Cabinet presents tax measures for 2012 on the Friday before Budget Day 

The 2012 Tax Plan was published on September 16, 2011, the Friday before Budget Day. The Tax Plan 2012 comprises the following bills:

• the Tax Plan itself;
• Other Tax Measures Bill 2012;
• Charitable Contributions Act;
• Act on the implementation of tax incentives for fuel efficient cars;
• Act on applying penalty rules to allowances;

This year’s proposed tax measures are aimed at creating a simpler, more reliable, and fraud-resistant tax system. Many of the proposed measures will take effect on January 1, 2012. Here we discuss the main features of the proposed measures for corporate income tax and dividend withholding tax.

Corporate income tax

Limiting of excessive interest deductions acquisition holdings
As announced earlier in the Tax Agenda, an interest deduction restriction will take effect for acquisitions in the financial years commencing on or after January 2012, when an acquisition is financed with loan capital and the acquirer and the target enter into a fiscal unity for corporate income tax purposes. In contrast to the existing interest deduction restrictions, the new provision (Section 15 ad Corporate Income Tax Act 1969) also relates to the interest on loans obtained from third parties. The limitation of the interest deduction only applies to the amount of interest exceeding the highest of a number of thresholds. These thresholds are as follows:

1. The interest is deductible up to an amount of EUR 1,000,000.
2. The profit achieved by the acquiring party before deduction of acquisition interest. In order to determine the level of own profit, the profit of the target company which is to be added to the fiscal unity, is not taken into consideration.  When a fiscal unity includes a number of a acquisitions which were, in the past, funded with loan capital, the profit resulting from these acquisitions may not be included when determining the own profit of the acquiring party and the subsequent deductibility of interest relating to the new acquisition.
3. The interest is also deductible in so far as the debt equity ratio of the fiscal unity stays within a certain margin. This ratio amounts to 2:1. It is important to realize that the value of the participations held by the fiscal unity are deducted from the equity irrespective of the method of financing or the rank they hold within the fiscal unity, as are the tax reserves,.  Payables and receivables are not set off when applying the ratio. A positive aspect is that the fiscal unity goodwill gap is repaired during the determination of the equity total, although the goodwill is depreciated off over a period of ten years.

Acquisition interest that is non-deductible in one year is transferred to the following year and will again be tested against the interest deduction limitation of that year. The EUR 1,000,000 franchise and the thincap-escape are not taken into consideration for the transferred interest.. It is therefore possible to deduct non-deductible acquisition interest in the following year for as far as the stalled acquisition interest can be paid from the acquisition holding's 'own' profit during that following year.

Important transitional rules apply to existing fiscal unities. The deduction restriction does not apply to the financing of acquisitions included in a fiscal unity before January 1, 2012.

Complementary measures will be introduced for situations whereby the acquirer does not enter into a fiscal unity with the target, but carries out a legal merger or a statutory split-off instead. This will concern mergers or split-offs which took place on or after January 1, 2012.

We would like to draw your attending to our web-based tool, designed by KPMG Meijburg & Co, which you can use to determine the impact the bill has on your own situation.

As yet no repair of the Bosal gap
The Budget Day proposals do not include measures aimed at the reparation of the Bosal gap, the interest related to the acquisition of subsidiaries for which the participation exemption applies. In April the Head Offices Top Team had advised prudent treatment of this subject - legislature should only act in abusive situations - after which the Lower House adopted a motion to repair the Bosal gap. A section of the expected budgetary income of the reparation of the gap was also used to cover the costs for the temporary lowering of the real estate transfer tax for houses. However, there is still no proposed bill on this subject. It is unclear at this time whether any specific action will follow. The documents do show that budgetary income has been earmarked for 2012.

Current measures for interest deduction restriction
The current measures (Section 10a) and the thincap measure included in Section 10d)) will remain in effect, but will be subject to a technical amendment due to the future source exemption for permanent establishments.

Source exemption permanent establishments
As previously announced in the Tax Agenda, as of January 1, 2012, the existing system for dealing with permanent establishments will be amended. Under the current system, the loss suffered by a foreign permanent establishment is set-off against the taxable amount, while profit generated by a permanent establishment results in an exemption for the corporate income tax owed on the worldwide profit. This will be replaced by a source exemption. The foreign permanent establishment’s assets and debts will remain part of the taxpayer’s balance sheet for tax purposes, but the profit allocable to the permanent establishment will be eliminated from the taxable profit, as is the case, for example, when applying the participation exemption. The most important practical consequence of the new system is that, unlike the current system, losses suffered by foreign permanent establishments will, in principle, no longer be deductible. This also applies to interest paid on financing relating to a foreign permanent establishment. If the foreign activities cease, and these activities had, on balance, resulted in losses being incurred, then the cessation loss can, in principle, be deducted. This measure is accompanied by various anti-abuse supporting measures, comparable to those applying to the liquidation loss rules for participations. There are also recapture measures, if a taxpayer or an affiliated entity develops new activities within a specified period after the cessation of the activities in the country in question. Different provisions apply for passive permanent establishments.

Transitional measures apply for unrelieved or recaptured foreign results as at December 31, 2011.

R&D tax relief
The tax relief for R&D announced as part of the Top Teams report is expected sometime during the course of 2012.

Non-resident tax liability substantial interest
Foreign entities with more than a 5% interest in a Dutch resident company or cooperative are, in principle, subject to Dutch corporate income tax, unless the interest held forms part of the business assets of the foreign entity. The Netherlands often waives its right to levy tax in tax treaties. In practice, there has long been pressure to abolish this tax obligation, in particular, as it applies to EU situations.  The bill proposes that the Netherlands will only maintain its right to levy tax in specific situations of abuse. This is in particular the case if a substantial interest in a cooperative is involved, whereby the deciding factor for using the cooperative was to avoid Dutch dividend withholding tax and where the substantial interest does not form part of the business assets of the members of the cooperative.

Dividend withholding tax

Withholding obligation cooperatives
Under the current regime, distributions made by cooperatives are not subject to dividend withholding tax. The bill proposes levying dividend withholding tax where abuse is apparent. Interposing a cooperative in order to avoid dividend withholding tax or foreign tax is regarded as abuse. Dividend withholding tax is not owed if the membership rights belong to the business assets of the member in question, except to the extent that old profit is distributed, i.e. profit from the period preceding the interposition of the cooperative.

Refund of dividend withholding tax to pension funds in third countries
Currently, refund rules apply for dividend withholding tax that has been withheld from legal entities exempt from corporate income tax. In line with European law, these rules have been expanded to include comparable entities resident in the EU and the EEA (Iceland, Norway, and Liechtenstein). In practice, this primarily involves pension funds. Because the free movement of capital also applies to the relationship with third countries, these rules have been further expanded to include distributions to comparable entities, i.e. pension funds, in third countries, provided that:

1. a tax treaty that provides for the exchange of information has been concluded with the third country, and
2. it concerns portfolio interests.