On October 10, 2017, the VVD, CDA, D66 and ChristenUnie parliamentary parties presented the result of their coalition negotiations - the ‘Confidence in the Future’ agreement, which sets out the measures the new Cabinet intends to implement. Below we briefly addresses what is currently known about the proposed tax measures.
The agreement, which in principle covers the period 2017 through to 2021, does not replace the bills in the 2018 Tax Plan, although some of the measures will result in amendments or additions to the Tax Plan. Just how the majority of these measures will be realized will only become apparent at a later stage – in many cases not before next year – when the bills are introduced. Many of the measures referred to below should take effect as of 2019. If the expected effective date is different, this will be mentioned separately.
Reduction of corporate income tax rates
Corporate income tax will be incrementally reduced: as of 2019 both rates will be reduced in three steps by a total of 4%. The normal rate of 25% will eventually drop to 21% in 2021 and the reduced rate of 20% for profit up to EUR 200,000 will eventually drop to 16% in 2021. In this way, the new Cabinet aims to keep the tax and business climate in the Netherlands competitive. The incremental extension of the first bracket from EUR 200,000 to EUR 350,000 in 2021 that had already been approved, will be reversed.
Limitation interest deduction corporate income tax
In exchange for the reduction in corporate income tax rates, the tax base will be expanded as of 2019. The interest deduction will be further limited. The Anti-Tax Avoidance Directive (‘ATAD’) contains a generic interest deduction limitation in the form of an earnings-stripping measure. Interest is no longer deductible insofar as the balance of payable and received group and third party interest exceeds a maximum of 30% EBITDA (earnings before interest, taxes, depreciation and amortization). The new Cabinet has opted for a threshold of EUR 1 million in interest; the possibility of a group escape offered by the Directive will not be taken advantage of. Some existing specific interest deduction limitations will be abolished (with the exception of the specific interest deduction limitation aimed at profit shifting).
Because banks usually receive net interest, they will not be affected by an earnings-stripping measure. A thincap rule will however be introduced for banks and insurers, which will limit the interest deduction on debt exceeding 92% of the balance sheet total for accounting purposes.
Loss set-off scaled back
For corporate income tax purposes, a loss can currently be set off against the profit of the preceding year (‘carry-back’) or the nine following years (‘carry-forward’). The carry-forward will be limited to six years. The coalition agreement in this respect only refers to corporate income tax and thus not to the loss set-off for personal income tax purposes. The coalition agreement does not state a precise effective date for this, although this is only expected to generate tax revenue as from 2028.
Effective Innovation Box rate to 7%
The Innovation Box is an instrument used to narrow the tax base for corporate income tax purposes, the outcome of which is an effective rate of 5%. As of 2018 this will be raised to effectively 7%.
Limitation of depreciation on building in own use
For corporate income tax purposes, as of 2019 it will only be possible to depreciate a building that is in own use up to a maximum of 100% of its WOZ value (this was 50%). The coalition agreement in this respect only refers to corporate income tax and thus not to depreciation for personal income tax purposes.
Dividend withholding tax partially abolished
Dividend withholding tax will be abolished, except in abuse situations and in the case of distributions to low tax jurisdictions. More information about this can be found in our separate memorandum on this.
Introduction of partial withholding tax on interest and royalties
In connection with the abolition of dividend withholding tax, a withholding tax on interest and royalties paid to low tax jurisdictions will be introduced, which is expected to take effect as of 2023. More information about this can be found in our separate memorandum on this.
Fiscal investment institutions no longer allowed to directly invest in property
As of 2020 fiscal investment institutions (fiscale beleggingsinstellingen; FBIs) will no longer be allowed to directly invest in property; this in connection with the abolition of dividend withholding tax.
Two bracket regime Box 1
A two bracket regime will be introduced in Box 1 with a basic rate of 36.93% and a top rate of 49.5%. As is currently the case, retirees will not pay any state pension contributions (AOW), which means that three brackets will continue to apply to this group. During the parliamentary term of the new Cabinet, the cut-off point for the current third bracket (the first bracket in the new rate structure) will be frozen at the level for 2018. This means that this bracket will end at approximately EUR 68,600.
All deductible items in Box 1 gradually reduced to the basic rate
In 2020 the rate at which expenses in Box 1 are deductible will be standardized for all deductible items at the mortgage interest deduction rate then prevailing and will be reduced by 3 percentage points per year to the basic rate. The deduction rate in 2021 will be 43%.
Measures for own home
As of 2020, there will be an accelerated reduction of the mortgage interest deduction. At present, the deduction in the highest bracket in Box 1 is being incrementally reduced in steps of 0.5% per annum. As of 2020, the deduction will be reduced in four steps of 3% to 36.93%, the new basic rate in Box 1. Home owners will be compensated for this through a reduction in the imputed income from homeownership (eigenwoningforfait). This will be reduced from 0.75% to 0.6%, but will continue to be taxed at the marginal rate. The deduction for not having a mortgage or only a small mortgage (the ‘Hillen deduction’) will be gradually phased out in equal steps over thirty years (the coalition agreement states twenty years, but the chairmen of the four parliamentary parties agreed to extend this period to thirty years). The high imputed income from homeownership of 2.35% calculated on the WOZ value insofar as this exceeds EUR 1,060,000 (2017) looks set to be retained.
