With the focus of 2014 being international tax competition, 2015 shows signs of continuing this trend. The European Commission (COM) and European Parliament (EP) are starting to debate and extensively investigate Member States’ tax ruling policies, partly as a result of the LuxLeaks revelations and partly in relation to the tax planning activities of multinational enterprises. In this article we will consider three major topics: transparency of advance tax rulings and advance pricing agreements (ATR/APA), tax competition in field of research and development and procedural harmonisation in field of estate tax and we will also turn to other international and national developments in the field of tax.
Transparency of ATR/APA
The disclosure of the Luxembourg’ secret tax rulings provoked an investigation by the European Commission and by the European Parliament into tax competition and state aid aspects of tax policy in relation to locational benefits for holding, finance, and royalty companies. Pressure is put especially on the Netherlands, Luxembourg and Ireland for more transparency with respect to issued ATR/APA’s. In response to this pressure, the Dutch Minister of Finance has announced a unilateral spontaneous exchange of tax rulings in cases with limited nexus. Substance rules were introduced last year and the tax authorities are actually verifying the disclosures made by the tax payers. Both houses of parliament are very sceptical about the possibilities for corporate tax planning created by the Dutch tax treaty network. It still has to be debated whether the Netherlands is a tax haven or not, but the fact is that its treaty network is used/abused as a conduit for financial transfers from high tax jurisdictions to low tax jurisdictions.
The COM has proposed (on 18 March 2015) an amendment of the administrative cooperation directive (2011/16/EU) which provides for a mandatory automatic exchange of information on active ATR/APA’s, covering the last 10 years, to be effective from 01 January 2016. The active rulings should be exchanged before 31 December 2016 and new rulings should be exchange within one month after the end of the quarter during which the agreement was concluded. It can be debated whether the exchange of tax rulings is ‘necessary’ for the enforcement of the tax laws of the source country or country of origin of the financial flows. Problematic here is the handling and operation of the domestic tax secrecy provisions, which provision is protected by the privacy provision of the European Convention on Human Rights, which also applies to the ‘private life’ of corporate entities. Privacy may be infringed by a State, but only if it is ‘necessary’, which is quite different from the ‘may be relevant’ criterion as used in the Directive.
The ongoing discussions within the BEPS project of the OECD will probably lead to a recommendation and to a further strengthening of ‘beneficial ownership’ requirements and to a reduction of access to the treaty network as LOB-type provisions will be introduced. The Netherlands is not in favour of the introduction of a general anti-abuse clause; any measure should be specific and targeted on the abuse. General measures may conflict with the four freedoms on which the European Union is based.
IP Boxes and Incentives for Research and Development.
A serious measure in the tax competition for research and development is the introduction of an IP box. Various countries have introduced IP boxes with lower tax rates for benefits resulting from research and development activities. A patent box is a preferential tax regime and as such has a relation with BEPS action 5, the tackling of harmful tax practices and patent box regimes for IP in particular. The OECD wishes to introduce a modified nexus approach to harmful IP regimes. Condition for acceptable patent box regimes is that the entity itself has incurred the expenditures that lead to patentable or patented intellectual property. The nexus approach determines the amount of income that may receive tax benefits by applying a ratio between qualifying expenses and overall expenses to the royalties’ income of a company. This conflicts with the freedom of establishment as it discriminates between local R&D and outsourced R&D. The requirement of patented property discriminates smaller companies who often do not have the capacity to successfully register a patent. German and Dutch enterprise organisations have made representations with the OECD for the relaxation of the patent requirement. Innovation is a broader concept than just patented property. This representation of the industrial associations is in response to a common suggestion of the German and British tax authorities for a general reduction of the exemption for IP to 30 per cent of the related income, whereas currently the Netherlands exempts 80 per cent of the IP related profit, resulting in a rate of five per cent on the profit. Ireland exempts 50 per cent of IP profit, resulting in a rate of 6.25 per cent, UK has a rate of 10 per cent, Luxembourg 5.76 per cent, and Belgium 6.8 per cent
EU Succession Regulation
As of 17 August 2015 the EU Succession Regulation 650/2012 (OJ L 201/107 dd. 27.7.2012 celex: 32012R0650) will be directly applicable in the Netherlands and 24 other member states (UK, Ireland and Denmark have opted out). This Regulation will affect all persons with cross-border affairs. Domestic affairs will be governed by domestic law.
