Budget day in the Netherlands: New tax regulations’ impact on business

Classification rules for a CV and FGR

For Dutch tax purposes, the treatment of a Dutch limited partnership (commanditaire vennootschap; CV) and of a Dutch mutual fund (fonds voor gemene rekening; FGR) will be altered. The same applies to foreign entities that are comparable to a CV or FGR.

As per 1 January 2025, a CV or foreign entity similar to the CV will be treated as tax transparent by default. This means that the ‘unanimous consent’ requirement will no longer need to be met for transfers of CV and foreign limited partnership interests in order to ensure transparency from a Dutch tax perspective. Existing structures with CVs or FGRs and similar foreign entities should be reviewed as a shift in tax classification between transparent or opaque and vice versa may warrant measures to be taken to avoid a taxable event or other undesired consequences in The Netherlands or abroad. The FGR will be treated as opaque, when it qualifies as an investment fund under the Financial Supervision Act (Wet financieel toezicht; WFT) and its participation rights are considered to be freely tradable. This should not be the case if the participation rights can only be transferred to the FGR itself.

These new rules which will enter into effect as per 1 January 2025 (as these have already been approved by parliament) should eliminate most classification differences in relation to so-called hybrid entities and concerns a very welcome relaxation in particular regarding the CV and foreign limited partnerships.

Earning stripping rule

Interest deduction in The Netherlands is limited based on amongst others the so-called earnings stripping rule. It is proposed that the applicable percentage for this rule will be increased from 20% to 25%, with the aim to be more in line with other European jurisdictions.

This means that above the threshold of EUR 1 million, net interest expenses would be deductible up to 25% of the fiscal EBITDA. Above this limit, net interest expenses may be carried forward. Where interest is deductible based on the earnings stripping rule, such deduction remains subject to any other interest deduction limitation that may apply.

This relaxation should generally allow corporate taxpayers to deduct a higher amount of interest expenses. Specifically for real estate entities leasing out property to third parties, the abovementioned EUR 1 million threshold shall no longer be applicable in order to avoid misuse.

Debt waiver exemption and the sett-off of losses

Currently in certain situations there may be obstacles in performing a debt restructuring. This may be the case where debts are (formally or in substance) waived and the loss deduction limitation rule applies, which in turn may cause the so-called debt waiver exemption not to apply and a waiver gain to be taxable. This is an unwanted result and therefore it is proposed to repair this in the debt waiver exemption.

Definition of affiliation and collaborative group in the conditional withholding tax

The imposition of conditional withholding tax on dividends, interest and royalties depends amongst others on the affiliation between the payor and the recipient of the relevant income.

Such affiliation is determined by on the basis of the definition of ‘qualifying interest’. In short, a qualifying interest means a directly or indirectly held interest – either individually or jointly as part of a collaborative group (samenwerkende groep) – that enables the holder of such interest to exercise a decisive influence on the decisions that can determine the activities of the entity in which the interest is held. Fifty per cent. or more of the voting rights in the relevant entity will in any event be considered sufficient to consider affiliation present. The current concept of a collaborative group is vague and experience shows that it does not align well with the objective of the conditional withholding tax and the anti-hybrid legislation. Therefore a new concept of the collaborative group is being introduced in the conditional withholding tax, the so-called ‘qualifying entity approach’

(kwalificerende eenheid). The proposed concept consists of two key components. First, there must be a coordinated action between the payor and the recipient of the dividend, interest or royalty. Secondly, this coordinated action must be initiated with the main purpose or one of the main purposes to avoid taxes at the level of either the payor or the recipient.

The burden of proof will in first instance lie with the tax inspector within this context. The aim of the proposed introduction of these amended rules, is to only affect investments into The Netherlands that have been structured to avoid taxation (based on the text of the proposed stipulation; though according to the explanatory memorandum only ‘to avoid the levy of conditional withholding tax’).

Contractors

As per 1 January 2025, the Dutch tax authorities will start enforcing again the classification rules regarding contractors and employment relationships.

As principals that hire contractors are not subject to a withholding obligation for wage taxes and social security charges, there is an incentive to steer away from employment relationships. There are classification rules that avoid the misclassification of employment relationships (in substance) into contractor relationships. Due to a number of reasons, these rules have not been enforced by the Dutch tax authorities for several years, but this would change as per 1 January 2025. Enforcement will take place on the basis of current legislation and case law. Moreover, a legislative proposal will likely be issued to clarify the current legislation and case law, scheduled to be effective on 1 January 2026.

30%-ruling

Subject to certain conditions, employees recruited from abroad (i.e. expats) above certain income thresholds can enjoy an exemption of wage tax up to 30% of the relevant income tax base.

The plan existed to restrict this facility, however the proposal has now been issued to amend the facility as follows:

• The exemption of 30% at a maximum will remain applicable for the years 2025 and 2026;

• From 2027 onward, the exemption will be slightly decreased to 27% at a maximum;

• These amended rules are proposed to apply only to expats that have been issued a so-called 30% ruling on 1 January 2024 or later. The 30% exemption remains applicable for 5 years if the ruling was obtained prior to 1 January 2024;

• In addition, as from 2027 one of the conditions to the 27% ruling (by then), being the so-called minimum income to be eligible, shall be increased which effectively reduces the number of expats who could apply the 27% ruling.

Selection of other changes

• The general rate of real estate transfer tax (RETT) for residential real estate assets is proposed to be reduced from 10.4% to 8% as per 1 January 2026. This is of relevance to investors in real estate, so not for home owners for their personal dwelling.

• The announced abolishment as per 1 January 2025 of the dividend withholding tax exemption on the repurchase of own shares for listed companies is proposed be reversed. So the exemption would continue to be applicable if the conditions are met.

• It is proposed to make the dividend tax exemption compulsory for profit distributions by subsidiaries on which the participation exemption applies or when the recipient and the subsidiary are part of the same fiscal unity. This aims to ensure that recipients can effectively lodge an objection if the subsidiary/withholding agent does not apply the exemption.

• Another proposed item is the codification of the general anti-abuse rule (GAAR) based on ATAD1 into Dutch law. The implementation of GAAR is however not likely to cause any change to existing practice where abuse of law (fraus legis) can be used to combat abusive tax structures.

Authored by Alexander Fortuin.