The proposed reduction of the Netherlands' corporate income tax rate to 25.5 %, announced in the draft reforms of the Dutch Corporate Income Tax Act (CITA), will bring the country into line with the larger EU jurisdictions. The reforms, that are due to come into force on January 1 next year, also contain the contentious introduction of separate boxes for patent and group interest income, the legality of which is being debated with EU Commission.
The government had previously announced the corporate income tax rate would fall to 27.4% in 2007 from 29.6% now, so the new 25.5% rate represents a significant reduction.
An even lower figure was expected, had it not been for the threshold for controlled foreign companies (CFCs). The rate of 75% in the CFC's native country means that a corporate tax under 25% would disturb the threshold. Japan, in particular is thought to have been affected by this.
The new rate applies to taxable profits of more than €60,000 ($72,000). The reform Bill, which was introduced in the Dutch parliament on May 24, proposes a rate of 20% for the first €25,000 ($30,000) taxable profits and a 23.5% rate for profits between €25,000 and €60,000.
The average corporate income tax rate in the EU is now 25.04%, after some member states cut their rates recently and because many of the countries that joined the EU in 2004 are using tax rates to compete aggressively for new investment. This average rate compares to 29.99% in Asia Pacific, and 28.25% in Latin America.
Tom van der Meer, tax lawyer at Loyens & Loeff, a law firm, in Amsterdam, saw the Dutch reduction as inevitable: "Everyone called for it. We need to be closer to the EU average."
He also said that the Netherlands cannot compete with the lower tax jurisdictions of 12.5%, but must certainly make the Netherlands a more interesting jurisdiction for investors.
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Machiel Lambooij: "Unlikely the Netherlands will reduce rates any further." |
The combination of a more competitive rate and an attractive infrastructure will keep the Netherlands in line with the EU average. According to Machiel Lambooij, tax lawyer at Freshfields Bruckhaus Deringer in Amsterdam, the Netherlands will probably stop cutting the income tax rate for corporates, saying: "We won't go down more than we have, unless drastic further reductions are introduced elsewhere in the EU and the Netherlands is forced to react."
And the government will react if it has to. "There is competition in Europe and we want to be in that competition," said Joop Wijn, the state secretary for finance, in an interview with International Tax Review last year. "We will not sit on the sideline and watch what is happening on the field."
The introduction of separate boxes for patent and group interest income has caused more controversy than the proposal to cut the corporate rate. This income will be taxed at lower effective tax rates. However, there is uncertainty over the legality of the reforms.
The debate focuses on whether the benefits granted by the boxes can be classified as state aid. The Dutch government insists they are not, because they are theoretically available to all taxpayers. However, in practice, corporate taxpayers will benefit most. "The interest box will give benefits only to those tax payers that receive net interest from abroad, which effectively means that it is most interesting to international groups of companies," said Lambooij.
The EU Commission found the predecessor of this initiative (the group finance regime), to be illegal state aid. And although the government is convinced that these boxes comply with EU state aid, they have started consultations with the EU commission to confirm that view.
The effective date of the tax reform should be 1 January 2007, but the introduction of the patent and group interest box have not been given a fixed date, and cannot come in until a conclusion has been reached. The resignation of the Dutch government on June 29 is now set to create even more uncertainty. TY
