Several tax measures have been announced by the Dutch Ministry of Finance as part of the 2025 Budget Day Tax Plans which may impact the restructuring of companies.
There were few surprises this year, as most changes had already been announced.
On a positive note, the government expressed its ambition to improve the Netherlands' business climate this year. To achieve this, the government prioritizes enhancing the business environment and has (re)considered several tax measures as part of this effort. As a result, the government has decided to reverse or relax certain tax increases announced on or after Prinsjesdag 2023.
The most notably measure in light of restructurings is the changes to the debt waiver exemption and offsetting of tax losses.
All proposed measures may be subject to amendments throughout the legislative process and need to be approved by the Dutch Parliament to become effective.
Debt waiver exemption and tax losses
The Dutch government has proposed to remove the adverse interaction between the debt waiver exemption and the tax loss compensation rules, which led to issues in the restructuring of debt for companies.
Under the current rules, income resulting from the waiver of loans can be eligible for the exemption. Before the exemption can be applied, any existing carry forward tax losses must be absorbed first. The tax loss compensation rules allow for a full offset against taxable profits up to € 1 million, whereby only 50% of any excess profits can be offset against tax losses. These mechanics can result in part of the waiver income not being exempt from corporate income tax under the exemption in case of waivers resulting in offsetting more than € 1 million.
The new proposed measure ensures that in cases where there are
losses to be offset exceeding €1 million, the debt
cancellation profit is fully exempt from tax, provided that the
cancellation profit surpasses the losses incurred during the
year.
This measure is very necessary in the restructuring market as it
leads to a lot of issues in the debt restructuring of companies and
has actually led to several bankruptcies. The measures are however
only expected to be in force as of 1 January 2025.
VAT
- The reduced VAT rate (9%) for culture, media, accommodation, books, and sports will be abolished as of January 1, 2026. The general VAT rate of 21% will apply to goods and services in these categories. However, there are some exceptions. The reduced VAT rate will still apply to among others: schoolbooks, day recreation, zoos, campsites, and cinemas.
- The Dutch government has proposed to extend the Dutch VAT adjustment rules (i.e., revision period rules) to cover certain immovable property services when the remuneration for those services amounts to at least € 30,000. The current VAT adjustment rules are limited to capital goods, such as immovable property itself. The revision period for immovable property services will be five years. The new rules will become effective as of 2026
Other potentially relevant measures
Liquidation loss regime
The government proposes two changes to the liquidation loss regime.
The first change relates to the calculation of the participation's sacrificed amount, which is necessary to determine the deductible liquidation loss. The proposed change will require that when calculating the sacrificed amount, any previous write-downs of a claim against the participation that were reversed and included in taxable income must also be considered.
The second proposed change concerns the intermediary holding company provision within the liquidation loss regime. This provision is intended to prevent a (non-deductible) negative participation result of an intermediary holding company from being converted into a (deductible) liquidation loss at the taxpayer level.
These changes are very specific and technical changes that should only have effect in certain specific cases.
Earnings stripping rule
The earnings stripping measure serves as a general limit on interest deductions under corporate tax rules. Interest expenses can be deducted only up to the greater of €1,000,000 or 20% of EBITDA (gross operating income), with this threshold applying per taxpayer.
In the new coalition's policy agreement, it was decided that the 20% threshold will be increased to 25%, aligning with the European average.
This relaxation is a very welcome relaxation for any leveraged buy-out as the current 20% threshold is limiting interest deductions in a lot of situations, especially with increased interest rates and pressure on EBITDAs of companies. The 20% was also not in line with a lot of other EU countries.
At the same time the Dutch government has proposed that the de minimis amount of €1 million under the earnings stripping rule will no longer be available effective 1 January 2025 for companies that directly or indirectly lease out immovable property to third parties. As a result, the strategy to divide these activities over multiple entities to maximize the utilization of the threshold is no longer successful.
