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On 18 September 2012 the Dutch Ministry of Finance published its Tax Plan for 2013 and several accompanying Bills (hereinafter: Tax Plan). The most important 2013 change for the business community, is the restriction on the deductibility of excessive interest on loans related to participations, was already adopted before the summer and will have effect as of 1 January 2013. The most important change in the Tax Plan is the abolishment of the Dutch thin capitalisation provision as of 1 January 2013.

1. INTRODUCTION

On 18 September 2012 the Dutch Ministry of Finance published its Tax Plan for 2013 and several accompanying Bills (a total of six Bills).

The most important change included in the Tax Plan for the business community is the removal of the Dutch thin capitalisation provision as of 1 January 2013. The background of the removal of this provision is the new restriction on the deductibility of excessive interest on loans related to participations and that will apply as of 1 January 2013. Such interest will not be deductible to the extent the excessive part is in excess of EUR 750,000. This change was included in the Tax Act to Combat the Deficit which Parliament already adopted in July 2012 (we refer to our ePublication of 8 June 2012).

In this ePublication we discuss proposals in the Tax Plan which might be of interest to you. However, given the changes in Parliament since last week's elections, it is not unlikely that the Tax Plan as it is currently drafted will be changed in the course of the parliamentary discussions. Mid November, the Second Chamber of Parliament will decide on any amendments to and the final content of the Tax Plan. In December the First Chamber of Parliament will vote on the Tax Plan.

2. CORPORATE INCOME TAX

2.1 Tax rate 2012

The 2013 corporate income tax rate will remain 20% on the first EUR 200,000 of taxable profit and 25% on the remainder.

2.2 Thin capitalisation provision and new restriction on interest deduction

The Dutch thin capitalisation provision will be abolished as of 1 January 2013 and will no longer apply in respect of financial years starting as from 1 January 2013. Thus, the thin capitalisation provision will still apply to financial years starting before 1 January 2013 and ending on or after 1 January 2013.

The background of the removal of this provision is the new restriction on the deductibility of excessive interest on loans related to participations as of 1 January 2013 in combination with other existing provisions which restrict corporate interest deduction. Such excessive interest related to participations will not be deductible to the extent the excessive part is in excess of EUR 750,000. The amount of non-deductible interest is calculated as follows: Non-deductible interest = total annual interest* (average participation debt/average total debt). Starting point for determining the amount of "participation debt" is that all participations are deemed to have been financed with equity. A company will only have "participation debt" if the total amount of the purchase price of the participations is higher than the equity of the company holding the participations. This excessive amount is the participation debt. Dutch tax payers that are actively involved in group financing activities are allowed to disregard debts - as well as the interest and costs relating to these debts - insofar these debts are connected to group loans receivable.

The purchase price of a participation is not taken into account when calculating the participation debt and does, therefore, not restrict the deductibility of the interest, to the extent an interest in a participation is purchased, extended or equity has been contributed in relation to an expansion of the operational activities of the group of which the participation will form part. However, this exception does not apply in case of a transfer of shares within the group of an existing subsidiary with operational activities or if certain other circumstances are present. In determining the participation debt, the tax payer may choose to disregard 90% of the fiscal cost price of subsidiaries that were acquired (or to which capital was contributed) in financial years that started on or before 1 January 2006.

Abolishing the thin capitalisation provision results in a more transparent collection of interest deduction limitation provisions, although it is still rather complex.

2.3 Fiscal unity conditions

One of the current conditions to form a fiscal unity for corporate income tax purposes is that the parent company holds both the full legal and economic ownership of at least 95% of the subsidiary's nominal issued and paid-up share capital. On 1 October 2012 the Flex-BV Act will enter into force that allows for a flexible allocation of profit rights and voting rights to shares (we refer to our ePublication of 12 June 2012)

This could result in the situation that a parent company would hold full legal and economic rights to 95% of the shares in a subsidiary without holding any voting rights or profit rights in such subsidiary. The fiscal unity rules will be amended so that a fiscal unity can not be formed in cases where less than 95% of the statutory voting rights are held by the parent company. As of 1 January 2013 a parent company will need to hold legal and economic ownership of at least 95% the subsidiary's nominal issued and paid-up share capital. Such shareholding must represent at least 95% of the statutory voting rights and must give right to at least 95% of the profits and the capital of the subsidiary. The latter minimum profit right condition was already included in the Fiscal Unity Decree 2003.

2.4 Foreign entities providing management services

The scope of the rules regarding foreign entities that provide management services will be extended per 1 January 2013. Currently, non-resident entities can become liable to corporate income tax in the Netherlands over, amongst others, the remuneration received for activities performed as (supervisory) director of a company that is resident of the Netherlands. As of 1 January 2013, in addition to the formal remuneration that is paid for directorships, the remuneration for actual management services performed by foreign entities in respect of a Dutch resident company can become liable to Dutch corporate income tax. The extension is specifically relevant for entities resident in Belgium that provide management services to a Dutch resident company. The Netherlands-Belgium tax treaty does not restrict the levy of corporate income tax on management services by the Netherlands. In most other situations, where a tax treaty applies that is based on the OECD-model, the Netherlands would be restricted to impose corporate income tax on management services.

3. DIVIDEND WITHHOLDING TAX

No substantial changes in the Dividend Withholding Tax Act have been proposed. The dividend withholding tax rate will remain 15%.

