1. Headlines proposal
1.1 Scope
The rules will apply to entities forming part of a group that has – based on its consolidated accounts – an annual turnover of at least € 750 million in two of four years preceding the relevant year. The rules apply to both large multinational groups as well as large domestic groups. Government entities, international organizations, non-profit organizations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of such groups or any holding vehicles used by such entities, organizations or funds are generally not subject to the rules.
The so called Pillar 2 consists of two rules intended for introduction in national domestic tax laws, and a treaty based rule. The two domestic tax rules, the Income Inclusion Rule (IIR) and its backstop, the Undertaxed Payments Rule (UTPR), are together known as the GloBE Model Rules. The Subject to Tax Rule (STTR) is a treaty-based rule that allows source jurisdictions to impose limited source taxation on certain related party payments that are subject to tax below a minimum rate. The STTR does not form part of the EU Directive or the Dutch implementation proposal.
The EU Directive provides that EU member states can opt to apply the top-up tax domestically to entities located in their jurisdiction, thus avoiding that the top-up tax is levied from the ultimate parent company as described below. The Netherlands have opted to include such domestic top-up tax (“binnenlandse bijheffing”) in their proposal. Due to the current CIT rate of 25.8%, this will only affect specific situations, for instance where a liquidation loss claimed in respect of subsidiaries or the application of the innovation box results in an effective taxation below the 15% minimum.
1.2 The Income Inclusion Rule (“Inkomeninclusiebijheffing”)
In line with the OECD/G20 proposal and the EU Directive, the Dutch draft Bill under the so called Income Inclusion Rule provides for a top-up tax (“bijheffing”) that is calculated in five consecutive steps. This top-up tax applies irrespective of whether the subsidiary is located in a country that has signed up to the international OECD/G20 agreement or not.
In step 1 entities falling within the scope of the rules should calculate their effective tax rate (ETR). In this calculation, all entities of the group in a specific country should be taken together, regardless whether they form part of a tax consolidation. The ETR should be calculated using the formula: adjusted relevant taxes / net qualifying income.
Briefly summarized, adjusted taxes relate to the profit taxes (both actual and deferred) as reflected in the financial accounts of the entity with certain adjustments, together with taxes levied on (deemed) distributions and other taxes levied on non-distributed profit and equity. Net qualifying income is in principle the net profit or loss as reflected in the financial accounts of all entities in one state taken together, adjusted for certain temporary and permanent differences. Amongst others, adjustments are made for tax loss carry forwards and certain depreciation periods. Also, dividends and gains relating to non-portfolio shareholdings[1] and portfolio shareholdings (to the extent held at least 12 months) are excluded from such net income. The Dutch draft Bill includes specific provisions for income from shipping activities, permanent establishments, intra-group financing activities and (reverse) hybrid entities.
If the ETR for the entities in a particular jurisdiction is below the 15% minimum, then the Pillar 2 rules are triggered and the group must in principle pay a top-up tax to bring its rate up to 15%. In step 2 the top-up tax percentage is calculated as the difference between the minimum tax rate of 15% and the ETR calculated in step 1. If the ETR is for instance 10%, the top-up tax percentage will be 5%.
Step 3 is the calculation of the so called excess income. This is defined as the net qualifying income less the so called substance based income exclusion. The substance based income exclusion is the sum of a payroll carve-out and a tangible asset carve-out, which is a percentage of eligible payroll costs and the carrying value of eligible tangible assets (such as property, plant and equipment) in the relevant country. The percentage to be used for the tangible asset carve-out will gradually decrease from 8% in 2024 to ultimately 5% after 2033. The percentage to be used for the payroll asset carve-out will gradually decrease from 10% in 2024 to ultimately 5% after 2033.
In step 4 the top-up tax is calculated by multiplying the excess income from step 3 by the top-up tax percentage from step 2.
Steps 1 to 4 are performed per jurisdiction for all group entities combined. Finally, in step 5 the top-up tax is allocated to individual group entities pro rata to their share in the combined net qualifying income.
