Final proposals Dutch Corporate Income Tax Reform 2007
On May 24, 2006, the Dutch government submitted the Bill 'Working on profit' to Parliament. The Bill contains important amendments to the Dutch Corporate Income Tax Act 1969. On October 3, the Lower House passed the Bill. The Bill is now submitted to the Upper House. It is expected the Upper House will pass the Bill before the end of this year. The Upper House can not change the Bill. It is intended that the Bill becomes effective as of January 1, 2007
The most important aspect of the proposed legislation includes the following:
Reduction of Corporate Income Tax rates
The standard corporate income tax rate will be reduced from 29.6 to 25.5%. For income up to EUR 25,000, the rate will be reduced to 20%. A rate of 23.5% is proposed for income between EUR 25,000 and EUR 60,000.
Reduction of dividend withholding tax rate
The dividend withholding tax rate will be reduced from 25% to 15%. This should reduce the administrative burden for companies and shareholders as many shareholders will no longer be required to apply for a general reduction from the general rate of 25% to the more common 15% treaty rate.
Reduced tax on intra-group interest
New legislation for a group interest regime will be introduced which will mean tax will be paid at the effective rate of only 5% on the balance of all interest earned or paid by the group.
An election for this tax treatment applies for a period of at least three years. It applies to all interest directly or indirectly received from or paid to a related entity.
Upon your request we can provide you with the further conditions of the group interest regime and its planning possibilities.
Changes to the participation exemption
To benefit from the participation exemption, a number of conditions must be fulfilled. Under the Bill, a number of those conditions will be abolished or modified.
Under the new regime, there will be only one condition: at least 5% of the nominal share capital must be held. It is noted that under the current regime in some situations also shareholdings of less than 5% can qualify. That possibility will no longer apply under the new regime. An important exception will apply with regard to a qualifying interest which is held for at least one year that subsequently falls below 5%. In that case the participation exemption will remain applicable for a maximum of three years.
The 'non inventory test' the 'non-portfolio investment test' and the 'subject to tax requirement' will be abolished. However, in case the shareholder's interest in I) a portfolio investment in a company that is not subject to tax a rate that is considerable (meaning subject to a profit tax that equals at least an effective tax rate of 10% over a base according to Dutch tax standards) and II) which assets, directly or indirectly, consist for more than 50% of portfolio investment assets, only a tax credit for the profit tax paid by that subsidiary shall be available.
Losses arising from the liquidation of a (foreign) subsidiary will continue to be deductible, subject to certain conditions.
Loss relief limitations
The loss carry-back will be reduced from three years to one year, while carry-forward will be limited to nine years. As a transitional rule, all losses incurred prior to 2003 can be carried forward until and including 2011.
Other changes
- Changes will be made to various rules that restrict interest deduction. As they concern rather particular situations and elaborate sets of rules, we will not discuss these changes here in detail.
- The issuance of shares and option rights to acquire shares (e.g. under an employee share option plan) will no longer be tax deductible.
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