tax-free reserves and the offsetting of tax losses. Where these conditions apply, an advance agreement should be obtained to confirm the relief.
The relief does not apply where the merger is primarily aimed at avoiding or deferring taxation. Unless the taxpayer can demonstrate otherwise, this motive is presumed where the transaction does not take place for sound business reasons, such as a restructuring or rationalization of the activities of the companies involved. A business merger is deemed to have been performed for non-business reasons where shares of a company involved in a business merger are sold within 3 years after the date of the merger (subject to counterproof). An advance tax ruling can be obtained from the Dutch tax authorities confirming that the business merger is/was not primarily aimed at avoiding or deferring taxation.
As a rule, pre-merger tax losses of the transferor may not be transferred to the acquiring company. Post-merger losses of the acquiring company may not be carried back against profits of the transferor company. An exception to this rule is made where a Dutch PE is transferred by way of a business merger and the Dutch transferor company is no longer subject to Dutch tax after the merger. In such cases, a request may be submitted to carry the losses forward to other tax years, subject to the losses being streamed against the profits from the assets that generated them. Losses attributable to the transferred business can also be carried back against profits of the transferor.
In a legal merger, the assets and liabilities of one or more companies are transferred under a universal title of succession to a new or existing company at which the transferor(s) cease(s) to exist. As a rule, the acquiring company issues new shares to the shareholder(s) in the transferor(s) in exchange for the transfer.
The tax relief available for a legal merger consists of an exemption from tax for the transferor and a rollover of the transferor’s existing tax basis in the transferred assets and liabilities, as well as fiscal reserves, to the acquiring company. Any gain is thereby effectively deferred. The relief does not apply where the merger is primarily aimed at avoiding or deferring taxation. Unless the taxpayer can demonstrate otherwise, this motive is presumed where the transaction does not take place for sound business reasons, such as a restructuring or rationalization of the activities of the companies involved.
A legal merger may involve non-Dutch companies, subject to conditions. Generally, the tax relief is not restricted to resident companies but also applies to companies resident in the EU/EEA (subject to conditions). A Dutch public liability company (NV) can also merge with similar entities from other EU member states to form a new Societas Europaea (SE).
A similar procedure to that of business mergers is available for obtaining the relief and advance certainty. The transferor’s pre-merger losses may be transferred to the acquiring company. However, if pre-merger losses are transferred, certain specific loss set-off rules apply. These loss set-off rules are primarily intended to avoid pre-merger or losses of a company from being offset against the profits of one or more other companies.
There are two basic forms of a demerger under Dutch civil law, both, however, entail a transfer of assets and liabilities under a universal title of succession. The first generally results in the division of a company’s business between two or more acquiring companies, at which the transferor ceases to exist (‘pure demerger’). The second involves a transfer of all or part of a company’s business to one or more new or existing companies, at which the transferor continues to exist (‘split-off’). In both cases, new shares are issued in exchange for the transfer. Typically, the acquiring company issues the new shares to the shareholders in the transferor company.
The tax relief by means of a rollover of the existing tax basis applies in the same way as for legal/business mergers. The relief does not apply where the merger is primarily aimed at avoiding or deferring taxation. Unless the taxpayer can demonstrate otherwise, this motive is presumed where the transaction does not take place for sound business reasons, such as a restructuring or rationalization of the activities of the companies involved. A demerger is deemed to have been performed for non-business reasons where shares of a company involved in a demerger are sold within 3 years after the date of the merger (subject to counterproof). A similar procedure to that of business mergers is available for obtaining the relief and advanced certainty.
Under a pure demerger, the transferor’s pre-demerger losses may be transferred to the acquiring company. However, if pre-merger losses are transferred, certain specific loss set-off rules apply. These loss set-off rules are primarily intended to avoid pre-demerger losses of a company from being offset against the profits of one or more other companies. Under a split-off, losses may only be transferred to the acquiring entity subject to certain conditions (e.g. that the demerging entity ceases to be a taxpayer in the Netherlands). If those conditions are not met, the tax losses stay with the company that continues to exist.
Purchase prices from affiliated parties may be challenged under transfer pricing rules. There are no specific rules for allocating the purchase price, other than using the fair market value for each of the assets acquired.
Goodwill is reported in the acquiring company’s financial statements for financial reporting and tax purposes as the difference between the value of the acquired assets and the price paid. The maximum annual amortization of goodwill for Dutch tax purposes is 10 percent of the acquisition or development costs. Under a merger or demerger where tax relief is granted, any goodwill recognized for accounting purposes as a result of purchase price accounting is not tax-deductible.
Depreciation is available on the acquired assets, provided that these are necessary for carrying on the business and their value diminishes over time. Maximum annual amortization and depreciation percentages apply to goodwill (10 percent) and business assets other than goodwill and real estate (20 percent).
Although assets may, in general, be depreciated to their expected residual value, a floor applies to real estate, which is based on the value of the property as determined by the local municipality (the ‘WOZ’ value). Investment properties may be depreciated to 100 percent of their WOZ value, while properties used for business purposes may also be depreciated to 100 percent of the WOZ value as of the (financial) year 2019. This was previously 50 percent of the WOZ value. If the building was depreciated before 1 January 2019 but had not yet been depreciated for 3 full financial years, then under the transitional rules, it can continue to be depreciated for these 3 years according to the regime before 2019 (thus to 50 percent of the WOZ value). If the going concern value is below book value, a downward valuation adjustment may be made under certain conditions.
Investment in certain business assets can qualify for ‘free’ depreciation. Assets eligible for this regime fall into two main categories: qualifying environmentally friendly assets (referred to as ‘VAMIL’ investments) with free depreciation up to 75 percent, and other designated types of business assets. The last category includes certain seagoing vessels. In addition, certain investments made in 2009, 2010, 2011 and in the period between 1 July 2013 and 31 December 2013 may be freely depreciated. One of the conditions that then, in principle, applies is that the asset was put into use before 1 January 2012, 1 January 2013, 1 January 2014 or 1 January 2016, respectively.
