Dutch Corporate Income Tax Reform 2007 by Jimmie van der Zwaan
On 24 May 2006, the Dutch Ministry of Finance published a bill entitled: ?Working on profit?. The bill aims to modernise the Dutch Corporate Income Tax Code (hereinafter ?DCIT?) but also contains minor amendments of the income and dividend tax codes. The main goal of the bill and the reform is to improve the tax allure of the Netherlands. It has often been said that the Netherlands lost its ?leading position? in 2001 due to, amongst others, the changes in the Advance Ruling Practice and the abolition of the Group Finance Company Regime under the pressure of the European Code of Conduct (Primarolo). The new rules should apply from 1 January 2007. Below, the main items are summarised.Rate ReductionsThe current general corporate income tax rate of 29.6% will be reduced to 25,5%. Profits below €25.000 will be taxed against a rate of 20% and profits between €25.000 and €60.000 against a rate of 23,5%. The government expects this rate to be competitive with other European jurisdictions.Taxpayers who have not incorporated their business will also benefit from a rate reduction. An exemption of 10% of business profits will effectively reduce the maximum personal income tax rate on such profits down from 52% to 46,8%.Inter-Company ?Interest Box?A special (optional) regime will be introduced for taxation of the difference (`spread´) between interest received and interest paid on inter-company loans, the so-called ?interest box?. This balance will be taxed at a preferential rate of 5 %. Funds held by one group company but due to another group company will be treated as an inter-company loan. War chests will also be treated as inter-company loans.?Patent / Royalty Box?A special (optional) regime will be introduced for taxation of royalties. Royalties will be taxed against a preferential rate of 10%. This special rate won?t be available for trademarks and logos.Withholding tax on DividendsThe withholding tax on dividends will be reduced from 25% to 15%. This is possibly a forerunner to the abolition of withholding tax on dividends.The Dutch participation exemptionThe participation exemption will remain more or less the same as the current system. The 5% minimum requirement will become a hard and fast rule with no exceptions. The facility to deduct losses incurred upon liquidation of the participation will be continued. The ?subject to profit tax? requirement for foreign participations will be abolished; a credit system for ?inactive? subsidiaries in tax havens will be introduced instead.Depreciation rulesSpecific rules regarding depreciation will be introduced.
Purchased goodwill may be depreciated over a period of at least 10 years;
Depreciation of real estate will be limited. The tax authorities survey all real estate yearly under the so-called Real Estate Survey Act (RESA). The RESA-value will determine the limit for depreciation purposes. The book value of portfolio real estate may not drop below the RESA-value; other real estate may be depreciated down to half the RESA-value.
Capital assets other than goodwill and real estate will carry a depreciation term of at least five years.
Compensation of lossesThe possibilities to carry over losses will be restricted. The carry back of losses for corporations will be reduced to 1 year (in the current system 3 years) and the carry forward of losses be reduced to 9 years (in the current system unrestricted in time). Non-incorporated businesses will keep the current 3-year carry back period. Transitional provisions will apply for existing losses. Anti Abuse rulesAt present, a number of anti-abuse provisions exist regarding the deduction of interest (thincap rules, rules regarding intercompany loans and rules regarding so-called ´hybrid´ loans). These provisions are currently included in numerous articles scattered all over the DCIT, since they were implemented at various times. Most of these rules will be streamlined. The thincap rules will be extended to include financial lease in similar situations.Broader tax baseMost of the aforementioned improvements will budgetary be covered by a broadening of the tax base. Such broadening will be accomplished amongst others: by limiting the depreciation on immovable property, by limiting the loss to be carried forward and backward in time, and through abolition of the equalisation reserve for insurance companies.