On Queen’s Speech, ‘Prinsjesdag’ in Dutch, the new Dutch cabinet Rutte III pronounced its ambitious Tax Plan 2018. Over the last months, the Tax Plan instigated many discussions and far more confusion. The 19th of December, the final ruling of the First Chamber took place. Here, you may find an overview of the actual fiscal changes that will go into effect on January 1, 2018.
Personal Income Tax
The threshold to pay income taxes has increased with €1. As a result, taxpayers wit in income lower than €46 are exempt from income taxes.
Contrary to the previous reporting, the different tax levies will still be based on four brackets. The first bracket levies 36,55% over income up to €20.142. Income surpassing this amount but lower than €68.507 falls under the second or third bracket. These brackets apply the same tax rate of 40,85%. The final and fourth bracket levies 51.95% over income above €68.507.
For the time being, the tax rate of box 2 remains 25%.
The capital yield tax of box 3 stays the same as well. Yet, the threshold for tax-exempt capital does changes. In 2018, the threshold is set at €30.000 instead of €25.000. On the contrary, the lower limit of the first bracket decreases. Hence, the bracket covers all income between €70.800 and €978.000 (2017: €75.000 – €975.000). Income above €975.000 falls under the second bracket.
In addition, Rutte III makes changes to the flat-rate yield. The first bracket will levy 2,02%, the second 4,33% and the third bracket apply the rate of 5,38%.
The Dutch government gradually reduces employee discount to a nil rate. As a result, the deduction on salary above €33.112 has a €3.249 maximum minus 3,6% of that salary.
Gifts that are not periodically paid, are subject to a €60 threshold. The threshold for donations above €60 is 1% of the total income, before the personal deduction takes place. The latter donations are also subject to an upper limit. Nu donation may be higher than 10% of the total income. In case of fiscal partners, the limit is based on the sum of their respective total incomes.
Under certain conditions, donations that reimburse costs of their beneficiary may be regarded as a deductible donation.
The ruling with reference to the deduction of donations to cultural facilities will stay in effect for another year. Yet, the abolishment of this ruling might still be the case, but only after the final ruling in 2019.
Random Deprecation of Environmental Investment Allowance
Rutte III grants entrepreneurs the possibility to randomly depreciate up to €25 million of their investment cost. Thus random depreciation is subject to several conditions, though. First, the costs must concern investments stipulated on the Dutch Environment List. Second, the depreciation is applicable to 75% of the acquisition and production costs, minus the residual value. The remaining 25% must adhere to the common depreciation regime. Entrepreneurs investing in non-environmental business assets may deduct a set amount of annual profit.
Energy Investment Deduction
Instead of 55%, entrepreneurs with investments included in the Energy list may only deduct 54,5% of their investment from their profit. This deduction is applicable to investment costs between 2.500 and €121 million. If the entrepreneur indeed chooses to make use of the deduction, he or she loses the right to apply the environmental investment deduction and vice versa.
Since January 1st, 2015, the government is gradually terminating the work bonus. In 2018, the bonus will be lowered to nil and therefore discarded.
Research and Development contribution
The research and development credit percentage of the second bracket will increase to 16% (2017: 14%). The lower limit of the second bracket remains €350.000 though.
When foreigners come to work in the Netherlands, they often face additional exterritorial costs. Their Dutch employer, however, is allowed to offer a reimbursement for these costs, free from taxes. The Dutch tax authorities offer a second option, though. Under this so-called 30% ruling, tax authorities won’t levy taxes on 30% of the expat’s wage, including the reimbursement. Nonetheless, employers may only apply the 30%-ruling with the consent of the tax authorities. These now tighten the requirements. In order to apply for the ruling, extraterritorial employees must earn at least the gross amount of €37.296 (€ 37.000 in 2017) a year. Only for foreigners under 30 years old in the possession of a master’s degree are granted the threshold is lowered to €28.350 a year (€28.125 in 2017). The exception to the rule is research scientists. They do not have to meet any threshold regarding their wage.
