The European Commission has taken another step in its combat against tax avoidance. On 28 January 2016 the European Commission presented its Anti Tax Avoidance Directive (Directive). This blog focuses on the possible consequences for the Dutch participation exemption.
The Directive aims to tackle cross-border tax avoidance by providing a set of rules in order to implement in a coordinated manner the OECD's base erosion and profit shifting project 'BEPS'. The Directive is based on the outcome discussions in the European Council, recommendations from the European Parliament and focuses on six key topics, including:
- Switch-over clause (participation exemption);
- Controlled Foreign Company-rules;
- Exit taxation;
- Interest limitation;
- General Anti-Abuse Rule.
The switch-over clause provides for a subject-to-tax-test for (participation) exemption regimes for income from both dividends and capital gains on the disposal of shares in non-EU subsidiaries or non-EU permanent establishments. Under the subject-to-tax-test the non-EU subsidiary or non-EU permanent establishment should be taxed at a minimum tax rate of 40% of the corporate income tax rate the parent company is subject to. Although a tax credit is given for the tax paid overseas, when the subject-to-tax-test is not met, double taxation could still occur when this tax credit is insufficient to cover the tax paid overseas. It is unclear whether an activity/asset-test is included.
The current Dutch participation exemption already includes a subject-to-tax-test, but the participation exemption also applies when an asset-test is met. If the current wording of the proposed switch-over clause is approved by the Council and the European Parliament, the Dutch participation exemption may only apply after meeting the subject-to-tax-test. The standard Dutch corporate income tax rate is 20% on taxable profits not exceeding € 200,000 and 25% on any surplus, meaning that under the switch-over clause the Dutch participation exemption may only apply on dividends and capital gains received from non-EU subsidiaries whose income is taxed at a statutory rate of 8-10% in the source country.
The proposed Directive is subject to further debate within the European Parliament and the Council and is scheduled for approval during the ECOFIN meeting on 25 May 2016. We will keep you updated on further developments.
Please contact Thomas Dasselaar in case you have any queries regarding the Anti Tax Avoidance Directive.