As a rule, tax losses are not transferred on an asset acquisition. However, an exception to this rule is made for qualifying mergers and pure demergers, and where a Dutch PE is converted into a BV or an NV by way of a business merger or split-off. In the latter cases, a request may be submitted to allow a carryforward or carryback of losses, subject to the losses being offset against the profits attributable to the assets that generated the losses.
The transfer of assets within a Dutch fiscal unity are generally non-existent for Dutch CIT purposes and therefore do not have any direct tax implications. A clawback may, however, apply where the fiscal unity is dissolved within 6 years after the transfer (under certain circumstances: 3 years after the transfer).
Value-Added Tax (VAT)
VAT is the most important indirect tax in the Netherlands.
Dutch VAT is levied on the net invoiced amount charged by businesses for supplies of goods and services taxable within the Netherlands. Businesses are only allowed to reclaim the input VAT on their investments and costs attributable to:
- activities subject to VAT
- VAT-exempt financial services rendered to non-EU persons and to non-EU PEs.
Input VAT can only be recovered where the business is the actual recipient of the services and a correct invoice is issued to this business.
No VAT is due when all, or an independent part, of a company’s business is transferred and the transferred business continues as before (also known as transfer of a business as going concern). These transactions are out of scope for VAT purposes. This relief also applies to legal mergers but not to the sale of single assets or trading stock (e.g. inventory).
Where the buyer in a merger or share acquisition transaction wishes to reclaim VAT on the transaction costs, the buyer should always ensure it has activities subject to VAT or provides VAT-exempt financial services to non-EU parties. The post-deal VAT recovery position depends largely on the facts and circumstances of the implemented structure.
A real estate transfer tax at the rate of 8 percent (2 or 0 percent on residential real estate) of the real estate value (which must equal at least the purchase price) is due on all transfers of titles to Dutch real estate. This tax also applies to shares in Dutch real estate companies, provided the buyer holds or will hold at least one-third of the economic interest in the real estate company. A company is considered as a real estate company if the assets (at fair market value) consist of more than 50 percent real estate. Real estate located outside the Netherlands is included, provided the assets consist of at least 30 percent of real estate located in the Netherlands (asset test). If the asset test is met, then the actual activities must be assessed to determine whether at least 70 percent of these activities involve the exploitation of this real estate (e.g. investment). The transferee is liable for the tax, but the contract may stipulate that the transferor will bear the expense.
Purchase of shares
Shares in a company generally are acquired through a purchase or exchange of shares. In principle, the acquisition of shares is capitalized in the acquiring company’s financial statements. Shares that are held as a shareholding qualifying for the participation exemptionare generally carried at cost for tax purposes. The amount capitalized in the balance sheet is only relevant for specific purposes, given that a disposal of such a shareholding is tax-exempt. Costs directly related to such acquisitions are non-deductible for tax purposes and need to be capitalized in the balance sheet as part of the cost of the shareholding. Costs related to obtaining debt-financing may be deducted if, and to the extent that, interest on acquisition loans is tax-deductible.
Specific regulations apply to a participation of 25 percent or more in a low-taxed investment company (i.e. generally, 90 percent or more of its assets comprise passive investments and are subject to tax at a rate lower than 10 percent). Furthermore, shares held as a portfolio investment are generally carried at cost or market value, whichever is lower.
Where shares in a Dutch target are acquired in exchange for new shares issued by a Dutch company — as in a share-for-share exchange — the new shares are only treated as paid up to the same extent that the target’s shares were paid up. In effect, the potential dividend WHT that would have been due on profit distributions by the target is shifted to the acquiring company as, and when, it distributes profits. To mitigate the impact of this rule, concessionary treatment applies when a Dutch company acquires a foreign target.
If the price the buyer pays for the shares exceeds the book value of the underlying assets of the acquired company, the basis of the company’s underlying assets may not be stepped up to the price paid for the shares and the excess cannot be treated as payment for amortizable goodwill. Goodwill paid on a share acquisition is not tax-deductible for the buyer or the target (on the basis of purchase price accounting).
The acquisition or transfer of shares is exempt from VAT. An important issue is often the extent to which a business is entitled to reclaim the Dutch VAT levied on its transaction costs for the sale of shares of a subsidiary (generally not taxed for VAT purposes) to an EU-based buyer. VAT levied on costs attributable to an asset transaction and a statutory merger generally can be recovered by the seller on a pro rata basis. Under a special decree for majority shareholdings, the VAT on costs attributable to their sale is generally fully reclaimable.
- A change in ownership of shares in a Dutch company may result in the company losing its right to carry forward losses (see ‘Tax losses’ later in this report).
- The acquisition of shares is not subject to capital contribution tax, other indirect taxes, or local or state taxes.
- The sale of a shareholding that qualifies for the participation exemption is exempt from tax. Accordingly, a loss is non-deductible.
- Costs directly related to the sale of a shareholding qualifying for the participation exemption are non-deductible for Dutch CIT purposes.
Dutch participation exemption
In principle, the participation exemption applies to shareholdings of at least 5 percent in the capital of Dutch or non-Dutch companies unless the subsidiary can be considered to be held as a passive investment (‘motive test’). The latter is the case if the taxpayer’s objective is to generate a return that may be expected from normal active asset management. Where more than 50 percent of the subsidiary’s assets comprise of shareholdings in companies representing an interest of less than 5 percent or where the subsidiary’s main function is to provide group financing, such subsidiary is also considered to be held as a passive investment.
A subsidiary that is considered as a passive investment may still qualify for the participation exemption if one of two conditions is met:
- less than 50 percent of the fair market value of the assets (on a special consolidated basis) comprise of non-business-related, low-taxed investments (‘asset test’), or
- the company is taxed at a reasonable tax rate (10 percent or more) based on Dutch tax principles (‘subject to tax test’).
