2024 Dutch Budget Plan – Tax Proposals19 September 2023
On 19 September 2023, the Dutch government published its tax proposals for 2024 and onwards.
In the area of direct taxes the following relevant changes have been proposed or will enter into force (if the legislative proposal has been submitted earlier or the amendment is already included earlier in legislation):
Corporate Income Tax
- Pillar Two rules: implementation of the global minimum tax;
- Amendments to the Dutch legal entity qualification policy;
- Adjustments to the regime for fiscal investment institutions (Dutch: fbi’s);
- Amendment to the regime for mutual funds (Dutch: fgr’s) and exempt investment institutions (Dutch: vbi’s);
- Measures against dividend stripping;
Personal Income Tax
- Change in the income tax rate for shareholders with a substantial interest in a company (box 2);
- Amendments to the lucrative interest rules;
- Amendments in the business succession schemes (real estate-related).
- Increase of tax-free travel allowance;
- Limitation of the 30%-ruling;
- Expiration of the temporary extension of the work-related costs scheme.
The Dutch government also plans to limit the earning stripping safe harbor of EUR 1 million for real estate entities, but this measure is not included in the 2024 Dutch Budget Plan.
In the area of indirect taxes, the following measures can be relevant:
Real Estate Transfer Tax
- Amendment to the Real Estate Transfer Tax concurrence exemption for certain share transactions
The final rules are likely to be published at a later moment but the (high-level) main rules from the proposals are already included below (potentially subject to change).
Currently, the tax proposals are subject to discussion in the Dutch House of Representatives (Tweede Kamer der Staten Generaal).
Proposed measures in the area of direct taxes
Corporate Income Tax
Pillar Two - Implementation Legislative Proposal
The proposed Minimum Tax Act 2024 implements the OECD Pillar Two Model Rules, as all EU Member States are required to do under Directive (EU) 2022/2523. Under these rules, multinational groups and domestic groups with a consolidated annual revenue of EUR750 million or more will be subject to an effective tax rate of at least 15%.
For more details on the Pillar Two rules, please refer to our alert on Pillar Two: OECD issues detailed rules to implement global minimum tax: a look at the 10 chapters
Companies will only pay the new top-up tax if the group to which they belong pays a corporate income tax at an effective rate that is lower than the minimum tax rate. Whether there is an obligation to pay, and the amount will be determined by deducting the effective tax rate calculated for that jurisdiction from the minimum tax rate of 15%. The minimum tax rate of 15% has been agreed internationally.
The Pillar Two proposal is aimed at reducing the incentive for companies to shift profits to low-tax countries. The proposal is also intended to put a floor on competition between states over corporate income tax rates. The Minimum Tax Rate Act 2024 is expected to enter into force on 31 December 2023.
Dutch Legal Entity Qualification Policy - Legislative Proposal
The Dutch government has been exploring ways to amend the legal entity tax qualification policy (treatment as “transparent” (disregarded) or opaque for tax purposes). The Dutch legal entity qualification policy differs in certain respects from that of other countries. This can lead to qualification differences and therefore (economic) double taxation on the one hand and double deduction without taxation elsewhere on the other hand. This legislative proposal aims to eliminate the cause of qualification differences as much as possible.
Under the proposed Dutch qualification rules, the general rule remains comparing foreign legal forms to Dutch legal forms (i.e. an approach based on the similarity of foreign legal entities with Dutch legal forms). There will, however, be two exceptions to this similarity approach:
- If no Dutch legal form can be found that is similar to the foreign legal entity under the similarity approach, a fixed approach will apply in case such foreign legal entity is a resident for tax purposes of the Netherlands. That is to say, such foreign legal entity will always be treated as a taxpayer (in other words: as opaque for Dutch tax purposes).
- If no Dutch legal form can be found that is similar to the foreign legal entity under the similarity approach, a symmetrical approach will apply to entities that are not a resident for tax purposes of the Netherlands. That is to say, such foreign legal entities will be treated the same as in their state of residence (in other words: if the state of residence treats such entities as opaque, the Netherlands treats such entities as opaque and if the state of residence treats such entities as transparent, the Netherlands treats such entities as transparent).