A company that leases out immovable property is broadly defined as a company whose assets consist for at least 70% of immovable property during at least 50% of the fiscal year. In this proposal, the term "making real estate available" does not refer to situations involving normal commercial operations in the service sector, where the use is transferred on a relatively short-term basis and there is no relationship between the owner or operator and the user(s), aside from the agreement regarding the use. Examples include hotels, cafes, restaurants, tennis halls, bowling alleys, squash courts, and similar establishments. However, this may differ if the use is not short-term, such as in the long-term rental of a hotel room or a vacation home in a holiday park.
Conditional withholding tax and 'acting together'
The Dutch government has proposed to replace the current acting together concept for conditional withholding tax purposes with a new definition. This new definition is "qualifying unity" and is broadly defined as entities that act together with a main purpose to mitigate the application of conditional withholding tax. The existing acting together concept refers to the term "cooperating group" which generally leads to uncertainty whether investors in investment funds (such as limited partnerships and mutual funds) act together.
The proposed concept of a "qualifying unity" consists of two elements. First, it must involve coordinated action between entities. Second, this coordinated action must have, as its main or one of its primary purposes, the avoidance of withholding tax for one of the entities. Based on this intent-based test, it is expected that the new group concept will only impact investments in the Netherlands that have been structured, at least in part, to avoid withholding tax. The burden of proof regarding the existence of a qualifying unity rests with the tax authorities.
Although the conditional withholding taxes were introduced to target structures that included entities in low taxed jurisdictions, the broad definitions and acting together principle in combination with anti-abuse rules made the question whether the rules would apply in a lot of non-Dutch investment structures very difficult to answer. This led to a lot of uncertainty in investment structures, even where it was clear that there were no low taxed jurisdictions involved. Therefore the proposed changes are very welcome and should provide the necessary comfort in a lot of investment structures that the conditional withholding tax should not be applicable.
Retention of the share buyback facility
The government has decided to reverse certain tax increases announced on or after Prinsjesdag 2023. This includes reversing the proposed abolition of the share buyback facility for listed companies under the dividend withholding tax.
Expat scheme
Another reversal relates to the expat scheme, which will be partially reversed starting in 2027. For five years, an allowance rate of 27% will apply. Additionally, the salary threshold will increase from €46,107 to €50,436. The salary requirement for employees under 30 with a master's degree will also be raised.
Real estate transfer tax rate
The real estate transfer tax rate for investments in residential property will be lowered from 10.4% to 8% as 2026.
Income Tax
- Introduction of a slightly lower first tax bracket in Box 1 with a rate of 35.82% (applicable to income up to EUR 38,000).
- Box 3 tax rate remains unchanged at 36%.
Corporate Tax
- Standard corporate tax rate remains at 25.8%.
- Removal of the donation deduction for donations to charities for corporate tax purposes, effective January 1, 2025 (resulting in non-deduction and a taxable dividend distribution in the case a donation is made).
Earlier adopted changes
The below measures that come into effect as from 1 January 2025 were already previously adopted:
- Currently, cultural, artistic, sporting, scientific, educational, or entertainment services are subject to VAT on the location where events or activities actually take place. These rules have been introduced in the time that virtual attendance didn't exist. To modernize these rules, as of January 1 2025, the VAT on virtual attendance will be due in in the member state where the recipient resides or is established, irrespective of the recipient's VAT qualification (business or customer). Currently the VAT is in such case still due in the country the physical event takes place. The implementing law has already been approved by parliament.
- As of 1 January 2025, as part of a broader overhaul of the Dutch tax entity classification rules, all Dutch limited partnerships and sufficiently comparable foreign limited partnerships (e.g., the Luxembourg SCSp and Cayman LP) should in principle always qualify as transparent for Dutch direct tax purposes. We refer to our previous alert for further details: Alert: Dutch Budget Day 2024 - What to Expect for Private Equity Real Estate?
- Starting January 1, 2025, the concurrence RETT exemption will tighten following the legislative change that has already been passed last yet. It aims to eliminate the VAT benefit that can arise during a real estate share transaction when the property is used for VAT-exempt purposes. The exemption only still applies if the underlying real estate is used for at least 90% VAT-taxable activities for a minimum of two years after the share acquisition. Other acquisitions will be subject to a reduced rate of 4%. Transitional provisions are also in place.
Originally published 23 September 2024
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