2025 Tax Plan - Pillar Two and related amendments to Dutch tax legislation

Bill amending the Dutch minimum tax act 2024

General

The Dutch minimum tax act 2024 (“DMTA”), which was introduced late 2023 as implementation of EU Directive 2022/2523, is largely based on the OECD / IF Pillar Two Model Rules (“Model Rules”) and the Commentary to the Model Rules (inclusive of updates provided in new OECD / IF Administrative Guidance). The Model Rules and the DMTA (also commonly referred to as the “Pillar Two rules”) in short function to ensure a minimum effective tax rate (“ETR”) of 15%. In case the ETR of a group in any jurisdiction is below the minimum rate of 15%, the rules require that a top-up tax is to be levied.

Administrative Guidances updating the Model Rules have been published in February, July and December 2023 and in June 2024. As the OECD / IF ruleset is continuously updated by new Administrative Guidance, the DMTA is subject to continuous updating by way of transposition of new guidance into the legal provisions. As has been expressed by the legislator, however, it is good to note that new guidance which is illustrative or clarifying does not necessarily require an amendment of the DMTA and instead can readily be applied.

The Bill amending the DMTA 2024 proposes a number of amendments incorporating some remaining items of the July 2023 Administrative Guidance and a significant amount of items of the December 2023 Administrative Guidance. These items require  actual transposition in the DMTA 2024 since they are considered not to be just illustrative/clarifying items. Next to this, certain more editorial changes are proposed  to improve the quality of the law. Most of the measures have retroactive effect until 31 December 2023. This is different for certain changes that may negatively impact taxpayers, which enter into effect for reporting years starting on or after 31 December 2024. In the below we will highlight some of the more interesting changes, and also provide a list of the other items that are envisaged to be amended by the Bill amending the DMTA 2024.

Qualifying domestic top-up tax

Several technical changes are proposed to amend the qualifying domestic top-up tax (“QDMTT”). These changes include among other things a tie-breaker, which is relevant if a group is required to calculate its QDMTT based on local GAAP and the group has Dutch constituent entities that report under multiple allowed local GAAPs (i.e. some entities reporting under Dutch GAAP and others under IFRS). If this is the case, the QDMTT should be calculated under Dutch GAAP.  The proposed changes are envisaged to apply for reporting years starting on or after 31 December 2024.

Further, the option is introduced that groups which do not calculate the results of their Dutch constituent entities in EUR may calculate their results for the QDMTT in the currency that is used in preparation of the consolidated financial statements of the ultimate parent entity. This election applies for a five-year period.  

As a last item, previously there was uncertainty in the DMTA on whether Dutch joint venture group entities could be subject to QDMTT over their income. In the legislative amendments, it is proposed that joint venture group members can be subjected to QDMTT over their income. This and the previously mentioned proposed change are envisaged to have retroactive effect to 31 December 2023.

Transitional CbCR Safe Harbour

Anti-abuse measures are proposed in the context of the Transitional CbCR Safe Harbour (“CbCR SH”). These measures aim to prevent the optimization of the position of Pillar Two groups for CbCR SH purposes by use of ‘hybrid arbitrage arrangements’ that lead to double recognition of taxes or mismatches in income or expense recognition. The amendments are envisaged to first take effect for reporting years starting on or after 31 December 2024.

At the same time, relief is provided to groups that may in a year not be obliged to prepare a CbCR (such as for instance purely domestic groups). It is proposed that these groups may invoke the CbCR SH under certain circumstances, even in absence of the legal obligation to prepare a CbCR. This amendment is envisaged to have retroactive effect to 31 December 2023.

Other items

A brief overview for the items that have also been amended by the Bill amending the DMTA 2024:

• Marketable and transferrable tax credits – a mitigation of the negative effects resulting from the use of such credits on the current tax of groups has been provided for in the July 2023 Administrative Guidance. The treatment for these credits is incorporated in this legislative update.
• Currency exchange – specific rules are provided for certain specific situations, such as for instance  where there are differences between the functional currency of a constituent entity compared to the currency used in preparing the groups consolidated financial statements. This could be of relevance for calculating the amount of covered taxes, income and thus top-up tax, as well as for determining certain monetary thresholds in the DMTA, as this legislation in principle is based on EUR calculations.
  
• Excess negative tax expense carry-forward – a regime that provides relief in cases where a group is on a jurisdictional basis in a profit-making position but has a negative ETR. The regime provides relief by deferring the top-up tax that may result from the negative ETR to reporting years in which on a jurisdictional net basis, income is generated. The amendment is not envisaged to have retroactive effect.
  
• Substance-based income exclusion (“SBIE”) – additional clarification is provided on how to treat certain types of assets (e.g. lease assets) in light of this income exclusion. Also, clarification is provided on mobile employees and assets, that may not be in the jurisdiction for which the SBIE is claimed for a full year and hence, the question could arise if (and to what extent) the SBIE for that jurisdiction should take these factors into account.
  
• Transitional rules for transition years ending before 31 December 2024 or reporting years ending before 31 March 2025 – specific relief in case groups have short reporting years, to ensure that the first GloBE Information Return or related notifications are not required to be filed prior to June 30 2026. Changes have also been proposed to allow for a similar treatment for the deadlines related to filing of the DMTA return, payment of the DMTA taxes, expiration of the right to impose an additional tax levy by the Dutch tax inspector etc.
  

Subject-to-tax clauses in the Dutch corporate income tax act 1969

The introduction of Pillar Two taxes around the world has given rise to the question whether these taxes can be considered to be qualifying taxes for certain subject-to-tax clauses in the Dutch corporate income tax act 1969 (“DCITA”).

It is proposed that foreign QDMTT’s may be considered as relevant taxes for the subject-to-tax condition(s) of the Dutch participation exemption and the object exemption for the results of permanent establishments (as well as some DCITA provisions that are closely related to these regimes). Further, in the context of the Dutch base-erosion provision of art. 10a DCITA, it is proposed that all Pillar Two levies (also a foreign Income-Inclusion Rule or Undertaxed Profits Rule) may be taken into account in determining whether a sufficient compensatory levy over interest income is levied. This means that in principle, also tax imposed on an entity other than the creditor of an intercompany loan could under circumstances constitute a compensatory levy for art. 10a DCITA purposes. These proposed amendments to the legal provisions are not intended to alter the application of the DCITA but rather to explicitly lay the interaction with Pillar Two top-up taxes down in legislation. It is good to note that differences may exist between the tax base as determined under the DCITA provisions and that under a Pillar Two top-up tax, meaning that whether there is a sufficient level of taxation requires a detailed analysis of the factual circumstances and the specific requirements of the respective DCITA provision under analysis.

No provisions are proposed for certain other subject-to-tax clauses in the DCITA, most notably those in the anti-hybrid mismatch legislation, the transfer pricing mismatch legislation and the controlled-foreign company rule. However, in the memorandum of understanding, it is mentioned that under circumstances where an income item is picked-up and taxed against a top-up tax percentage of 15% under a Pillar Two levy, this levy may possibly be of relevance for these subject-to-tax clauses.  Since the legal articles of these provisions are not amended, the analysis if and how a Pillar Two levy interacts with these subject-to-clauses should be based on the existing rule set and specific circumstances.