In addition, one of the four criteria for qualification (the criterion that gives rise to most hybrid mismatches) i.e., whether the accession or replacement of partners can take place without the prior written consent of all partners, would no longer be applicable. Due to this change, there would no longer be a distinction between the closed limited partnership (besloten cv; transparent for Dutch tax purposes) and the open limited partnership (open cv; opaque for Dutch tax purposes). Thus, the open limited partnership (open cv) would no longer be treated as a corporate taxpayer.
It is proposed that these amendments will come into effect on 1 January 2025. Transitional law will be provided as of 1 January 2024.
Adjustments to the Regime for Fiscal Investment Institutions (Dutch: fbi’s) - Legislative Proposal
The fiscal investment institution (FBI or Fiscale Beleggingsinstelling) is effectively corporate income tax exempt. It is a facility for individual shareholders to invest jointly in securities and real estate among others, without resulting into higher taxation, compared to when the individual shareholder invests directly without the interference of a fiscal investment institution. Thus, the fbi regime was introduced in the past to facilitate collective investment by preventing additional taxation at the level of the investment institution compared to direct investment.
This legislative proposal amends the fbi regime. As of 1 January 2025, it will no longer be possible for a fbi – which is subject to corporate income tax but of which the profits are taxed at a 0% rate – to invest directly in Dutch real estate (direct investment in foreign real estate remains possible). Such a real estate fbi will become a regular subject to corporate income tax. It remains allowed to invest directly in shares in a regular taxpaying subsidiary that holds real estate located in the Netherlands. This proposal aims to ensure corporate income taxation under all circumstances of profit derived from real estate.
Amendment to the Regime for Mutual Funds (Dutch: fgr’s) and Exempt Investment Institutions (Dutch: vbi’s) - Legislative Proposal
This proposal adjusts the definition of the mutual fund (fgr) and the exempt investment institution (vbi) regime for corporate income tax purposes. The proposed adjustments will bring the use of the schemes more in line with their original objective and prevent unintended use of the fgr and vbi regime (mainly by high-net-worth individuals and families).
- An open mutual fund (fgr) is by itself subject to Dutch corporate income tax. It is proposed to amend the definition of the open fgr so that the regime better reflects its original purpose (i.e. equal treatment of open investment vehicles as public limited liability companies). This means that a “family fund” will no longer qualify as an open fgr and therefore will no longer be subject to corporate income tax itself. The participants in such a fund will henceforth be taxed themselves.
- The vbi regime was introduced in the past to facilitate collective investment by preventing additional taxation at the level of investment institutions compared to direct investment. Collective investment allows for greater risk diversification (and thus higher returns) possible and creates easier access to investment markets. The vbi regime is intended for investment institutions offering units to a broad public. However, research shows that the vbi regime is often used by high-net-worth individuals. It is proposed to match the definition of the vbi with the definition of the institution for collective investment in securities (Dutch: icbe) within the meaning of the Dutch Financial Supervision Act (Wet op het financieel toezicht). The proposal aims to amend the vbi regime in such a way that only the target group is able to use the vbi regime.
It is proposed that these changes take effect on 1 January 2025. Transitional law is provided for this purpose effective as of 1 January 2024.
Measures Against Dividend Stripping
Dividend stripping involves the separation of the legal and economic entitlement to dividends in order to achieve a withholding tax benefit. The Dutch government proposes a few measures to better address dividend stripping:
- The first measure pertains to the legal codification of a so-called registration date. A credit, reduction or refund of dividend tax will henceforth only be granted to those who are entitled to it on a reference date, to be determined by the new legislation.
- The second measure refers to the adjustment of the burden of proof to improve the position of the tax inspector. The proposed new burden of proof does not apply to all situations. In particular, in order not to proportionately increase compliance burdens, a threshold is introduced within the burden of proof for certain situations.
- Lastly, the concept of ‘combination of transactions’ would be further defined. Whether there is a ‘combination of transactions’ should be determined at group level.
These measures should help prevent underpayment of withholding tax caused by dividend stripping and should be effective as of 1 January 2024. The amendments affect the Dutch personal income tax, corporate income tax and dividend withholding tax.