The other requirements to apply the 30%-ruling, do remain unchanged. Hence, expats must still be employed in Dutch group enterprises. Two years before being transferred to the Dutch company, they must have lived at least 150km from the Dutch border. Second, among others, their wage needs to demonstrate that the foreign employees have ‘specific expertise’. Lastly, employers are to be withholding agents registered in the Netherlands.
Corporate Income Tax
Corporate Income Tax Rate
Prior to December 19th, Rutte II claimed to reduce the corporate income tax rate. The final ruling, however, did not vote in favor of this adjustment. Nor will the upper limit of the low bracket change. The former threshold of €200.000 is thus still in order.
Innovation Box rate
Profit resulting from innovative business activities will be subject to a levy of 7% instead of 5%.
Double Business Motive Test for Arm’s Length Principle
Furthermore, Rutte III broadens the scope of the anti-profiteering ruling. Starting 2018, the measures also apply to companies taking out a loan from another body of its fiscal unity to drain profit of a debt that is actually owed to an independent third party. When an indirect third-party loan is seen as a suspicious transaction, the company in question may no longer deduct interest. A loan qualifies as suspicious when it relates to dividends, loaned capital or participation acquisitions that were not reimbursed. If that is indeed the case, the company in question loses its right to deduct the interest.
Moreover, suspicious transactions generally lead to legal acts. Hence, every company that takes out such an indirect third-party loan must prove that debt was indeed caused by business activities, instead of maleficent purposes. Yet, even when acquisitions and the associated debts indeed result from business activities, those activities aren’t necessarily the motive of the related legal act. Rutte III hence imposes the so-called double business motive test. Hence, starting 2018, the company will have to verify the arm’s length of both the debt and the related legal act independently. When proven that business activities are indeed caused the debt and associated act, the interest is tax-deductible.
Dividend Withholding Tax
More than all other proposals, the alleged abolishment of the dividend withholding tax made a wave in the Netherlands. December 19th, 2017, the First Chamber approved adjustments to the withholding tax obligation and exemption proposed by the current government. Since these adjustments entail the existence of the withholding tax, the tax will not be discarded yet.
However, the abolishment of the withholding tax is still possible, since it is indeed a bill in the coalition agreement by the new government Rutte III. Therefore, Rutte III may only start its negotiations regarding the bill in 2018. If the government comes to an agreement, the dividend withholding tax will not be abolished before 2019. DTS’ blog on the Dutch dividend withholding tax elaborates gives more elaborate information on the subject.
Starting 2018, Dutch holding corporations will be obligated to dividend withholding taxes. Recipients of the revenue from shares in, profit participation certificates of or hybrid loans to limited or private liability companies were already subject to dividend withholding tax. The coalition agreement now expands this withholding obligation for the profit of fiscal investments enterprises if they pay (part of) their profit out to exempt bodies. Hence, the beneficial owners of qualifying membership rights in Dutch holding corporations will also have to pay dividend withholding taxes. Such a qualifying membership right grants the owner a share in the holding corporation of at least 5%.
Dividend Withholding Exemption
In contrary, a withholding exemption is planned to go into effect on January 1, 2018, for companies in third countries. However, the exemption only applies when the third country has entered into a complete agreement with the Netherlands that concerns dividend withholding tax.
Rutte III aims to avoid future tax avoidance and abuse by imposing substance requirements on intermediary holdings. They should account for sufficient labor costs and utilize their own office space. When a holding does not meet these conditions, it will be regarded as an artificial construction set up to avoid taxes In the Netherlands. Such artificial constructions and transactions will therefore not be exempt from the dividend withholding tax, as mentioned before.
In accordance with the anti-abuse ruling, Dutch tax authorities will verify whether corporations obligated to dividend withholding tax illegally make use of the exemption when paying out dividends to the entitled foreign bodies. If that is indeed the case, they will request the corporations to justify their actions within a set timeframe. After this deadline, corporations might face a default penalty, amounting to no less than €5.278. Moreover, the government introduces the duty of notification for recipients of paid out dividends residing abroad.
