Proposal of law nr. 28 608 - 59
This proposal of law was adopted on 10 December 2002. It entered into force on 1 January 2003.
1. Background
This proposal of law has been submitted to the Dutch Second Chamber on 17 September 2002; after some changes, it has been accepted by that Chamber on 14 November and submitted to the First Chamber (which formally can not change it any more) on the same day. The relevant proposed changes concern:
2. Extension of the exclusion of certain EU participations from the participation exemption
2.1 Current legislation
The Dutch participation exemption, exempts income and gains from qualifying subsidiaries from corporate income tax (see our memorandum for more information). This exemption does not apply to portfolio investments in entities resident outside the Netherlands, unless they are resident in the EU and are sheltered under the EC Parent/Subsidiary Directive (which arguably does not allow the portfolio investment test). Under art 13g'3 of the Corporate Income Tax Act (CIT), the exemption for EU participations does not apply for ownership in a company which is resident in another member state and which is held as a portfolio investment, if the assets of that participation consist for 70 percent or more of participations in companies resident outside the EU and if those participations would not have qualified for the participation exemption, had they been held by the taxpayer directly.
2.2 Proposed legislation
The proposed legislation covers two extensions of this exception:
- In determining whether 70% or more of the assets of the EU participation would not have qualified for the participation exemption, had they been held directly, the proposed art 13g'3 CIT does not only apply to non EU participations, but also to EU participations which would not have qualified for the participation exemption, had they been held directly. Examples are:
- 25% or larger participations in EU companies which are not covered by the EC Parent/Subsidiary Directive, because they do not have one of the legal forms listed in the annex to this directive;
- 25% or larger participations in EU companies which are not covered by the EC Parent/Subsidiary Directive, because they are not subject to an income tax; or
- participations which do have one of the legal forms covered in the listed annex to the EC Parent/Subsidiary Directive and are subject to an income tax, but are not covered by the directive because the interest held is smaller than 25%, the minimum interest required under the directive.
- In determining whether 70% or more of the assets of the EU participation would not have qualified for the participation exemption, had they been held directly, the proposed measure is extended from looking at shares in other companies only, to also looking at assets situated outside the country of residence of the participation, in case no relief for the prevention of double taxation would have been available for the Dutch shareholder, had it held those assets directly. The parliamentary history mentions direct and indirect participations in Luxembourg companies with (passive) Swiss finance branches as examples.
The proposed legislation goes on to determine in art. 13g'4 CIT that art. 28b'2 CITis now applicable as well. The current art. 13g'4 CIT already determined that participations had to be marked to market if they presented an interest of at least one quarter in an entity and if that entity's assets consisted almost wholly of investments.
3. Changes concerning the new tax consolidated group regime
We refer to our separate memorandum on this for a more complete description of the proposed changes. The original proposal of law has already been approved by the Second Chamber and submitted to the First Chamber, which does not have the authority to directly amend the proposal, but did have a number of concerns with the original proposal. Therefore, the law proposed in the original proposal has subsequently been amended through other proposals of law still being debated by the Second Chamber. These amendments, if accepted, will amend the law enacted through the original proposal, but not the original proposal itself.
Noteworthy changes to the original proposal include:
- the inclusion of hybrid loans into the proposed art. 15ac'5 CIT. Because the original wording of the law left the possibility of circumventing it through the use of hybrid loans, the proposed law is now being amended;
- the extension of the so-called earn out rule in the participation exemption to tax consolidated groups. Under the earn-out rule, a buyer and a seller of a participation may agree a sales price dependent on uncertain future events (e.g. future earnings).
Texts of proposed changes of law
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