Increased Box 2 rate
Due to the reduction in corporate income tax rates, the Box 2 personal income tax rate will be increased to 27.3% in 2020 and to 28.5% as of 2021.
Box 3 tax reduced
The tax on income from savings and investment in Box 3 will be reduced. The basic allowance will be increased from EUR 25,000 to EUR 30,000 (EUR 60,000 for partners). The new Cabinet also wants to bring the current methodology more quickly in line with the actual return (on balance) by using figures for the return on savings that are more actual.
Limitation of 30% ruling term
The period that the 30% ruling can be used will be shortened from eight to five years as of 2019. It is not yet clear whether transitional rules will apply.
Measures concerning entrepreneurs subject to personal income tax/self-employed persons without employees
The personal income tax relief for self-employed entrepreneurs will be limited, because, as is the case with other deductible items in Box 1, it will only be possible to apply this at the new basic rate in Box 1 of 36.93%.
The controversial Assessment of Employment Relationships Deregulation Act (Wet deregulering beoordeling arbeidsrelaties; DBA Act) will be reversed. It will be replaced by a Client Statement, which lays down the relationship between the client and the contractor. With regard to self-employed persons without employees (zzp-ers), it has been decided that there will always be an employment contract at a low rate in combination with a longer term contract or a low rate in combination with the performance of regular business activities. A low rate is defined as corresponding to payroll costs up to 125% of the statutory minimum wage and will be between EUR 15 and EUR 18 per hour. A longer term is defined as longer than three months. At the top end of the market, an ‘opt out’ for payroll tax and employee insurance schemes will be introduced for self-employed entrepreneurs if there is a high rate (according to the new Cabinet: above EUR 75 per hour) in combination with a shorter term contract or a high rate in combination with the non-performance of business activities. A shorter term is defined as being shorter than one year. The current compliance moratorium will be gradually phased out after the above measures have been introduced. Following the introduction of the new measures, a cautious compliance policy (including no penalties after the first inspection) will apply for a maximum one-year period.
Low VAT rate to increase from 6% to 9%
As of 2019, the low VAT rate will increase from 6% to 9%. The low VAT rate applies to many staple goods, but also, for example, to services such as hairdressing and shoe repairs. The high VAT rate remains unchanged at 21%.
Reform of pension system
The pension section of the coalition agreement covers the mandatory company and professional pension plans. The methodology currently applying means that the contribution is a percentage of the payroll, regardless of the age of the participant (flat-rate contribution). This benefits older participants; something which is no longer considered appropriate. The Cabinet wishes to reform the entire pension system to produce a more personal pension capital. However, the principles of mandatory participation, collective implementation, risk-sharing and tax relief will (for the time being) be respected. The costs of this reform must be shared equally by the various participant age groups. The transition to this new way of accruing a pension can be partly financed by relaxing the fiscal frameworks, provided this does not affect the long-term sustainability of public finances.
The new system must not be contrary to EU law, but the Cabinet is opposed to additional EU rules that detract from national powers. Allowing a limited commutation option on the date of retirement is being considered as a way of giving participants more freedom of choice. The aim is to reach agreement on the main features of a new system at the beginning of 2018. The supporting legislative process must then be completed in 2020, after which the implementation period could begin. Incidentally, pension funds cannot be forced to switch to the new system. The social partners will ultimately decide what happens.
Other tax measures
- The general tax credit will be increased by approximately EUR 350 in 2021.
- The labor tax credit will be increased so that the maximum will be approximately EUR 365 higher and subsequently phased out more quickly. The phase-out percentage will be 6%.
- The elderly person’s tax credit will be increased by approximately EUR 160 and an income-related phase-out will be introduced to replace the current fixed phase-out threshold. The phase-out will take place in steps of 15%.
- In response to the ‘Panama Papers’, the availability of and access to information and the investigative capacity of the Dutch tax authorities will be strengthened and there will be greater transparency.
- A kilometer charge will be introduced for trucks.
- The BPM (private motor vehicle and motorcycle tax) refund for taxis will be abolished.
- The introduction of a tax on airline tickets in 2021 is being considered as a possibility if EU agreements on aviation taxes for the purposes of attaining the Paris climate goals fail to realize sufficient results.
- The untaxed remuneration for volunteers of no more than EUR 1,500 per calendar year will be increased by EUR 200.
- The landlord charge will be reduced for housing associations, depending on the amount they invest in the sustainability of their housing stock.
- The tax on natural gas will be increased, while the tax on electricity will be reduced.
- Waste incineration will be subject to a higher tax.
- To encourage businesses to make their production as green as possible the new Cabinet will introduce a new CO2 This will be elaborated on in a new Energy Agreement.
- The excise tax on cigarettes and tobacco will be increased.