In February 2011, the Ministry of Economic Affairs, Agriculture, and Innovation (“EAI”) launched its initiative for 10 Top Teams, as part of the government’s new business sector policy. The Top Teams consist of representatives from the business sector, knowledge institutes, and government. On June 17, 2011, they presented their plans of action. The Top Team Head Offices also announced its plan of action after holding discussions with various parties, and receiving written contributions requested by the Top Team. This is an overview of the tax-related topics included in the plans of action, in particular, that of the Top Team Head Offices.
Current business climate
Most surveys indicate that the Dutch business climate is considered favorable. Next to its geographical location, the two most important factors for choosing the Netherlands as a business location are a competitive and stable tax climate and the talent pool available. Other important factors are the presence of main shipping ports, good infrastructure, an international orientation, the standard of living, political and social stability, and high quality financial, business, creative, and logistic services. The positive aspects of the Dutch tax climate that are most often cited are:
1. The relatively stable tax climate with its relatively low corporate income tax rate.
2. The extensive and efficient tax treaty network.
3. The opportunity to receive advance certainty from the Dutch Revenue.
4. The participation exemption and the fact that no withholding tax is levied on interest and royalties.
Preferences that can be broadly applied are the ability to offer legal certainty via an exceptional treaty network, that includes emerging economies, and safeguarding potential extensive horizontal monitoring by the Dutch Revenue. In addition to the above, tax instruments need to be more effectively applied (see below).
Tax treatment of participation interest
On April 14, 2011, Deputy Minister of Finance Mr. Weekers has sent the Tax Agenda to the Lower House on behalf of the Cabinet. In the Tax Agenda, the Deputy Minister announced that the chairperson of the Top Team Head Offices had been asked to prepare an opinion on the tax treatment of participation interest, i.e. the ‘Bosal gap’; briefly put: participation interest deductible, participation benefits tax exempt. In its report, the Top Team states that the large majority of the parties consulted regard the deduction of participation interest as an important element of the Dutch tax climate for head offices, all the more so given the tax climates in surrounding countries, and the improvements these countries intend to implement. In a separate letter to the Cabinet, the chairperson of the Top Team Head Offices advises against a unilateral general limitation on the participation interest deduction. Such a limitation would have a strong negative effect on the business climate and on the foreign expansion of Dutch businesses, including small and medium enterprises. The chairperson of the Top Team Head Offices is of the opinion that while abuse must be prevented, an assurance must be given that this will only involve constructions without sufficient underlying business reasons.
Research & Development (“R&D”) deduction
In the 2010 Coalition Agreement, the government announced that innovation and business subsidies would be reduced, but that this would be compensated by a EUR 500 million easing of the tax burden via corporate income tax and the Promotion of Research and Development Act (in Dutch: “WBSO”). This would involve increasing the remittance reduction for payroll tax. A new proposal for easing the tax burden has been put forward by various Top Teams, including the Top Team Head Offices. Under the new proposal, the following tax stimulation measures would be introduced to ease the tax burden:
A deduction for non-payroll R&D costs
· This is a tax rule centering on profits (personal and corporate income tax) that aims to effectively lower R&D operating and investment costs, but not payroll costs. The rule should apply along with the current WBSO facility, that only subsidies payroll costs.
· It would involve an additional deduction by means of a tax credit: 25% of the costs of R&D investments in business assets, and 25% of R&D operating costs will be deducted from the annual personal or corporate income tax owed. The tax owed can thereby not result in a refund. Any tax reductions not set off, should be allowed to be set off against the tax owed for other years, i.e. carry back/ carry forward; whichever is applicable for the business concerned.
A deduction for public-private collaboration
This tax deduction would apply to expenses relating to a business’ R&D activities which are carried out jointly with a Dutch knowledge institute, for example, a university, The Netherlands Organization for Applied Scientific Research, etc. The expenses should result in an additional deduction of 50% from the annual personal or corporate income tax owed. The deduction is conditional on the research being pre-competitive, that it is undertaken as a public-private collaborative project, and that multiple businesses are involved. We would like to emphasize that the condition for cooperation with a Dutch knowledge institute could possibly conflict with EU law.
Dividend withholding tax
The report states that abolishing dividend withholding tax would result in a substantial loss of budgetary revenue. This loss would have to be covered by measures primarily affecting resident businesses. The Top Team considers this inadvisable. The respondents supporting the continuance of the participation interest deduction also support abolishing dividend withholding tax, and refer to a number of competing countries that have already done so.
If the participation interest deduction were to be limited, then the Top Team proposes that the revenue raised by such a measure be used to modernize the dividend withholding tax regime. A unilateral waiver of dividend withholding tax in treaty situations could be considered, as could a combination of less far-reaching measures.
30% ruling
Expats working in the Netherlands may be eligible for the 30% ruling, subject to certain conditions. The tax relief offered under this ruling allows employers of foreign staff to pay them a tax-free allowance in respect of the extra costs involved in working in a foreign country. The report concludes that the 30% ruling is regarded as one of the business climate’s most positive features, and almost everyone supports at least continuance thereof, or a liberalized application of the 30% ruling. Of importance is that the Dutch Revenue deal swiftly with requests for application of the 30% ruling. There appears to be one bottleneck to the 30% ruling. Foreigners, who receive a doctorate from a Dutch university, are regarded as residents for the purposes of tax legislation. This means that they cannot work in the Netherlands as expats; yet it is precisely this category of knowledge workers that the Netherlands wishes to retain. It has been proposed to extend the 30% ruling to include this specific target group.
Innovation box/WBSO
The innovation box is considered a very useful and important improvement to the tax climate for R&D. One issue that has repeatedly been identified is the Dutch Revenue’s treatment of the innovation box. It has been argued in the Top Team’s report that some of the more restrictive conditions be repealed, that the implementation be improved, and that the innovation box also be extended to include, for example, contract R&D, i.e. R&D undertaken on behalf of third parties.
Expanding the WBSO by increasing its cap is another suggestion that has been put forward.
We also note that the Top Team Chemical Industry has advised the government to adopt an additional tax deduction for WBSO/the innovation box for small and medium enterprises. The Top Team Creative Industry has advised opening this form of tax relief to the whole creative industry sector.
Status and follow-up
It is important to recognize that the above involves proposals from independent Top Teams; they are not legislative proposals or Cabinet announcements of their intention to introduce certain legislation. The Minister of EAI has, however, reacted positively to the proposals to introduce a tax deduction for the costs of research and development, and to introduce tax measures to stimulate the collaboration between the public and private sectors. The Minister has indicated that he will explore both proposals in more detail with the Deputy Minister of Finance, and have a reply ready after the summer, but before Budget Day. Attention will thereby be paid to the effectiveness of the proposed measures, the European law consequences and budgetary aspects of such measures, and the implementation costs.
Tax Agenda
In reply to a request from the Lower House’s Finance Standing Committee, the Deputy Minister of Finance confirmed by letter of June 9, 2011, which of the matters included in the Tax Agenda will have bills presented on Budget Day, September 20, 2011. The Corporate Income Tax Bill will consist of: the limitation in respect of acquisition holding companies, a source exemption permanent establishments, amendment to foreign substantial interest, and lowering of the tax rate. The last general meeting of the Finance Standing Committee to be held before the summer recess will take place on June 30, 2011, and will include discussions on the letter of June 9, 2011. Another meeting on the Tax Agenda is scheduled for September 12, 2011.