Generally, assets held by sub-subsidiaries are taken into account for the asset test. The relevant entity’s activities determine whether an asset qualifies as a non-business-related investment, which is an investment that cannot reasonably be considered necessary for the business operations of the entity holding these investments. The question of whether investments qualify as non-business-related should be answered on a case-by-case basis. If the participation exemption applies, WHT on any received dividends cannot be credited.
As a result of changes to the EU Parent-Subsidiary Directive, the Dutch participation exemption does not apply to payments received from, or made by, the subsidiary insofar as the subsidiary can deduct these for profit tax purposes (a hybrid mismatch). The participation exemption therefore no longer applies if a parent company, for example, receives a dividend whereas this dividend is deductible by the subsidiary. Benefits derived from the disposal of the participation and foreign exchange results remain exempt in principle, given that they are non-deductible at the level of the subsidiary.
Complex temporal ring-fencing rules deal with situations where the participation exemption does not apply to the entire period that the shareholding has been held, because of either a legislative amendment or a change in the facts. In both cases, the change of the applicable regime is referred to as an exemption transition. In that case, (part of) the benefits (dividends or capital gains, for example) may be realized at the time the participation exemption no longer applies, despite the fact that those benefits arose at a time when the participation exemption did apply, or vice versa. Under Dutch law, benefits must be ring-fenced in case of an exemption transition. This means that the benefits are either taxed or exempt, depending on whether the participation exemption applied at the time they arose. This is achieved by creating a special reserve: the temporal ring-fencing reserve.
A tax charge does not arise on a share transfer if the transfer qualifies as a share-for-share merger. This essentially involves an exchange of shares in the target company for shares in the acquiring company. The relief consists of an exemption from tax for the transferor and a rollover of the transferor’s existing tax basis in the target shares into consideration shares in the acquiring company, effectively deferring any gain.
This relief is available where:
- A company resident in the Netherlands:
- acquires, in exchange for the issue of shares in its own capital (or profit rights), shares in another company resident in the Netherlands; and
- can exercise more than 50 percent of the voting rights in the latter company after the acquisition.
- A qualifying company resident in an EU member state:
- acquires, in exchange for the issue of shares in its own capital (or profit rights), shares in a qualifying company resident in another EU member state; and
- can exercise more than 50 percent of the voting rights in the latter company after the acquisition.
- A company resident in the Netherlands:
- acquires, in exchange for the issue of shares in its own capital (or profit rights), shares in a company resident outside the EU; and
- can exercise at least 90 percent of the voting rights in the latter company after the acquisition.
A cash payment of up to 10 percent of the nominal value of the shares issued under the share-for-share merger is permitted for rounding purposes (but the relief is limited to the share-based element).
Relief is not available where the transaction is primarily aimed at avoiding or deferring taxation. Unless the taxpayer can demonstrate otherwise, this motive is presumed where the transaction does not take place for sound business reasons, such as a restructuring or rationalization of the activities of the companies involved. Before carrying out the transaction, the taxpayer can request confirmation from the Dutch tax authorities that it will not deny relief on these grounds.
For corporate taxpayers, the importance of the share merger relief is limited by the broad scope of the participation exemption. Moreover, although the share-for-share merger relief also applies for personal income tax purposes in case Dutch individual shareholders are involved, the importance of the relief generally is limited to those owning at least 5 percent of the target (i.e. holders of substantial interests), as gains on smaller shareholdings are not taxable as such.
Tax indemnities and warranties
In a share acquisition, the buyer takes over the target company together with all related liabilities, including contingent liabilities. Therefore, the buyer normally requires more extensive indemnities and warranties than in the case of an asset acquisition.
Generally, tax losses may be carried forward for 6 years (until 2019: 9 years; as per 2022: indefinitely — see hereafter) and carried back for 1 year, unless a loss set-off limitation applies.
Loss set-off limitation — a significant change of control
The carryforward may be restricted or denied in circumstances involving a change of 30 percent or more in the ownership of the company where the company has primarily held passive investments during the years concerned or its business activities have significantly (70 percent or more) decreased. There are, however, some exceptions. An important one is that the restriction on loss set-off does not apply if the significant change of control is the result of an expansion of the interest by a person or company that already held an interest in the loss company of at least one-third at the beginning of the ‘oldest’ loss year.
Loss set-off limitation — qualifying holding and/or group financing activities
The carryforward of prior-year losses/the carryback of losses by a holding and finance company may be restricted according to transitional legislation. According to said transitional legislation — which deals with losses up to 2019 — a company is a holding and/or finance company where 90 percent or more of its activities, for 90 percent or more of the financial year, comprise holding participations and/or the financing of affiliated companies. The losses incurred by such companies may only be set off against profits where the company also qualifies as a holding and finance company in the profitable year and where the net amount of affiliated loan receivables is not greater in the profitable year or, if the net amount is greater, then this was not primarily done to take advantage of the loss set-off.
Loss set-off limitation — fiscal unity
The existing rules for setting off losses within a fiscal unity are rather extensive. Generally, pre-fiscal unity losses can be set off only if the fiscal unity as a whole has a profit for tax purposes after setting off the results of the various fiscal unity companies. Thereafter, the total result of the fiscal unity is divided into the parts attributable to the companies participating in the fiscal unity. If the individual participating company still shows a profit, only the pre-fiscal unity losses of that company may be set off against that profit. The same procedure is followed for carrying back the loss incurred by a fiscal unity company to be set off against its pre-fiscal unity profits. Other specific rules apply to the treatment of losses and foreign tax credits after a fiscal unity is dissolved or when a company leaves a fiscal unity.
Loss set-off limitation — (business) mergers and demergers
Specific loss set-off rules apply to (business) mergers and de-mergers. These loss set-off rules are primarily intended to avoid pre-merger or pre-demerger losses of a company from being offset against the profits of one or more other companies (see ‘Purchase of assets’ prior in this report).