If no domestic top-up tax is levied, the top-up tax under the Income Inclusion Rule is imposed on a parent entity in respect of the low-taxed income of group entities. This applies on a top-down basis, which means that it is applied by the entity that is at, or near, the top of the ownership chain in the group, which is normally the Ultimate Parent Entity (UPE). However, in a case where the UPE does not apply the IIR[2], one or more intermediate parent entities (IPE) will have to apply the IIR to their low-taxed constituent entities. The IIR is subject to a split-ownership rule for shareholdings below 80%. This means IIR will be applied by a partially-owned parent entity (POPE) to its controlled subsidiaries of a sub-set of the group in priority to the UPE when such POPE is owned by more than 20% by shareholders outside of the group. In case there are several POPEs in a group, the IIR will be applied by the POPE closest in the chain of ownership to the low-taxed constituent entity.
1.3 The Undertaxed Payment Rule (“Onderbelaste winstbijheffing”)
The UTPR acts as a backstop to the IIR and applies in situations where there is no qualifying IIR in the jurisdiction of the UPE or where a low level of taxation arises in the jurisdiction of the UPE. The UTPR works by allocating top-up tax to a jurisdiction to the extent the low-tax income of a constituent entity is not subject to tax under an IIR. The UTPR allocates top-up tax to jurisdictions based on a two-factor formula – carrying value of tangible assets in the jurisdiction and number of employees in the jurisdiction. The UTPR will be introduced slightly later than the IIR, with the effective date in the Netherlands now scheduled for 1 January 2025.
1.4 Formal aspects
Dutch group entities falling within the scope of the GloBE rules should file a GloBE information return and a GloBE tax return. Apart from information about the relevant entities and the group, the GloBE information return should include the effective tax rate for each country and the top-up tax, if and when due. Such information return should in principle be filed within 15 months after the relevant year. The tax return should in principle be filed within 17 months after the relevant year and the top-up tax due should be paid on declaration. A joint and several liability will be created for all entities forming part of the same group in the same jurisdiction, regardless whether such entities form part of a Dutch fiscal unity.
For late payment of tax, interest will be calculated as from the ultimate filing date. If a taxpayer fails to meet its filing obligations substantial fines may be imposed.
1.5 Transitional rules and exceptions
The law contains an important exclusion from the IIR and UTPR due by groups during the start-up phase (a period of five years from the moment they have become a multinational group with international activities). This is the phase during which the group’s entities have a maximum of EUR 50 million tangible assets outside its reference jurisdiction and that operate in no more than 5 other jurisdictions outside the reference jurisdiction. This exclusion is limited to a period of 5 years after the MNE comes into the scope of the GloBE rules for the first time. For MNEs that are in scope of the GloBE rules when they come into effect the period of 5 years will start at the time the UTPR rules come into effect.
In respect of a UPE applying a distribution tax system, there will be no top-up tax liability if earnings are distributed within 12 months after the reporting year and taxed at or above the minimum level in the hands of its (qualifying) shareholders.
The proposal also contains a de minimis exclusion (upon request) for those jurisdictions where the group entity forming part of the MNE group has revenues of less than EUR 10 million and profits of less than EUR 1 million in that jurisdiction in the reporting year. There will also be a safe harbor rule for which the conditions yet need to be published.
In addition, the law contains specific provisions relating to the deferred tax assets and liabilities and transferred assets present in the first year in which a multinational group falls within the scope of the GloBE rules.
2. Next steps
The Dutch State Secretary of Finance has meanwhile informed the Dutch Parliament on the agreement reached about the EU Directive. A further technical briefing of Parliament is scheduled for 24 January 2023. The final Bill for implementation of the Directive into Dutch law is then intended to be submitted with Parliament in the spring.
3. Our preliminary conclusions
Many international and national groups will be affected by these rules. Even if their tax burden is not materially increased, the administrative burden can be substantial. In view of the high fines imposed in case of non-compliance, it is highly recommended to start as soon as possible with the setting up of compliance processes and analyze your position. The Dirkzwager team may assist you in this process if and when desired.
[1] Requiring entitlement to at least 10% of equity, reserves or voting rights.
[2] For instance, where the UPE is located in a third state and does not apply the IIR.