4. REAL ESTATE TRANSFER TAX

With retro-active effect to 1 September 2012, the period during which real estate can be acquired with real estate transfer tax being only due on accrued value of the property since its previous taxable acquisition (instead of on the transfer price), will temporarily be extended from 6 months to 36 months. If the subsequent transfer takes place at a lower price than the first transfer, no real estate transfer tax is due. This extension is temporary: it only applies if the first acquisition took place on or after 1 September 2012 and before 1 January 2015.

5. WAGE TAX: REIMBURSEMENT FOR COMMUTING EXPENSES

Currently, employers can provide for a tax free reimbursement of commuting expenses to their employees. The full costs of commuting by public transport and up to EUR 0,19 per kilometer commuted by private transport (car, bicycle) may be reimbursed. It is proposed to abolish this wage tax exemption. If this, highly debated, proposal is accepted by Parliament, the reimbursement for commuting expenses will be taxable as of 1 January 2013. Depending on whether the employer and employee have agreed on a net reimbursement of these costs and on the bargaining power of (certain) employees, this might lead to additional costs for employers. However, in their 2012 election campaign, most political parties have renounced this proposal: some parties do not want to change the current rules for tax free reimbursements, other parties want to keep the tax free reimbursement for public transport and only want to fully or partially restrict the tax free reimbursement for commuting with private transport. It is, therefore, likely that this proposal will be amended.

6. PERSONAL INCOME TAX

6.1 Tax rates

The Tax Plan does not substantially change the existing personal income tax rates. The maximum rate of 52% will be due insofar as the taxable income exceeds EUR 55,991. However, during the election campaign, several left wing parties have proposed to increase the top rate for income over EUR 150,000. In the Tax Act to Combat the Deficit which was adopted in the summer of 2012, a temporal extra tax burden is already included. In March 2013 employers will have to pay a rate of 16% over wages earned above the threshold of EUR 150,000 in the calendar year 2012, resulting in a total wage tax burden on this income of 68%. This extra wage tax contribution is an extra cost for the employer, and cannot be recovered from the employees. Some left wing parties might want to prolong this employers' levy, but the right wing parties are probably not in favour of such prolongation.

6.2 Deductibility of mortgage interest

During the past years, a hot personal income tax topic has been the deduction of interest paid on loans used to finance the main residence of an individual (in short: mortgage interest). Currently, this interest is tax deductible during 30 years. The Netherlands is the only country in the European Union which still provides for such tax relief. It has become a heavy burden on the budget of the government. The Tax Plan contains a restriction on the deductibility of such interest expenses. As of 2013 mortgage interest payments on new loans will only be tax deductible if the loan is fully repaid within 30 years at least on an annuity basis. Loans entered into before 1 January 2013 will be grandfathered. However, this proposal is heavily debated by all political parties. Most parties will try to amend the proposal. Several alternatives have been presented, such as limiting the tax deduction to a fixed rate (such as 42%) or a maximum amount (such as EUR 350,000) and to limit the grandfathering of existing loans. It remains to be seen whether any alternative will get a majority in Parliament. The two parties which won the elections and which will try to form a government, the liberal party and the labour party, have different views in this respect. For the liberal party the grandfathering is important, whereas the labour party is in favour of more restrictions and limited grandfathering. Furthermore, the tax authorities are very much opposed to complicated alternatives and prefer a uniform solution which can be easily implemented and supervised using ICT and information obligations of banks instead of tailor made information from individual tax payers that requires additional supervision. It might be that Parliament will postpone the decision on this proposal. It is, therefore, difficult to predict the changes in the deductibility of mortgage interest on 1 January 2013.

7. VAT RATE

As of 1 October 2012 the general Dutch VAT rate will be raised from 19% to 21%. No change is made to the low VAT rate of 6%. The applicable rate is the rate which applies on the date the service or supply of goods takes place: supplies before 1 October 2012 are taxed at the 19% rate, even if the invoice is sent after 1 October (and 21% is due even if the invoice is sent and paid before 1 October, but the supply takes place after 1 October). Specific grandfathering rules apply for the supply and renovation of real estate.

8. EFFECT OF THE RECENT ELECTIONS ON THE TAX PLAN

On 12 September general elections were held in the Netherlands. The liberal party and the labour party won the elections and have a majority in the Second Chamber of Parliament, but not in the First Chamber of Parliament. It is expected that these two parties will try to form a government, either with or without a third party. The Tax Plan was drafted by the outgoing government, which does not have a majority in the new Parliament. As the new government will have to be constituted in the coming weeks (or months), the parties in Parliament are not yet bound to a compromise with other parties. However, the parties that aspire to form the new government must take into account the preferences of their possible partners in the new government. As many parties criticised the proposals on, for example, interests on mortgages and the abolishment of the tax-free reimbursement of employees' commuting expenses, it is likely that the Tax Plan as it is currently drafted, will be amended in the course of the parliamentary discussions. New elements may be added to the Tax Plan to compensate for amendments. As the Tax Plan is divided into six separate Bills, it is possible that certain proposals will be withdrawn or postponed without affecting the other Bills. Mid November the Second Chamber of Parliament will vote on the amendments and the final content of the Tax Plan. In December the First Chamber of Parliament will decide to adopt or to reject the Bills which are part of the Tax Plan. Even more than in other years, it is possible that certain proposals will be adopted in a different form or will not be adopted at all.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.