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Pillar Two bill submitted to Dutch Parliament
June 2023
In brief
The Netherlands legislative proposal to transpose Pillar Two into the Dutch company tax system, titled ‘Minimum Tax Act 2024 (Pillar Two),’ was submitted to the Dutch Parliament on May 31. The Netherlands is the first country within the European Union to release its domestic Pillar Two legislation. By doing so, the Netherlands takes the next step in implementing Pillar Two, effective December 31, 2023. The proposal aims to implement EU Directive 2022/2523 of 14 December 2022 (the Directive), published by the European Commission on December 14, 2022. The proposal generally aligns with the Directive.
Observation: The adoption of Pillar Two will significantly modify the Dutch corporate tax system. The complex Pillar Two legislation effectively introduces a new corporate tax system in addition to the existing company tax framework. The Dutch legislative proposal lays down the new rules in a separate legislative act and creates a separate levy. The new tax act will apply alongside and in addition to the existing and already complex Dutch (inter)national (corporate) tax rules, tax treaties, various EU Directives, and government decisions. The legislative act will apply to entities of (multinational or large domestic) groups that are based in the Netherlands with a consolidated group turnover of at least €750 million (certain sectors are exempted).
Takeaway: Parliament and the Upper House will discuss the legislative proposal in the coming months. The legislative bill is expected to enter into force on December 31, 2023. The Pillar Two rules will apply to accounting years beginning on or after this date. The complex Pillar Two legislation impacts the entire (global) business organization of in-scope companies. Therefore, companies should start analyzing the financial and administrative impact of these new rules on their business organization.
Background of the legislation
The Dutch Government’s legislative proposal of May 31, 2023 serves to implement the text of the EU’s Pillar Two Directive that was adopted by the Council on December 14, 2022. On December 22, 2021, the European Commission published the Pillar Two Directive proposal that was based on the OECD’s Model Rules. In anticipation of the Council’s adoption of the proposed Directive, the Dutch Government submitted a draft Pillar Two legislative proposal for online public consultation on October 24, 2022. Following up on additional outputs from the OECD, i.e., the Administrative Guidance published on February 2, 2023, in response to the input of consultation processes in this regard, further (technical) modifications have been incorporated into the legislative proposal that has now been submitted to Parliament.
Implementation in Dutch legislation
Substantively, the legislative proposal is based almost entirely on the EU Directive and the international political agreements reached within the Inclusive Framework (IF). Entities established for tax purposes in the Netherlands and that are part of a (multinational or large domestic) group with a consolidated group turnover of at least €750 million fall within the scope of the proposed legislation. Certain industry sectors, such as investment funds and pension funds, are exempted from the scope of Pillar Two, in alignment with the internationally politically endorsed Pillar Two framework.
The proposal introduces a top-up mechanism in accordance with the system as laid down in the EU Directive, which in turn follows the lines that have been internationally politically agreed upon within the IF. The effective tax rate to which a group entity is subject under the introduced legislative proposal is calculated by reference to the covered taxes involved and the qualifying income. Profit determination based on accepted financial reporting standards (such as IFRS, US GAAP, or Dutch GAAP) acts as a starting point in this regard. A number of adjustments then are made to arrive at qualifying income, again, in line with the international Pillar Two framework.
Based on the legislative proposal, Top-up Tax will be levied in the Netherlands up to the minimum tax rate of 15% if the effective Dutch corporate income tax rate of group entities that are taxable in the Netherlands, or if the effective tax rate (ETR) of any of the group entities established abroad, is lower than this minimum tax rate. In such case, Top-up Tax will be levied on the group’s business profits up to 15%. To arrive at this Top-up Tax, the proposal introduces three tax levy mechanisms:
- the Qualified Domestic Top-up Tax (QDMTT),
- the Income Inclusion Rule (IIR), and
- the Under-Taxed Profits Rule (UTPR).
Observation: In essence, by introducing the QDMTT, the Netherlands secures domestic taxation and accompanying tax revenues on Dutch-source business income up to the internationally agreed upon 15% minimum tax rate.
Administrative aspects
The legislative proposal introduces a separate substantive tax act alongside the current Dutch corporate income tax framework. The legislator has chosen to formalize any Top-up Tax due on the basis of a self-assessment tax filing mechanism. The tax return period for this purpose, in principle, is 17 months, equal to the payment period of the Top-up Tax (if any). A different deadline of 20 months applies for the first year.
Moreover, the legislative proposal regulates interest on tax charges due, and establishes liabilities for any unpaid tax debts and sanctions and fines, in case there is a violation of the administrative information and filing obligations. For objections and appeals, existing remedies as available under current legislation based on the Dutch General Law on Taxation (in Dutch: 'Algemene wet inzake Rijksbelastingen (AWR)') generally are adhered to.
Observation: The legislative proposal includes an obligation to disclose any information to the Dutch tax authorities, and a sanctioning provision in the event of non compliance. This may be important or relevant for a correct imposition of the minimum tax.
Notable differences with the consultation draft
Aside from some technical modifications and clarifications, the legislative proposal is largely in line with the consultation document of October 24, 2022. While much has remained unchanged, below are some of the notable exceptions.
Safe Harbour Rules
The most significant modification in the May 31, 2023 draft legislative bill as compared to the October 24, 2022 consultation document is that the draft bill includes Safe Harbour Rules. The consultation document merely contained a regulatory framework for a temporary Safe Harbour mechanism, whereas the recently released draft legislative act provides some detailed provisions on a temporary Safe Harbour. The draft act also introduces a regulatory framework for a permanent Safe Harbour. On December 15, 2022, the IF reached political agreement on a temporary Safe Harbour Rule, and also drew up a regulatory framework for a permanent Safe Harbour Rule. The Safe Harbour Rule aims to reduce the additional administrative burden and compliance pressure for companies and tax authorities.
