Proposed changes to corporate income tax in Coalition Agreement

The Coalition Agreement 2021-2025 states that the new Dutch cabinet intends to extend the CFC measure by introducing a minimum tax rate in accordance with OECD Pillar II.

Controlled Foreign Company ("CFC")

Under the current CFC measures, certain income of foreign indirectly and directly held subsidiaries that are established in countries with a statutory tax rate below 9% and EU blacklisted countries will under certain circumstances be subject to Dutch corporate income tax, even though the income is not yet actually received. The CFC measures apply to so-called passive income such as and amongst other royalties, interest or dividends. The current CFC rules do not apply if the CFC distributes income or if the CFC carries on substantial economic activities which can amongst other be demonstrated by meeting a certain set of minimum substance requirements.

It is now  - contrary to the current measure- the intention to also tax distributed profits under the CFC rules and to delete the provision that should the substance requirement be met the CFC is deemed to carry on genuine economic activities. In addition, it is proposed to ignore transfer pricing adjustments in the determination of CFC income and to align with the commercial profit reported by the low-taxed entity. Finally, it can be expected that the statutory tax rate will be replaced in the new rules by an effective tax rate test.

Implementation of Pillar II in accordance with OECD Pillar II

The new Dutch government will combat tax avoidance through international cooperation. One of the measures to combat tax avoidance will be the implementation of OECD Pillar II. The implementation of Pillar II should realize a minimum taxation of profits of 15% as of 2023. A separate update on Pillar II will follow in January 2022.

Although Pillar II only applies to multinationals with a consolidated turnover of at least EUR 750 million, the regulations will also indirectly be relevant for smaller multinationals. The introduction of the Pillar II - Income Inclusion Rule (“IIR”) will require ultimate parent entities to pay additional tax if direct or indirect owned subsidiaries are effectively taxed on their profits at a rate less than 15%. The coalition has indicated that it intends to amend the current CFC regulation by testing the effective tax rate instead of merely looking at the statutory tax rate, whereby the CFC regulation could in fact function like the IIR of Pillar II.

More information?

Would you like to know more about the changes in the CFC rules and the consequences of the introduction of Pillar II? If so, please contact your trusted contact person at RSM.