Maximum annual loss set-off and unlimited carryforward as per 2022
As of 1 January 2022, losses will only be fully available for carryforward and carryback set-off up to an amount of EUR1 million of taxable profit. In the case of a higher profit, the losses will only be available to be set off up to 50 percent of that higher taxable profit. This rescheduling of the loss set-off is combined with an indefinite carryforward loss set-off. However, the carryback loss set-off period will remain 1 year only.
The changes with regard to the indefinite carryforward loss set-off will apply to all losses available for offset incurred as of 1 January 2022 or that are still available for carryforward loss set-off at year-end 2021. This means that losses incurred in financial years commencing on or after 1 January 2013, and that had not yet been set-off at the end of the financial year commencing on or after 1 January 2021, can be carried forward indefinitely and will not expire.
Crystallization of tax charges
Clawback with respect to intra-fiscal unity transferred assets
The disposal outside a fiscal unity of a subsidiary that has been involved in the transfer of assets within the fiscal unity in the preceding 6 years (under certain conditions: 3 years) may give rise to a tax liability in respect of the transferred assets. This is due to an anti-abuse clause, which prescribes that the transferred assets are marked to market immediately prior to the disposal. However, under certain conditions, a rollover-relief is available. Furthermore, an exception is made if the transfer of the assets is part of the normal businesses of both companies.
Clawback with respect to the rollover relief within the context of a business merger, demerger or legal merger
The rollover relief for business mergers and demergers does not apply if these transactions are primarily aimed at avoiding or deferring taxation, as would generally be the case if the merger was not performed for business reasons. A business merger or demerger is deemed to have been performed for non-business reasons where shares in a company involved in a business merger or demerger are sold within 3 years after the date of the business merger or demerger (subject to counterproof). Therefore, the sale of shares in a company that was involved in a business merger or demerger within the said period may lead to the presumption that the business merger or demerger has been performed for non-business reasons and thus to a clawback of the rollover relief. The rollover relief within the context of a legal merger and a share-for-share exchange is not applicable either, in case the legal merger has been performed for non-business reasons. However, they do not have the aforementioned ‘3-years-rule’.
As mentioned previously, the profit realized upon the sale of an operating asset or the compensation for loss or damage can be added to a reserve (the reinvestment reserve) that is deducted from the acquisition or production costs of a new operating asset. The acquisition (or production) of the new operating asset must, in principle, take place in the year of sale or in the 3 following years. If this condition is not met, the reserve will be released and added to the taxable profit.
Fiscal unity: jointly and severally liable for taxes payable
It should be noted that even if a company has left a fiscal unity, it remains jointly and severally liable for taxes payable by the parent company of the fiscal unity (both CIT and VAT fiscal unity) and allocable to the tax periods in which the company was included in the fiscal unity. This liability arises pursuant to the Dutch Tax Collection Act and should be addressed in the sale-purchase agreement.
The participation exemption applies to a pre-sale dividend, provided it meets the applicable conditions and the seller is a Dutch resident. Where the seller is non-resident, the relevant treaty or the applicable domestic type of relief determines whether or not the Netherlands will impose WHT on the paid dividend.
See ‘Purchase of assets’ and ‘Share-for-share merger’ earlier in this report.
Choice of acquisition vehicle
Several potential acquisition vehicles are available to a foreign buyer for acquiring the shares or assets of a Dutch target. Tax factors often influence the choice of vehicle.
Local holding company
Dutch tax law and the Dutch Civil Code contain no specific rules on holding companies. In principle, all resident companies can benefit from the participation exemption if they satisfy the relevant conditions (see ‘Purchase of shares’). Under the participation exemption, capital gains and dividends from qualifying shareholdings are exempt from CIT. However, transitional legislation limits the possibility of setting off losses that are incurred by holding and finance companies against profits (see ‘Tax losses’).
In principle, therefore, a buyer already active in the Netherlands through a subsidiary or branch could have that entity make a qualifying share acquisition. In practice, a special-purpose company is often incorporated in the Netherlands for the purposes of such acquisitions. The main types of Dutch corporate entities are the BV, the NV and the Dutch cooperative association.
For Dutch tax purposes, there are no material differences between the types of entities. Dividend distributions made by cooperative associations are not subject to dividend WHT, unless the entity qualifies as a ‘holding cooperative’, defined as a cooperative association whose actual activity in the preceding year generally consisted primarily (70 percent or more) of holding participations or directly or indirectly financing related entities or individuals.
A cooperative with at least 70 percent of participations on its balance sheet is not regarded as a holding where it actively holds these participations, employs staff and performs other head office functions. Under certain circumstances, a cooperative association used in a private equity structure where the total assets on the balance sheet consist of at least 70 percent of participations may also be ‘disregarded’ as a holding cooperative based on other factors, such as number of employees, office space and active involvement in the business of the participations.
Foreign parent company
The foreign buyer may choose to make the acquisition on its own. As a non-resident company without a Dutch PE, the foreign buyer is normally not exposed to Dutch taxation with respect to the shareholding, except for possible WHT on dividends, or if the non-resident taxation rules would apply. Dutch WHT on dividends is 15 percent unless reduced by a treaty or a domestic exemption. Dividends to foreign EU-based corporate shareholders holding at least 5 percent of the shares normally qualify for an exemption from WHT. Since 1 January 2018, the WHT exemption also applies for distributions if the recipient to the distribution is established in a state that has a tax treaty with the Netherlands containing a dividend article and owns a qualifying interest in the share capital of the Dutch company (in short ≥5 percent).
The dividend WHT exemption includes an anti-abuse provision. In short, this provision applies where the interest in the company or holding company established in the Netherlands is held for the principal purpose of, or one of the principal purposes of, avoiding dividend WHT being levied on another party (subjective test) and the arrangement is an artificial structure or transaction (objective test).
