On September 14, 2018, the Netherlands Ministry of Finance (MOF) issued a report regarding a legislative proposal to implement the first EU anti-tax avoidance directive ATAD 1 (2016/1164), with respect to controlled foreign companies (CFCs) and limitation on interest deduction. See BEPS Actions 3 and 4, respectively.
The proposed legislation, if approved, would enter into force with effect from January 1, 2019. The provisions on CFCs and interest deduction limitations would apply for the first time for financial years beginning on or after January 1, 2019;
CFC
The proposed legislation would insert a new section 13ab, following section 13aa, in the Corporate Income Tax Act. Under the new article, the following categories of a CFC’s undistributed income will be included in the taxpayer’s profits:
- Interest or other benefits from financial assets.
- Royalties or other benefits from intangible assets.
- Dividends and gains from the disposal of shares.
- Benefits from financial leasing activities.
- Benefits from insurance activities, banking activities or other financial activities.
- Billing activities, that add little or no economic value, consisting of sales or service benefits purchased from or sold to related parties, minus the costs associated with these benefits.
According to the proposed legislation, a CFC refers to a “controlled body” in which the taxpayer has a direct or indirect interest, alone or with affiliates, in the CFC and one of the following applies:
- Owns more than 50% of the shares in the nominal paid-up capital.
- Owns more than 50% of the statutory voting rights.
- Is entitled to more than 50% of the profits.
In addition, the CFC rules apply where this entity is established in a jurisdiction that imposes a statutory rate of less than 7%, or is included in the EU list of non-cooperative jurisdictions for tax purposes.
Interest Deduction Limitation
The draft bill contains a new interest deduction restriction (new section 15b, following section 15a, in the Corporate Income Tax Act). If the taxpayer’s deductible interest expenses exceed its taxable interest income, the deductibility of the balance of interest is limited to a maximum of either 30% of the taxpayer’s earnings before interest, tax, depreciation, and amortization (“EBITDA”) or €1 million, whichever is higher. This measure goes beyond article 4 of ATAD 1, which has a threshold of €3 million. This measure limits the deductibility of interest due on third party and related party loans.
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