Tax alert ATAD 1
Tax alert Anti-Tax Avoidance Directive
This alert is intended to briefly explain the measures implemented in Dutch tax as a result of the Anti-Tax Avoidance Directive (ATAD1), and remind you why these ATAD1 measures could be important for your company in the Netherlands. This Directive contains rules against tax avoidance on a national and international level. Since the first of January 2019 this Directive entered into force in all Member States.
Consequences of implementation of ATAD 1 in the Netherlands
Controlled foreign Companies (CFC)
The CFC rule is a measure to circumvent that companies in normal-taxed jurisdictions place their passive income into a controlled company in a low-taxed jurisdiction in order to reduce the corporate income taxation burden. To be defined as a ‘controlled foreign company’ there are two cumulative requirements an entity needs to meet:
(a) the taxpayer by itself, or together with its associated (participation of 25 percent) enterprises holds a direct or indirect participation of more than 50 percent of the voting rights, or owns directly or indirectly more than 50 percent of capital or is entitled to receive more than 50 percent of the profits of the entity; and
(b) the entity is located in a jurisdiction from a Dutch list of jurisdictions with a statutory corporate tax rate of less than 9 percent, or a jurisdiction from the EU list of non-cooperative jurisdictions.
If the company meets the requirements mentioned above, the non-distributed income of the entity (such as interest, royalties, dividends, capital gains in relation to the alienation of shares, and income from financial lease, insurance and banking) will be attributed to the tax base of the (indirect) Dutch parent company.
This rule does not apply if the CFC carries on a substantive economic activity. A substantive economic activity is, among others, considered to be present in case of wage costs of at least 100,000 euro and having an office space at the entity’s disposal for at least 24 months. The rule also does not apply if the listed items of non-distributed income derived by the CFC make up less than 30 percent of the total income of the CFC.
Earnings stripping rule
The earnings striping rule is a measure that limits the deductibility of ‘excess’ net interest expenses. According to this rule, excess interest costs (i.e. the balance interest income minus interest costs, including foreign exchange results on the loans) are only deductible up to 30 percent of the adjusted Dutch taxable profit (the EBITDA for tax purposes). Deduction of interest expenses up to 1,000,000 euro is in any case not restricted by the earnings stripping rule. Since the rule is applied on a fiscal unity level, the threshold of 1,000,000 euro is reached faster in case a fiscal unity is present than if it were applied per individual company part of that fiscal unity. Non-deductible interest expenses can be carried forward indefinitely to the next financial years.
General Anti Abuse Rule (GAAR)
The GAAR is a measure that requires Member States to ignore an arrangement or a series of arrangements which are not genuine having regard to all relevant facts and circumstances, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law. The result of this may be an adjustment in the corporate income tax base of the Dutch company.
Since the Netherlands already has the concept of ‘fraus legis’, which is comparable to and reaches the same goals as GAAR, there is no need for further implementation steps to convert GAAR into Dutch national tax law.
Dutch tax law already had certain rules for exit taxation, but ATAD1 contains stricter rules. If a company that is taxed in the Netherlands moves the company itself or its assets to another Member State, it has to pay an exit tax. The company is charged on a deemed capital gain (i.e. the difference between the fair market value and the book value for tax purposes) of assets at the time the assets are transferred across the border.
In January 2020 the second Anti-Tax Avoidance Directive (ATAD2) will enter into force. ATAD2 contains measures against hybrid mismatches. A hybrid mismatch is a situation in which the differences in tax rules between two countries (between two Member States or between Member States and third countries) are being used to reduce taxation. For example, when a payment is deductible, but does not get taxed anywhere else, or when a payment is deductible multiple times. However, these measures seem difficult to enforce due to a simple shortage of time and manpower. The tax authorities will be overflowed by information sent by companies, and will most likely struggle to keep up with enforcing these measures.
Our tax advisors are more than willing to answer any further questions and have extensive experience in verifying whether your corporate structure is compliant with Dutch tax law following from ATAD.