On 17 September 2024, the Dutch Budget for 2025 was presented, including the Tax Plan for 2025. Some of the main measures include:

• The reversal of the previously approved repeal of the tax-free share buyback facility for listed companies from 2025, exempting companies from dividend tax on purchases of their own shares subject to certain conditions;
• An increase in the 20% of EBITDA interest deduction limitation to 25% from 2025;
• The repeal of the deduction for donations made by businesses for corporate tax purposes from 2025, along with the repeal of the rules under which donations made by a company were not regarded as profit distributions, meaning that such donations will be regarded as taxable profit distributions from 2025 for donations made at the request of shareholders with a substantial interest (sponsorship and advertising expenses will remain deductible);
• The cancelation of the planned reduction in the SME profit exemption (reduction) rate to 12.03% in 2025, with the currently scheduled reduction to 12.7% in 2025 maintained;
• The removal of the reduced VAT rate for cultural goods and services from 2026 including museums, music and drama, art, books, and sports, with the applicable rate increased from 9% to 21%;
• The removal of the reduced VAT rate for overnight accommodation from 2026, with the applicable rate increased from 9% to 21%, except for campgrounds;
• An increase in the gambling tax rate from 30.5% to 34.2% in 2025 and to 37.8% in 2026;
• The partial reversal of the planned scaling back of the 30% ruling (exemption) regime for expats, with a 27% allowance (deduction) provided from 2027 (maximum of 30% in 2025 and 2026), along with an increase in the general qualifying salary under the regime from EUR 46,107 to EUR 50,436 in 2027, and from EUR 35,048 to EUR 38,388 for expats under the age of 30 with a master’s degree (current qualifying salary maintained for 2025 and 2026);
• A reduction in the basic rate of individual income tax for Box 1 income (employment and certain other income) to 35.82% on income up to EUR 38,441, along with a second bracket rate of 37.48% on income of between EUR 38,441 and EUR 76,817 per year from 2025;
• A reduction in the top bracket rate for Box 2 income (income from a substantial interest) from 33% to 31% in 2025 on income above EUR 67,804; and
• The removal of the planned reduction in the tax rate on individual Box 3 income (taxable income from savings and invested assets), which will remain at 36%.

The Dutch Directorate-General for Tax and Customs Administration has issued the Decree of 19 September 2024, which was published in the Official Gazette on 20 September 2024 and replaces the Decree of 9 March 2020 on the participation exemption. Subject to various conditions as detailed in the Decree, the participation exemption generally provides that benefits arising from a participation, and the costs incurred in connection with the acquisition or disposal of that participation, should not be taken into account in determining profits. The Decree provides detailed information and examples on when and how the participation exemption may be applied considering the relevant provisions contained in Article 13 of the Corporate Income Tax Act, including participation requirements for the exemption and the associated benefits and costs eligible for the exemption. The Decree is effective from 21 September 2024.

The Dutch government published a protocol to amend the “Convention between the Kingdom of the Netherlands and the Republic of Poland for the elimination of double taxation with respect to taxes on income and the prevention of tax evasion and avoidance” (the Protocol). This followed the signing of the Protocol on 29 October 2020 in which the intentions of the countries were agreed upon.

This GT Alert summarizes what is included in the Protocol.

A Real Estate Clause

The Protocol introduces a so-called real-estate-rich company clause. The clause provides that gains obtained by a resident of a Contracting Country from the alienation of shares in a company or comparable interests (such as interests in a partnership or trust) may be taxed in the other Contracting Country if, at any time during the 365 days preceding the alienation of such shares or comparable rights, their value derived directly or indirectly by more than 75% from immovable property situated in that other Contracting Country.

Changes Concerning Permanent Establishments

The Protocol amends the definition of a permanent establishment by implementing a number of BEPS (Base Erosion and Profit Shifting)-oriented solutions to prevent the avoidance of a permanent establishment status by non-residents.

The Protocol clarifies that the convention’s examples of activities that are not covered by the permanent establishment definition must all be of a preparatory or auxiliary character in order not to result in constituting a permanent establishment. 

Additionally, a permanent establishment is deemed to exist when a person acts on behalf of an enterprise in a Contracting Country and by undertaking these actions concludes contracts or habitually exercises a major role in concluding contracts without significant changes made by the enterprise, and these contracts are concluded:

• on behalf of that enterprise; or
• for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or
• for the provision of services by that enterprise.

The Protocol further provides that profits of a permanent establishment are the profits it might be expected to make, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise through the permanent establishment and through the other parts of the enterprise.

Implementation of a Principle Purpose Test

The Protocol introduces a principle purpose test, which focuses on preventing abuse of agreements on the avoidance of double taxation. In short, the principle purpose test says that a benefit under this convention shall not be granted in respect of an item of income if it is reasonable to conclude, weighing all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this convention.