The subjective test assesses whether less dividend WHT is payable by the taxpayer by interposing the direct shareholder of the Dutch entity (the ‘disregard principle’). If not, then there will be no avoidance of dividend WHT for another party. The objective test assesses whether a structure is set up on the basis of valid commercial reasons that reflect economic reality.
If the intermediate holding company cumulatively meets a number of substance requirements in the country where it is resident, the burden of proof that both the subjective and objective element of abuse are fulfilled, shifts from the taxpayer to the tax authorities. Among others, these requirements include a payroll expense criterion of at least EUR100,000 (which must be an actual remuneration for the activities performed) and the requirement that, during a period of at least 24 months, the company must have its own office equipped with the usual facilities for performing holding activities.
Substantial interest rules for non-resident corporate shareholders
If a foreign company holds a substantial interest for the primary purpose of, or one of the primary purposes of, avoiding personal income tax of another party (subjective test) and the arrangement is an artificial structure or transaction (objective test), tax is levied at the CIT rate on dividends and capital gains. Any paid dividend WHT can be credited with CIT due. The deduction of costs is also possible. Again, if certain substance requirements are met, there is a presumption of non-abuse (subject to counterproof by the tax inspector, see ‘Foreign parent company’ prior in this report).
Non-resident intermediate holding company
Due to the Netherlands’ extensive network of tax treaties, there is often no benefit to interposing a treaty country intermediary. However, where the buyer is resident in a non-treaty country, WHT may be reduced by interposing a Dutch cooperative association (if not considered as a holding cooperative) or a foreign holding company resident in a treaty country between the buyer and the target company. Consideration should be given to the Dutch domestic anti-abuse provisions and the principal purpose test (‘PPT’) as incorporated in the various tax treaties due to the multilateral instrument (‘MLI’) or on a bilateral basis.
A branch of a foreign company is subject to Dutch CIT practically in the same way as a domestic company. In principle, non-resident entities that have Dutch PEs to which qualifying shareholdings can be attributed can benefit from the participation exemption. In principle, funding costs, such as interest incurred by a local branch, can be deducted in computing the taxable profits of the target if a fiscal unity can be formed after the acquisition (see ‘Group relief/consolidation for CIT purposes’). No WHT is levied on distributions to the foreign head office, which can be an advantage when acquiring a Dutch target’s assets. If the deal is properly structured, using a branch to acquire shares in a Dutch target also offers the possibility of distributing profits free from WHT. A negative commercial aspect of using a branch is that the branch may not be considered a separate legal entity, fully exposing the head office to the branch’s liabilities. Additionally, the Dutch tax authorities deny a deduction for interest charged by the head office unless the deduction relates to external loans.
Joint ventures can be either incorporated (with the joint venture partners holding shares in a Dutch company) or unincorporated (usually a limited partnership). A partnership may be considered transparent for Dutch tax purposes, if certain conditions are met. In this case, the partnership’s losses can be offset against the partners’ profits. However, selling the business may lead to taxable profit at the level of the partners. Due to the participation exemption, where the conditions are met, the profit or loss on the sale of the shares of a tax-transparent partnership do not lead to taxable profit.
Choice of acquisition funding
Interest expenses on both third-party and related-party debt are, in principle, deductible on an accruals basis for Dutch CIT purposes, unless a general or specific restriction on the deductibility of interest applies.
Restrictions on the deductibility of interest
Specific restrictions on deducting interest expenses — including costs and foreign exchange results — apply for interest paid to affiliated companies and individuals where the loan is used for the acquisition of shares in companies that, after the acquisition, become affiliated with the buyer. Certain guarantees by affiliated companies and individuals may qualify a third-party loan as a loan by these affiliated companies or individuals.
These restrictions do not apply where the taxpayer convincingly demonstrates that both the transaction and the related debt were predominantly motivated by sound business reasons (double business motivation test) or where the recipient of the interest (or, for a conduit company, the ultimate recipient) is subject to effective taxation at a rate that is considered reasonable according to Dutch standards (generally, 10 percent or more, computed under Dutch CIT principles). In the latter case, the restrictions still apply where the Dutch tax authorities can show that the transaction and the related debt were not both predominantly motivated by sound business reasons.
Furthermore, interest paid on a loan between affiliated entities that has no defined term or a term exceeding 10 years and carries a return of less than 70 percent of an arm’s length return is not deductible.
The deduction of interest (and deductible payments in general) may also be denied on the grounds of the complex Dutch anti-hybrid mismatch rules as in force per 1 January 2020 (i.e. the implementation of the ‘second’ European Anti-Tax Avoidance Directive; ATAD 2).
As of 1 January 2019, an earnings-stripping measure was introduced in the Dutch Corporate Income Tax Act. As a result of which specific interest deduction limitations concerning the deduction of interest related to the financing of participations and the limitation of deductibility of interest by acquisition holding companies that are debt financed and where the buyer and the target subsequently enter into a fiscal unity for CIT purposes, were abolished.
The earnings-stripping measure provides that the net interest payable will only be deductible up to 30 percent of the taxpayer’s EBITDA (in short: the gross operating result) or up to EUR1 million, whichever is higher. The non-deductible interest can be carried forward without limitation to subsequent years.
The net interest is the difference between the interest expense and the interest income in respect of loans and comparable agreements (such as financial leases and hire purchases). The interest definition also covers exchange results on the principal loan and the interest instalments on, and results from, instruments used to hedge interest and exchange risks on loans. The costs incurred on loans and on instruments to hedge interest and exchange risks on loans will be treated as interest expenses.
To determine the EBITDA, the profit determined according to tax standards (thus without the exempt benefits such as the exempt participation benefits and before the deduction of donations) will be:
- increased by the total depreciation and write-downs of an asset taken into account in a year;
- decreased by any write-downs of an asset recaptured in a year; and
- increased by the net interest in the particular year.
