The Netherlands has adopted the global minimum tax to ensure that multinational and domestic groups with revenues of EUR 750 million or more pay at least a 15% tax on their profits, starting from financial years that begin on 1 January 2024. On 17 September 2024, the government released its Budget Day proposals for 2025, which include several amendments to the Minimum Tax Act 2024 (MTA), such as incorporation of the OECD Pillar 2 administrative guidance and its interaction with existing Dutch anti-abuse measures (for prior coverage, see the tax alert dated 2 October 2024).
The MTA, which transposed the EU Minimum Tax Directive into Dutch domestic law and became effective on 31 December 2023, introduced a tax to ensure that multinational and domestic groups with turnover of EUR 750 million or more pay at least a 15% effective tax rate on their profits. The directive is based on the OECD Pillar Two model rules released at the end of 2020 (for prior coverage, see the tax alert dated 21 December 2021). Following publication of the model rules, the OECD published several sets of administrative guidelines in February, July and December 2023 and June 2024 (for prior coverage, see the tax alert dated 24 July 2024 and the article in the December 2023 issue of Corporate Tax News).
The Dutch implementation of the EU Minimum Tax Directive aligns with the OECD model rules. While the OECD cannot mandate binding legislation, the directive stipulates that the OECD model rules and accompanying commentary serve as sources for interpretation and the EU has thus far found the guidelines to be compatible with the directive. Where the legal text of the MTA coincides with the OECD model rules, the administrative guidelines can offer clarifications without necessitating legal amendments to the legislation. The remaining topics from these guidelines that require a legal basis will be incorporated into the MTA through one of the budget bills.
The following aspects of the OECD administrative guidance released in 2023 will be incorporated into the MTA:
The government is evaluating whether further legislative changes will be needed based on the OECD administrative guidance issued in December 2023 and June 2024.
The Corporate Income Tax Act 1969 (CITA) contains subject-to-tax rules that apply in relation to various anti-abuse measures, which are used to determine whether a company is sufficiently taxed on profits. A taxpayer can avoid application of the anti-abuse rules if it can demonstrate that a reasonable level of taxation is imposed on the relevant asset, transaction or entity. To date, it has been unclear whether the 15% minimum tax is considered a “tax levied on profits” and whether the subject-to-tax test would be met by including that tax. The budget proposals include amendments to the CITA to clarify when a qualifying Pillar Two top-up tax would be considered a tax on profits, a change that could impact interest deductions, the participation exemption or the foreign branch income exemption starting in 2025.
The Pillar Two tax would be deemed to be a tax levied on profits in the case of the following anti-abuse measures:
Aligning Dutch legislation with the OECD’s Pillar Two administrative guidance is critical for a consistent interpretation of the rules. Businesses headquartered in the Netherlands can reference this guidance when preparing qualifying financial statements and CbCR and when assessing the application of temporary safe harbours. The fact that some OECD guidelines will be incorporated in Dutch law now, with a partial retroactive effect to 31 December 2023, may result in differences in application with other jurisdictions. The expansion of the subject-to-tax rules to include a qualifying Pillar Two top-up tax means it will be important for affected taxpayers to examine whether this has an effect on current limitations on the deductibility of interest expense or exemptions.
Frederik Boulogne
Hans Noordermeer
Rosalynn de Jong
BDO in Netherlands
Incorporation of OECD Pillar Two Guidance
The MTA, which transposed the EU Minimum Tax Directive into Dutch domestic law and became effective on 31 December 2023, introduced a tax to ensure that multinational and domestic groups with turnover of EUR 750 million or more pay at least a 15% effective tax rate on their profits. The directive is based on the OECD Pillar Two model rules released at the end of 2020 (for prior coverage, see the tax alert dated 21 December 2021). Following publication of the model rules, the OECD published several sets of administrative guidelines in February, July and December 2023 and June 2024 (for prior coverage, see the tax alert dated 24 July 2024 and the article in the December 2023 issue of Corporate Tax News).The Dutch implementation of the EU Minimum Tax Directive aligns with the OECD model rules. While the OECD cannot mandate binding legislation, the directive stipulates that the OECD model rules and accompanying commentary serve as sources for interpretation and the EU has thus far found the guidelines to be compatible with the directive. Where the legal text of the MTA coincides with the OECD model rules, the administrative guidelines can offer clarifications without necessitating legal amendments to the legislation. The remaining topics from these guidelines that require a legal basis will be incorporated into the MTA through one of the budget bills.