Introduction of a Definition of a Recognized Pension Fund

A “recognized pension fund” of a country means an entity or arrangement established in that country that is treated as a separate person under the tax laws of that country and that is established and operated exclusively or almost exclusively to administer or provide retirement benefits and ancillary or incidental benefits to individuals, or has been created and operates exclusively or almost exclusively to invest funds in such entities.

In accordance with the Protocol, dividends or interest will not be taxed if a recognized pension fund is a beneficiary of such payment. Furthermore, gains realized by a recognized pension fund from the alienation of shares as stipulated in the real estate clause (see above) will also not be taxed in the state where the real estate property is situated.

A Transparent Entity Clause

The Protocol provides that income obtained by or through an entity or arrangement that is treated as wholly or partly tax transparent under the tax laws of either Contracting Country is considered income of a resident of a Contracting Country, to the extent that the income is treated, for purposes of taxation by that country, as the income of a resident of that country.

Rules for Determining Tax Residence of Persons Other Than Natural Persons With Double Tax Residence

In line with the MLI (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting) provisions and the 2017 OECD Model Tax Convention, the Protocol introduces new rules for tackling dual tax residence situations. It provides that, if a person other than a natural person is a resident of both Contracting Countries, the competent authorities of the Contracting Countries determine by mutual agreement the Contracting Country of which such person is a resident for the purposes of this convention based on its place of effective management. Should such an agreement be absent, then the person shall not be entitled to any relief or exemption from tax provided by this convention except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting Countries.

Conclusion

The Protocol will come into force when both Contracting Countries that have ratified the Protocol conform national constitutional procedures; this may not occur until 1 January 2022.

On March 24, 2021, the Netherlands and Germany signed a protocol to amend the tax treaty between the two states (the Protocol). The tax treaty prevents, on the one hand, double taxation by companies or citizens and, on the other hand, non-taxation. The Protocol contains agreements on the right to levy taxes on (short-term) social security benefits and clauses to prevent tax avoidance.

The Protocol has not yet entered into force, but it will take effect once parliamentary ratification and the exchange of ratification instruments between the contracting states occurs. This GT Alert summarizes the content of the Protocol.

Social Security Benefits

The Protocol amends the distribution of taxing rights over certain social security benefits, which include the so-called “Krankengeld” (sickness benefit) and “Elterngeld” (benefit for parents of young children). This ensures that in all cases the country providing the social security benefit may also tax it. Amongst other things, this provision ensures that German net social security benefits are not taxed in the Netherlands if they would be exempt in Germany.

Tax Avoidance

The Protocol contains agreements between the states that prevent the benefits of the treaty from being used solely to avoid taxation. These anti-abuse provisions are in-line with the base erosion and profit shifting (BEPS) project. The treaty now meets the minimum standards of the BEPS project.

Conclusion

The provisions of the Protocol will enter into force once both contracting states have ratified it in accordance with national constitutional procedures. Subsequently, the provisions of the Protocol will take effect on the first day of January in the following calendar year.

Per 1 January 2023, the Dutch RETT (real estate transfer tax) will increase from 8% to 10.4%. Transactions that close after 31 December 2022 will therefore be subject to a 2.4% higher transfer tax.

It may be possible to avoid this by applying a Provisional Closing Scheme (Groninger akte structuur). This essentially means that the formal closing for tax purposes takes place this year, but the purchase price is paid at a later stage, next year, after certain conditions subsequent have been fulfilled, such as financing.

The Provisional Closing Scheme entails that the transfer of ownership takes place provisionally. The ownership passes to the buyer, but the purchase price remains unpaid. Only the RETT is to be paid to the tax authorities.

The parties furthermore agree on a long stop date for payment of the purchase price (generally depending on financing arrangements). If, at the long stop date, the purchase price is not paid, the purchase agreement is dissolved by force of law. Therefore, no retro-transfer via a civil-law notary is required to effectuate this. Non-fulfillment of the condition subsequent (payment of the purchase price) automatically leads to the legal ownership shifting back to the seller.

Moreover, all rights in rem (such as mortgages, liens, pledges, etc.) vested in the interim period become null and void as well. So, the seller does not run the risk of receiving an asset encumbered with rights vested when ownership was with the buyer. When the legal ownership shifts back to seller, no RETT is due.

If the condition subsequent (payment of the purchase price) is not fulfilled, and ownership shifts back to the seller, the buyer is entitled to reclaim the RETT paid from the tax authorities. The Provisional Closing Scheme does not only apply to the current increase of RETT. The scheme is also a useful solution in various other situations where there is a tax deadline that cannot be met because certain conditions subsequent are still pending.