The profit will not be adjusted for any interest to be capitalized in a year. This interest will, however, be taken into account for the purposes of the 30 percent rule. If the 30 percent criterion is exceeded, the limitation of the deduction of the other interest expense (i.e. the interest expense other than the interest to be capitalized) will take precedence. Insofar as the interest to be capitalized is less than 30 percent of the EBITDA, it will be capitalized. Insofar as the interest to be capitalized exceeds 30 percent of the EBITDA, no capitalization will take place, but the interest will be carried forward to a subsequent year. The earnings-stripping measure, in principle, should be applied on an entity level basis. However, if the entity is part of a fiscal unity for CIT purposes, the measure should be applied at the level of the fiscal unity.
As of 1 January 2020, an anti-abuse provision has been introduced to combat the trade in companies with an amount of interest eligible for carryforward. This provision stipulates that if the ultimate beneficial ownership in a taxpayer has changed by more than 30 percent, the carried-forward interest that has arisen before the change cannot, in principle, continue to be taken into account thereafter.
WHT on debt
In general, no dividend WHT is levied on interest, except if (i) the interest is paid on hybrid loans or (ii) the interest payments fall within the scope of the newly introduced WHT on interest and royalties.
According to Dutch case law, a loan may be re-qualified as equity for CIT purposes in the following situations.
- The parties actually intended equity to be provided (rather than a loan).
- The conditions of the loan are such that the lender effectively participates in the business of the borrowing company.
- The loan was granted under such circumstances (e.g. relating to the debtor’s financial position) that, at the time the loan was granted, neither full nor partial repayment of the loan could be expected.
Pursuant to Dutch case law, loans referred to under the second bullet point above may be re-characterized as equity where:
- the term of the loan is at least 50 years
- the debt is subordinated to all ordinary creditors
- the remuneration is almost fully dependent on the profit.
Where a loan is re-characterized as equity under the above conditions, interest payments are non-deductible and may be deemed to be a dividend distribution, triggering 15 percent WHT (unless reduced by treaty or domestic relief).
WHT on interest and royalties
As of 1 January 2021, a WHT of 25 percent (equal to the highest CIT rate) is applicable to the arm’s length interest and royalty payments made by an entity established in the Netherlands to an affiliated entity established in a low-taxed country, in abuse situations or — under certain circumstances — to hybrid entities. Payments made from a Dutch PE of a foreign entity will also be subject to this new WHT, provided conditions are met.
Payments to affiliated entities entail payments to both parent/grandparent, subsidiary/sub-subsidiary and sister companies. In short, affiliation is present if either indirectly or directly such influence can be exercised on the decision making that this can determine the activities of the other entity; this will in any case be present if the interest represents more than 50 percent of the authorized voting rights. In case of a cooperating group of entities, the interests of the group members are added together.
Low-taxed countries are designated countries with a nominal corporate profit tax rate of less than 9 percent, and designated countries appearing on the EU list of non-cooperative jurisdictions. A 3-year transitional period applies in cases of payments to parties resident in treaty countries, to give the Netherlands and its treaty partners the possibility to start negotiations before the position of taxpayers actually changes.
A buyer may use equity to fund its acquisition, possibly by issuing shares to the seller in satisfaction of the consideration (share merger). Contributions to the capital of a Dutch company are not subject to capital contribution tax.
Where securities are issued at a discount, because the interest rate is below the market rate of interest, in principle, the issuer may be able to obtain a tax deduction for the discount accruing over the life of the security.
Payments pursuant to earn-out clauses that result in additional payments or refunds of the purchase price are covered by the participation exemption applicable to the relevant participations. Similarly, the participation exemption covers payments related to indemnities or warranties to the extent that they are to be qualified as an adjustment of the purchase price. Where settlement of a purchase price is deferred, part of the purchase price may be re-characterized as interest for tax purposes, depending on the agreed terms and the parties’ intent.
Company law and accounting
Under Dutch law, a company may operate in the Netherlands through an incorporated or unincorporated entity or a branch. All legal entities must register their business with the trade registry (Handelsregister) at the local Chamber of Commerce (Kamer van Koophandel). The most common forms of incorporated companies under Dutch commercial law are the BV and the NV. Both are legal entities and have capital stock divided into shares.
As of October 2012, it is possible to issue shares without voting rights or profit entitlement. Shares of a BV are not freely transferable, which makes this type of company generally preferred as the vehicle for privately held companies.
Generally, shares in an NV are freely transferable. Foreign investment in a Dutch company does not normally require government consent. However, certain laws and regulatory rules may apply to mergers or acquisitions. In a stock merger, the shareholders of the target company either exchange their shares for those of the acquiring company or sell them to the acquiring company. The transfer of title to registered shares is made by a deed of transfer executed before a Dutch civil-law notary.
Legislation on mergers and demergers (i.e. split-offs) has been in force since 1998. Participants in mergers and demergers must adhere to the requirements of the Dutch takeover and merger code (SER Fusiegedragsregels), which protects the interests of shareholders and employees, and the Works Councils Act (Wet op de Ondernemingsraden), which protects the interests of employees and requires notification of mergers. Mergers and demergers of large companies that qualify as concentrations within the meaning of the Dutch Competition Act must be notified in advance to the Dutch Authority for Consumers & Markets.
Legislation for financial reporting is laid down in Part 9 of Book 2 of the Dutch Civil Code. Further, the Council of Annual Reporting (CAR — Raad voor de Jaarverslaggeving) publishes Guidelines for Annual Reporting (GAR), which is largely based on International Financial Reporting Standards (IFRS).
The financial reporting rules contain requirements about the content, analysis, classification, recognition and valuation of items in the financial statements. The statutory management of an NV or BV must prepare the financial statements within a period of 5 months. This period can be extended for up to 5 more months, with approval from the shareholders and when special circumstances apply.