Value-added Tax (Sales Tax or Turnover Tax)
The Dutch government now confines the medicines for which it previously lowered the VAT-rate. Starting January 1, this 6%-rate applies solely to those products that meet the marketing authorization or exemptions stipulated in the Pharmaceutical Act.
The Tax Plan includes less fortunate news for the agricultural sector. Under the Plan, farmers, foresters, and gardeners have to pay VAT for the services and goods they provide. Moreover, the VAT-rate for several products mainly intended for the agriculture will increase. Yet, the Dutch government meets the sector halfway. The sector will be entitled to reclaim (part of) the VAT on their costs and investments. Farmers that are subject to the small entrepreneurs ruling may also apply additional VAT-deductions. When the VAT is reduced to nil, it is possible to request a relief of the administrative obligations.
Landfilling and/or Incineration of Waste
The incineration and landfilling of waste will be levied more severely, no matter where the Dutch waste is managed. Dutch tax authorities will thus levy taxes on the export of waste produced in the Netherlands as well. Only the recycling of waste will not be met with a more severe tax rate.
A more severe regime is also the case for energy taxes. During the following two years, both businesses and households will be subject to a higher tax rate on natural gas and coals. For electricity, on the other hand, the tax authtax rate in order to promote renewable energy.
Second, the government expands the district heating ruling to installations running on biomass and geothermal energy. To fund this expansion, the district heating rate will momentarily increase.
Similarly, the tax rate on tap-water increases as well, resulting in €0.339 per cubic meter.
Contrary to the rise in environmental taxes, the tax rate on private cars will go down. In 2018, the so-called “BPM” or tax on private cars and motorcycles will levy at a rate of 4,41%. Furthermore, the tax authorities also base the tax on CO2 emissions. Hence, on the one hand, there will be a rise in the surcharge for diesel-powered vehicles and motorcycles. The first will be met with a supplement €87,38 (2017: €86,69), the surcharge of the latter will be corrected by 0,8%. Vehicles with a CO2 emission of 0 gr/km, on the other hand, are exempt from the BPM until 2020. Plug-in hybrid electric vehicles, however, are not granted this exemption.
Catalogue Price BPM
From January 1, the manufacturer or important will publicly declare the price of a car. This price will then serve as their listed price on which the addition of cars in wage- and income taxes are based.
Entrepreneurs will still be subject to taxes on delivery vans in case the BPM exemption expires before the end of 2022. If that is indeed the case, the calculation of the outstanding taxes is similar to the one of used delivery vans. The depreciation should serve as the basis for this calculation. Yet, this only applies to former delivery vans that were turned into a private car, thus creating a BPM-debt, and to imported delivery vans registered in the Netherlands. The latter are subject to the entrepreneur exemption and should, therefore, be sold within a five-year period.
Fees and Collections
General Tax Credit Box 1
Rutte III entitles taxpayers with an income up to €20.142 a tax credit of €2.265. The credit for income above this threshold decreases with 4,682% of the taxable income above €20.142. Hence, the general tax credit might eventually decrease to nil.
Furthermore, the Dutch government started to limit the possibility to pay out the tax credit to a partner with the lower box 1-income. This limitation started in 2009. In the following 15 years, the tax credit in question decreased and will further decrease by 6,67% per year. As a result, the maximum tax credit to pay out to the partner with the lower income will be 33,33% in 2018.
2018 will welcome back the former 10% ruling for ex-partners or ex-residents when their income had increased after their departure. In 2017, tax authorities applied a lower surcharge for the period in which the partners or residents still lived together. By implementing the 10% ruling, the ex-partner or ex-resident has, under specific circumstances, the right to request that the increase in income may be disregarded.
Tax on Tobacco
Aiming to improve the health of the Netherlands’ population, the government raises the taxes on tobacco. This will not go into effect on January 1st, 2018, but four months later, on the 1st of April.
Tax on Mineral Oils
However, January 1st, a more severe tax on mineral oils will be the case. The tax rate will increase with an index factor of 1,008. Fuels, on the other hand, will not be subject to a rise in the tax rate. The sole exception is gasoline, which will be surcharged with €0,78 per liter.
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