The temporary Safe Harbour Rule has been drafted in alignment with the framework as agreed upon within the IF. The Safe Harbour Rule essentially establishes that a multinational or domestic group that falls within the scope of the Pillar Two measures while meeting certain conditions can opt to apply a simplified regulatory framework instead of applying the detailed Pillar Two rules as currently proposed. Matters mainly involve the application of the rules for calculating the effective tax burden for Pillar Two purposes. The Safe Harbour Rule allows eligible group entities to use existing financial and country-by-country reporting data as a basis for the Pillar Two effective tax rate calculations. If the simplified conditions in the Safe Harbour Rule are met, any additional Top-up Tax under any of the proposed Top-up Tax mechanisms will be set at nil for application of the detailed Pillar Two rules.
The legislative proposal introduces a regulatory framework for a permanent Safe Harbour Rule, stipulating that the manner in which the simplified calculations need to be performed under the permanent Safe Harbour will be laid down later on the basis of a council order. With this, the legislator is anticipating possible further guidelines from the IF and related political decision-making. As more substantive related provisions are yet to be released, the extent to which the permanent Safe Harbour Rule will provide companies with administrative relief is uncertain.
Other modifications
The legislative proposal includes specific additions and adjustments as compared to the consultation document. As to the ETR calculation, some technical adjustments have been introduced with regard to the calculation of the effective rate fraction’s numerator and denominator, – respectively, the so-called taxes involved (i.e., Covered Taxes in OECD terminology) and the so-called qualifying income or loss (i.e., GloBE Income in OECD terminology). The legislation also clarifies the exemption of income from international shipping.
Observation: The bill does not seem to comprehensively include the administrative guidelines that the OECD published with IF political support on February 2, 2023 (Administrative Guidance). The explanatory memorandum refers to the guidance in a general sense, but the content of the guidelines cannot be comprehensively found throughout the legislative proposal. The February 2, 2023 Administrative Guidance provides guidance for, e.g., the concurrence between qualifying domestic Top-up Tax and controlled foreign company (CFC) rules.
Observation: The guidelines also forward that the US Pillar Two Global Intangible Low-taxed Income (GILTI) rule qualifies as a CFC regime for Pillar Two purposes. Any tax levied on the basis of CFC rules and the US GILTI regime is allocated for the tax burden calculation to the countries where the relevant subsidiaries are located. This allocation applies to the income inclusion measure and undertaxed profit measure. The allocation, however, does not apply to the qualifying domestic additional tax.
During the internet consultation, questions also were raised about the suggested provisions regarding fines and penalties. The documents released by the Dutch legislature indicate that taxpayers who make reasonable efforts to be compliant during the transition period should not face fines or other sanctions; during this period, the tax authorities would exercise restraint in imposing sanctions. However, this lenient approach does not apply in cases of fraud and intent. The restraint to impose sanctions also does not apply to fines for omissions and neglect.
Notable differences between the proposed Dutch Pillar Two rules and the Dutch CITA
The Pillar Two legislative proposal would introduce an entirely new corporate tax system by reference to a separate tax legislative act alongside the Dutch Corporate Income Tax Act (Dutch CITA). The newly proposed tax legislative act introduces new sets of autonomous definitions, tax bases, and tax calculations. These do not fully align with their equivalents in the current Dutch CITA and its methodologies, interpretations, and applications.
Observation: The explanatory memorandum does not elaborate on the concurrent operation of the current legislative proposal and the existing Dutch CITA system. Observations on potential implications of the concurrent operation of the disparate company tax rulebooks include:
- The legislative proposal applies different conditions for applying the participation exemption than does the Dutch CITA vis-a-vis its Pillar Two counterpart. While the participation exemption may apply for corporate tax purposes, it is not taken into account for Pillar Two purposes under the proposal, thereby lowering the effective tax burden and leading to possible Top-up Tax.
- The legislative proposal does not address how it would operate concurrently with the Dutch fiscal unity regime. The Pillar Two calculation is determined per entity, and the calculations are subsequently aggregated on a jurisdictional level. In a fiscal unity for Dutch corporation tax purposes, any corporation tax is levied in the hands of a single taxable parent company. This tax consolidation raises the question as to how it fits in and interacts with the calculation of the effective tax burden on an entity-per-entity basis for Pillar Two purposes.
- The exception for international shipping income does not align with the current Dutch tonnage tax regime. This may result in ETR fluctuations for Pillar Two calculation purposes.
Provisions in existing Dutch company tax legislation, such as the liquidation loss offset regime and the innovation box regime (liquidatieverliesregeling and innovatiebox) have no counterpart regimes in the proposed Pillar Two rules. Therefore, their operation under the Dutch CITA in consequence would reduce the ETR under Pillar Two.
Implementation
Additions to the OECD Commentary and further administrative guidance is expected in the following months. As the legislative proposal is based on the OECD Model Rules, the OECD Commentary can be used to interpret the Dutch legislative proposal if it aligns with the Model Rules. Further additions to the OECD Commentary and additional administrative guidance would impact the current legislative proposal and could, at some point, also be incorporated into the Dutch legislation.
Pillar Two Expert Team / Certainty in advance
When the Minimum Tax Rate Act 2024 was published, the government also announced that the Dutch Tax Authorities would form a Pillar Two Expert Team to assist taxpayers with the application of the rules. Once the rules are in effect, it is expected that taxpayer certainty will be provided through the regular process of Advance Tax Rulings.
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