Group relief/consolidation for CIT purposes
A fiscal unity can be formed between a parent company and any company in which it owns 95 percent of the legal and economic ownership of the nominal share capital. This 95 percent interest should represent at least 95 percent of the voting rights and should give entitlement to at least 95 percent of the profits.
Firstly, entities can be included in a fiscal unity if they are formed under Dutch law (usually as BVs, NVs or cooperative associations); or if they are formed under foreign law, provided their legal form is comparable to a BV, NV or a cooperative association.
Secondly, a company does not actually have to be resident in the Netherlands. Where the company is not a Dutch resident, it should have a PE in the Netherlands and be resident in either an EU member state or a country with a tax treaty with the Netherlands that prohibits discrimination against such a company. If the Dutch PE is the ‘parent company’ of a fiscal unity, the shares in the respective subsidiaries should be attributable to the PE.
Thirdly, a fiscal unity of Dutch sister companies of an EU-/EEA-resident parent company is possible, as well as between a Dutch parent company and Dutch sub-subsidiaries held through one or more EU-/EEA-resident intermediate holding companies. Further, Dutch PEs of EU-/EEA-resident companies can be included in a fiscal unity even where the PE functions as a parent company and the shares held in its Dutch subsidiary/subsidiaries are not attributable to the PE.
A number of conditions need to be fulfilled, including identical financial years for both parent and subsidiaries. For newly incorporated companies, the start of the first financial year may deviate. A fiscal unity may be deemed to have been formed on the date requested, but the formation date cannot be more than 3 months before the date of the request.
Inclusion in a fiscal unity means that, for tax purposes, the assets and activities of the subsidiaries are attributed to the parent company. The main advantage of a fiscal unity is that the losses of one company can be set off against the profits of another in the year they arise.
In addition, assets and liabilities generally can be transferred from one company to another without giving rise to tax consequences. Specific rules apply to combat the abuse of fiscal unities. In particular, leaving a fiscal unity by a subsidiary that has been engaged in the transfer of assets within the fiscal unity in the preceding 6 years may give rise to a tax liability with respect to the previously transferred assets.
To ensure proper assessment and collection of tax, the Ministry of Finance has laid down a number of special conditions, in particular, extensive rules restricting a taxpayer’s ability to carry forward pre-fiscal unity losses to be set off against post-fiscal unity profits and to carry back post-fiscal unity losses to be set off against pre-fiscal unity profits.
Controlled foreign companies (CFCs)
As from 1 January 2019, a CFC measure may apply to a taxpayer’s controlled entities and PEs. In short, a company qualifies as a controlled company if the taxpayer, on its own or together with an affiliated entity or affiliated individual, directly or indirectly has an interest of more than 50 percent in such a company. This means that it will also be relevant for Dutch companies to know whether lower-tier CFCs are held. A taxpayer’s PE falls under the scope of the CFC rules if it is established in a designated jurisdiction, meaning:
- a state without profit taxes or with a statutory rate lower than 9 percent; or
- a state included in the EU list of non-cooperative countries (‘EU blacklist’).
When applying the CFC measure, the type of income received by the controlled entity should be considered. The CFC rule only applies to the income of the controlled entity/PE that comprises of interest, royalties, dividends, capital gains on shares, benefits derived from financial leasing, benefits derived from insurance, banking or other financial activities or specific invoicing activities (‘tainted benefits’).
The tainted benefits derived by the controlled entity are allocated to the taxpayer, becoming part of its tax base (to the extent not distributed by the controlled entity before the taxpayer’s year-end). This profit allocation should also take place where the controlled entity is part of a chain of companies where, at the taxpayer’s level, the participation exemption applies to the next tier company.
The CFC measure would not apply if 70 percent or more of the benefits received by the controlled entity or PE consists of benefits other than tainted benefits or where a regulated financial institution is involved (provided certain conditions are met). The measure would not apply if the controlled entity performs a significant economic activity, supported by staff, equipment, assets and premises.
Anti-hybrid mismatch rules
As of 1 January 2020, the Netherlands has several rules to tackle tax avoidance via hybrid mismatches in affiliated situations (EU and non-EU) and as a result of a structured arrangement. Hybrid mismatches, in principle, only concern situations in which differences between tax systems are used with regard to the qualification of entities, instruments or PEs. Hybrid mismatches may result in a tax deduction if the corresponding income is not taxed anywhere (deduction without inclusion), or if the same payment is deducted several times (double deduction).
In the case of a deduction that is not taxed, the usual sequence is that it is first up to the state of the payer to refuse the deduction (primary rule). If it does not, then the state of the recipient must tax the fee or payment (secondary rule). In case of a double deduction, the deduction must primarily be permitted in the state in which the payment originates, the expenses arose or the losses were incurred (state of the payer), and thus refused in the other state. If the deduction is not refused in the other state, then the state of the payer must refuse the deduction (secondary rule). Because the Dutch government wants to tackle tax avoidance, it has made full use of the options offered by the directive for combating this. That is why the Netherlands has, among other things, not made use of the option to not implement the secondary rule for certain hybrid mismatches.
As a result of the anti-hybrid mismatch rules, so-called reversed hybrid entities (in short: transparent for Dutch tax purposes but non-transparent by the laws of the participant[s]) will become subject to tax as per 1 January 2022, insofar as its profits are not taken into account at the level of the participant(s). This measure, therefore, not only tackles the effect (a deduction without inclusion) but also the cause (the elimination of the qualification difference). The Dutch legislator also announced that, as of 1 January 2022, the reversed hybrid will, in principle, become obliged to withhold and pay dividend WHT on dividend payments and other distributions made.
