On 10 July 2017, the Dutch government published the consultation document for implementation of the Anti Tax Avoidance Directive (ATAD1). The document outlines the potential changes to Dutch law based on ATAD1, which mainly concerns earning stripping and controlled foreign corporations. The consultation document is open for comments until 21 August 2017. Implementation of ATAD1 is (mainly) due on 1 January 2019.
Background and implementation process
The ATAD1 was agreed upon by the EU Member States in June 2016 and provides a minimum standard on several aspects of corporate income tax (see our previous post). The ATAD1 provides for earning stripping (interest limitation), exit taxation, general anti-abuse regulations (GAAR), controlled foreign corporations (CFC) and certain hybrid mismatches. In addition, the Member States agreed in February 2017 on ATAD2 to target all hybrid mismatches (see our previous post).
The implementation date of the various parts of the directives range from 1 January 2019 until as late as 1 January 2024, depending on national circumstances. This consultation document is the first step in the Dutch implementation process. As the Dutch government is in coalition formation, the consultation document explicitly notes that at this point the minimum implementation route has been chosen, but that following government formation this may change.
Content of the document
Please find below a brief outline of the consultation document.
Firstly, an earning stripping rule will be introduced limiting deductible net interest expenses (including FX results) to 30% of EBITDA. Any excess can be rolled-over to subsequent years. The earning stripping provides for a € 3 million threshold. Furthermore, escapes based on a group EBITA test and group equity assets test will exist.
Secondly, a CFC rule is suggested. The ATAD1 provides for two different CFC regimes: (i) based on categories of non-distributed passive income or (ii) non-distributed income from non-genuine arrangements. In both cases the taxpayer should hold 50% or more (direct or indirect) in the low-taxed CFC. In this case a CFC is low-taxed if the tax levied is less than 50% of the amount of tax that would be due if the CFC would be a Dutch tax resident. In the consultation document the first alternative has been chosen – the categories of passive income. However, the document poses the question whether the second alternative should instead be preferred. Furthermore, certain safe havens are provided: (i) if 70% or more of the income of the CFC doesn’t fall in the passive income categories, (ii) specific cases for the financial industry, and (iii) if the CFC carries on substantive economic activity, sufficiently supported by staff, equipment, assets, and premises.
Thirdly, the current exit taxation rules are already largely in line with ATAD1. However, they should be slightly amended. The most important amendment is that deferral of the recovery of exit taxes should be shortened from 10 to 5 years.
Fourthly, the consultation document provides that the current Dutch GAAR (in case law) is already in line with the minimum requirement of ATAD1.
The consultation document notes that the legislative proposal may differ from the current document, given the government coalition formation. Furthermore, it notes that possibly current interest limitation rules may be abolished upon the introduction of the earnings stripping.
We advise you to already check the potential impact of the introduction of these new regulations. Needless to say, we would be happy to conduct such quick scan for you.
We will follow the developments regarding the implementation of ATAD1 closely and we will inform you once further steps are taken.
Please contact us, should you have any questions or comments.