Personal Income Tax
Income Tax Rates Box 2 (for Shareholders with a Substantial Interest)
The Dutch government has announced it will introduce two rate bands in box 2 as per 2024, which would also include a threshold. The income of Dutch shareholders with a substantial interest in companies will be taxed through a progressive tax rate, as indicated in the table below.
|Rate: 26.9%||Lowest rate band: 24.5% for the first EUR67,000 box 2-income per person|
|Highest rate band: 31% for the amount exceeding EUR67,000|
Amendments to the Lucrative Interest Rules
Last April 2023, the Dutch Supreme Court issued a judgment on the lucrative interest rule. This judgment gives rise to a legislative amendment retroactive to 26 June 2023 (date of the announcement of a legislative proposal).
The Supreme Court ruled that for the economic comparability of assets with subordinated class shares, the capital requirement that the subordinated class shares be less than 10% of the issued share capital should be followed. In the parliamentary history of the lucrative interest rule, it was noted that loans that have a similar function in the capital structure also count when assessing whether there is a lucrative interest.
In practice, frequent use is made of loans provided by shareholders or affiliated entities that do not qualify as informal capital but for which favorable terms have been agreed and which are seen as remuneration for work.
With the criterion now provided by the Supreme Court, uncertainty arises regarding existing positions and agreements using loans that do not qualify as informal capital. In addition, not fixing this in the future may lead to structures whereby the lucrative interest rule is avoided.
The proposal aims to amend the lucrative interest legislation retrospectively, by prescribing that when assessing whether a lucrative interest exists, a loan that does not qualify as informal capital should be included. In other words: loans that also contribute to the remuneration for work motive are also included in the ‘total issued share capital’.
Amendments in the Business Succession Schemes (Real Estate-Related, Income Tax / Gift & Inheritance Tax)
The government plans to designate real estate leased to third parties as deemed investment assets, rendering such real estate ineligible for various business succession beneficial schemes in the gift and inheritance tax and income tax. This may affect real estate operators who wish to transfer their business as part of business succession. This measure is planned to be effective as of 1 January 2024.
Increase of Tax-Free Travel Allowance
The Dutch government proposed in the Budget Plan 2023 to increase the tax-free travel allowance (reiskostenvergoeding) for employees who drive to their jobs, first from EUR0.19 to EUR0.21. As of 1 January 2024, the tax-free travel allowance will increase from EUR0.21 per kilometer to EUR0.23 per kilometer . This measure is imposed to keep traveling to work affordable for employees.
Limitation of the 30%-Ruling
Employees that are recruited outside of the Netherlands and that have specific expertise can make use of the favorable 30%-ruling: 30% of the wage can be enjoyed tax-free. The Dutch government announced in the Budget Plan 2023 that it will impose a maximum to the ruling as of 1 January 2024 (the so-called Balkenende-norm or the Wet normering topinkomens (WNT)-norm, which is EUR223,000 in 2023, but is expected to be inflation-adjusted in 2024). As of 2024, the 30%-ruling can only be applied to wage amounting to a maximum of the WNT-norm. A gradual entry scheme is announced: for incoming employees that applied the 30%-ruling during the last tax period of 2022, the limitation of the 30%-ruling will not apply until 1 January 2026.
Expiration of the Temporary Extension of the Work-related Costs Scheme
The work-related costs scheme (werkkostenregeling, WKR) allows employers to spend part of the total taxable wage (the discretionary scope) without tax liability on certain untaxed reimbursements, certain benefits in kind and certain provisions.
The discretionary scope within the work-related costs scheme was temporarily expanded once for 2023. Up to and including the taxable wage of EUR400,000, the discretionary scope is 3%. This is an increased percentage that only applies to the year 2023 (2022: 1.7%). Over the excess of the taxable wage, the discretionary scope is 1.18%.
This temporary extension was introduced due to COVID-19 and will expire as of 1 January 2024. As of 2024, the discretionary scope is 1.92% (instead of 3%) for the taxable wages up to and including EUR400,000. Over the excess of the taxable wage, the discretionary scope remains 1.18%.
Announced Proposals in the Area of Direct Taxes
Limitation of the Applicability of the Earning Stripping Safe Harbor for Real Estate Entities
During parliamentary discussions, the Dutch government paid attention to the risk of 'splitting up' companies in order to make more frequent use of the threshold (EUR1 million) in the generic interest deduction limitation (earnings stripping rule). The earning stripping rule will be made stricter as of 1 January 2025, by excluding entities passively holding real estate from using the EUR1 million safe harbor.
This proposal is expected to be included in the Dutch Budget Plan for 2025.