The following aspects of the OECD administrative guidance released in 2023 will be incorporated into the MTA:
- Marketable Transferable Tax Credit (MTTC): An MTTC is a specific type of tax credit issued by governments that holders can use to reduce their tax liability. An MTTC is classified as GloBE income rather than direct reductions to covered taxes, resulting in a smaller negative impact on the effective tax rate (ETR) (with the denominator rather than the numerator decreasing). This is particularly beneficial for US multinationals (MNEs), as many transferable credits from the US Inflation Reduction Act are expected to qualify for the MTTC.
- Transitional Country-by-Country Reporting (CbCR) Safe Harbour: The CbCR safe harbour is accessible to MNEs or domestic groups that are not required to prepare CbCR. These groups are eligible for the safe harbour if they complete the appropriate section of the GloBE Information Return using data from qualified financial statements, showing total revenue and profit before tax that would have been reported in a CbCR.
- Anti-arbitrage provisions for hybrid arrangements in the CbCR safe harbour: These provisions aim to prevent mismatches due to differences in qualification between the tax rules and financial reporting used as the basis for the CbCR (e.g., deduction/non-inclusion or double deduction).
- Clarification on the Substance-Based Income Exclusion (SBIE):
- To claim the SBIE exclusion, MNE groups are not required to determine the full amount of eligible payroll costs and tangible assets; they can opt to restrict their claim to part of the exemption, using only some of their eligible costs. This flexibility is beneficial when compliance costs are substantial or when accessing information is challenging.
- If more than 50% of mobile employees or tangible fixed assets are located in the group entity’s jurisdiction, full payroll costs and tangible asset allocations may be applied, with a pro rata method used if such costs/allocations are 50% or less.
- When the ultimate parent entity (UPE) falls within the scope of a deductible dividend regime, dividends paid by the UPE are deductible from the GloBE income. As an adjustment, payroll costs and tangible assets in the UPE’s jurisdiction are proportionately reduced.
- Additional guidance: More guidance will be provided on qualifying QDMTT and tiebreaker rules related to applicable accounting standards, currency conversion (e.g., GloBE calculations in the currency of the UPE’s consolidated financial statements) and excess negative tax expense carry forward (no negative Pillar Two ETR; the remaining negative taxes are rolled over to the next year).
The government is evaluating whether further legislative changes will be needed based on the OECD administrative guidance issued in December 2023 and June 2024.
Qualification of Pillar Two Tax for ‘Subject-to-Tax Rules’
The Corporate Income Tax Act 1969 (CITA) contains subject-to-tax rules that apply in relation to various anti-abuse measures, which are used to determine whether a company is sufficiently taxed on profits. A taxpayer can avoid application of the anti-abuse rules if it can demonstrate that a reasonable level of taxation is imposed on the relevant asset, transaction or entity. To date, it has been unclear whether the 15% minimum tax is considered a “tax levied on profits” and whether the subject-to-tax test would be met by including that tax. The budget proposals include amendments to the CITA to clarify when a qualifying Pillar Two top-up tax would be considered a tax on profits, a change that could impact interest deductions, the participation exemption or the foreign branch income exemption starting in 2025.The Pillar Two tax would be deemed to be a tax levied on profits in the case of the following anti-abuse measures:
- For the anti-base erosion interest deduction limitation: A qualifying QDMTT, IIR and UTPR levied on the interest recipient.
- For the participation exemption: A qualifying QDMTT levied by the participation.
- For the object exemption, a qualifying QDMTT levied by the foreign permanent establishment.
- Transfer pricing mismatch rules and entity classification mismatches (ATAD2): The tax would be considered a tax levied on profits only if a taxpayer provides credible evidence that a qualifying Pillar Two top-up tax results in a 15% top-up tax rate on the income from a specific transaction or asset.
- Controlled foreign company (CFC) rules: Similar to the previous bullet, but there should be credible evidence in relation to the specific entity. If CFC income is recognised, qualifying QDMTT paid could be deducted from the Dutch corporate income tax liability, as codified effective 1 January 2024.
Key Takeaways
Aligning Dutch legislation with the OECD’s Pillar Two administrative guidance is critical for a consistent interpretation of the rules. Businesses headquartered in the Netherlands can reference this guidance when preparing qualifying financial statements and CbCR and when assessing the application of temporary safe harbours. The fact that some OECD guidelines will be incorporated in Dutch law now, with a partial retroactive effect to 31 December 2023, may result in differences in application with other jurisdictions. The expansion of the subject-to-tax rules to include a qualifying Pillar Two top-up tax means it will be important for affected taxpayers to examine whether this has an effect on current limitations on the deductibility of interest expense or exemptions.Frederik Boulogne
Hans Noordermeer
Rosalynn de Jong
BDO in Netherlands