The Regulation provides uniform rules for:
· jurisdiction and choice of forum;
· the law applicable to the succession, liquidation and settlement of the estate;
· the recognition, enforceability and enforcement of judgments;
· acceptance and enforceability of authentic instruments and court settlements.
Furthermore, the European Certificate of Succession is introduced that provides proof of international successions among others the applicable law, heirs, the allocation of certain assets of the estate to heirs/legatees and powers of the executor or administrator of the estate, see Regulation 1329/2014 (OJ L359/30 dd. 16.12.2014 celex: 32014R1329).
The Regulation is important for Dutch nationals with foreign residence and/or foreign assets (eg, second homes) and for foreigners residing in The Netherlands. The most important changes in practice include the rules for choice of the applicable law of the estate. Up to 17 August 2015 persons can apply for the law of the state in which they reside or for the law of the state which nationality they hold. As from 17 August 2015 persons can only apply for the law of the Member State(s) which nationality they hold at the time of making the choice or death. When no choice is made the law of the last habitual residence shall apply to the estate. The choice extends to the inheritance and the settlement of the entire estate. As of 17 August 2015 it is no longer possible to choose an applicable law for part of the succession.
Where appropriate, foreigners with their habitual place of residence in The Netherlands should apply for the law of the Netherlands on their estate before 17 August 2015! As of that date persons should be careful with revocation of their last will and testament. Please be informed that the EU Succession Regulation doesn’t provide rules for the taxation of cross-border estates!
The FATCA IGA1 with Netherlands became effective as of 9 April 2015.
The new tax treaty with Germany becomes effective as of 1 January 2016, with transitional provisions for those effected under the new treaty during 2016. The treaty replaces the 1959 treaty and will be more or less similar to the OECD-MC. All entities that are resident in the Netherlands for purposes of the Dutch corporate income tax, will be deemed to be subject to Dutch tax for purposes of the new treaty, therefore Dutch resident exempt companies (or subject to zero per cent rate of tax), such as pension funds, recognised charities, fiscal investment institutions (fbi) and exempt investment institutions (vbi) may qualify as residents for purposes of the new treaty. Capital gains realised on sale of shares in non-listed real estate holding companies (75 per cent of value derived directly or indirectly from real estate) are taxable in the state where the underlying real estate is located. An important carve out is that the gain is subject to the state of residence of the shareholder, if this shareholder owns less than 50 per cent of the shares in the real estate company prior to the first alienation of the shares.
The Netherlands has offered to amend tax treaties with all 23 developing countries and to introduce an anti-abuse provision in these treaties. Most treaty partners have responded favourably on this initiative.
The relationship with Curaçao has been renegotiated. Current withholding tax on dividends of 8.3 per cent will be reduced to five per cent. This rate applies until 2019. After 2019 a LOB provision will be introduced and the withholding tax will be the standard rate of 15 per cent for dividends to non-qualifying residents of Curaçao and zero per cent for distributions to qualifying residents.
Under pressure from EU COM and harmful tax competition rules, the tax treatment of governmental owned enterprises will be changed. Those publicly owned private enterprises and enterprises of public entities will be subject to tax. An exemption will remain for providing public services, but those are in general loss making and as such will not constitute a table enterprise. However if the public enterprise is in competition with a commercial company, it will be taxable for its profits. The publicly owned private enterprise, the Harbour of Rotterdam, currently exempt from tax, will become subject to tax. Expectations are that a complete overhaul of the income tax system will not be decided during current period of government and will be postponed to after 2017.
*Leo E C Neve LL.M., Tax Advisor, Neve Tax Consultants and Mathieu L. Neve LL.M., Estate and Tax Planner at Mazars, the Netherlands can be contacted at l.neve @nevetax.nl or Mathieu.neve @mazars.nl