As of 1 January 2020, the Netherlands introduced a documentation obligation related to the anti-hybrid mismatch measures. Under this obligation, a taxpayer that states in its tax return that the hybrid mismatch rules do not apply to it, must include information in its accounts and records showing this is the case. If a taxpayer does apply hybrid mismatch measures, it must include information in its accounts and records showing how the hybrid mismatch rules are applied. If a taxpayer does not (fully) comply with the documentation obligation, and the tax inspector can reasonably take the position that the hybrid mismatch measures do apply, the heavier burden of proof of ‘produce evidence of’ (convincingly demonstrate) may come to rest on the taxpayer.
Mandatory disclosure rules
The objective of the EU Directive on mandatory disclosure is to create a reporting obligation for potentially aggressive cross-border tax arrangements, whereby reports are exchanged within the EU.
If a cross-border arrangement meets one of the hallmarks referred to in the Directive, it must, in principle, be reported by the intermediary (e.g. the tax advisor) and in some cases by the taxpayer itself. The Directive contains order of priority rules to determine who must report. For a number of hallmarks, there is also the question whether the tax benefit of the arrangement is the most important benefit or one of the most important benefits (the ‘main benefit test’).
The arrangement must be reported within 30 days after it has been made available for implementation, was ready for implementation or the first step in the implementation thereof has been taken, whichever occurs first.
The information that must be reported includes the identification of the relevant intermediaries and taxpayers, of the member states and associated persons who are expected to be affected by the arrangement, as well as a summary of the content of the arrangement.
The Dutch tax authorities may impose penalties for information that is not reported, not reported on time, or is incorrect or incomplete. If gross negligence or deliberate intent is involved, the administrative penalty can run up to an administrative offense penalty of the sixth category (a maximum of EUR830,000).
In principle, intercompany transactions should be at arm’s length for tax purposes. In order to be able to provide evidence that transfer prices are at arm’s length, a taxpayer must maintain proper transfer pricing documentation to the Dutch tax authorities. If the Dutch tax authorities impose revised assessments, absence of such evidence may shift the burden of proof to the taxpayer (i.e. should the taxpayer wish to argue that a reasonable estimation made by the Dutch tax authorities is wrong). Penalties may also be imposed. Transfer pricing adjustments may entail secondary adjustments, such as hidden dividend distributions or capital contributions.
New transfer pricing documentation rules entered into force as of 1 January 2016. Companies that are part of a group with a minimum consolidated turnover of EUR750 million must notify the Dutch tax authorities by 31 December 2016 as to which company of the group will file a country-by-country (CbyC) report. If the fiscal year of the group starts on 1 January 2019, the group companies will need to have filed their CbyC report concerning that year by 31 December 2020. Penalties may be imposed in instances of intentional non-compliance or ‘serious misconduct’ of the reporting entity regarding its obligation to file the CbyC report.
Further, all group entities that are tax-resident in the Netherlands and that are part of a group with a minimum consolidated turnover of EUR50 million need to maintain a master file and local file in their administration at the time of filing their tax return. Non-compliance with these documentation requirements would result in a reversal of the burden of proof.
Information obligation for service entities
In light of the national and international debate on the taxation of multinationals and developments regarding BEPS, the Dutch legislator introduced a measure that concerns the information obligation for service entities.
In short, ‘service entities’ are Dutch-resident companies whose main activities involve the intragroup receipt and payment of foreign interest, royalties, and rental or lease payments. A service entity can request the Dutch tax authorities to provide advance certainty on the tax consequences of proposed related-party transactions. For the purposes of obtaining advance certainty in the form of international rulings, it is — inter alia — required that the service entity has sufficient economic nexus with the Netherlands. As of 1 January 2021, the previously mentioned substance requirements also play a role in the exchange of information about service entities within the meaning of the International Assistance in the Levying of Taxes Act (see ‘Recent developments’).
In principle, a company that has been incorporated under Dutch civil law is subject to Dutch tax, regardless of whether it is (also) resident in another country. In certain circumstances, a Dutch company that is resident in another country under a tax treaty may be deemed non-resident for Dutch tax purposes or it may be denied certain types of relief (such as obtaining fiscal unity treatment). Being a dual resident may also have severe adverse consequences within the context of the newly introduced WHT on interest and royalties: it could lead to taxation even though the entity has its place of effective management abroad.
Comparison of asset and share purchases
Advantages of asset purchases
- All or part of the purchase price can be depreciated or amortized for tax purposes.
- A step-up in the cost basis for taxing subsequent gains is obtained.
- Generally, no previous liabilities of the company are inherited.
- No acquisition of a tax liability on retained earnings.
- Permits flexibility to acquire only part of a business.
- Profitable operations can be absorbed by loss-making companies in the buyer’s group, thereby effectively increasing the ability to use the losses.
- Greater flexibility in funding options.
Disadvantages of asset purchases
- Possible need to renegotiate supply, employment and technology agreements.
- A higher capital outlay is usually involved (unless a business’ debts are also assumed).
- May be unattractive to the seller, thereby increasing the price.
- Higher real estate transfer tax.
- Seller retains the benefit of any carryforward of losses incurred by the target company.
Advantages of share purchases
- Lower capital outlay (purchase of net assets only).
- Likely more attractive to the seller, so the price is likely lower.
- May benefit from tax losses of target company.
- Lower real estate transfer tax.
- May benefit from the seller’s ability to apply the participation exemption.
Disadvantages of share purchases
- No depreciation of purchase price.
- No step-up for taxing subsequent capital gains.
- Liable for any claims against or previous liabilities of the entity.
- No deduction for purchase price.
- Buyer inherits a potential dividend WHT liability on retained earnings that are ultimately distributed to shareholders.
- Less flexibility in funding options.
KPMG in the Netherlands
Meijburg & Co
3012 CN Rotterdam
Netherlands — 3006 AK Rotterdam
T: +31 88 90 92564
This country document does not include COVID-19 tax measures and government reliefs announced by the Dutch government. Please refer below to the KPMG link for referring jurisdictional tax measures and government reliefs in response to COVID-19.
Click here — COVID-19 tax measures and government reliefs
This country document is updated as of 1 January 2021.