Netherlands: Loss set-off limitation and job-related investment allowance proposals
Netherlands: Loss set-off limitation
The Dutch government on 5 October 2020 presented to the lower house two “Memoranda of Amendment” to the bill on the 2021 tax plan—as previously announced on budget day.
The Finance Standing Committee of the lower house was scheduled to discuss the job-related investment allowance proposal on 6 October 2020, first as a technical briefing, followed by a hearing and round table discussion.
Tightening of loss set-off
The first Memorandum of Amendment contains the government’s proposal to limit the loss set-off for corporate income tax purposes as of 1 January 2022. This proposal comes directly from the report by the advisory committee on the taxation of multinationals (referred to as the Ter Haar Committee).
The limitation of the loss set-off is aimed at companies with profitable activities in the Netherlands but not paying any corporate income tax for years in a row due to, for example, large losses incurred in the past. For this reason and for the purposes of a more gradual loss set-off and thus more stable tax revenues, the government is proposing to limit the size of the losses that can be taken into account in a profitable year. Losses would only be fully available for carryforward and carryback set off up to an amount of €1 million of taxable profit per year.
Up to an amount of €1 million, losses would thus always be able to be set off against a profitable year. In the case of an annual profit greater than €1 million, any remaining loss could only be set off against 50% of the higher taxable profit for that year. This rescheduling of the loss set-off is proposed in combination with an in-time unlimited carryforward loss set-off (now a carryforward period of six years applies). The carryback loss set-off period is and would remain one year.
The rescheduling means that highly profitable companies would have to start paying corporate income tax again as soon as they return to profitability after a loss-making period. It would also contribute to a lower limit for corporate income tax purposes. Similar regimes are also used in various other countries such as Germany and France.
The combined measure only applies to (resident and non-resident) corporate income taxpayers and expressly not to businesses in Box 1 (individual income tax) and substantial interest holders in Box 2 (individual income tax).
Of crucial importance is that the proposed changes with regard to the unlimited carryforward loss set-off would apply to all off-settable losses incurred as of 1 January 2022 or that are still available for carryforward loss set-off at year-end 2021. The government considers this justified because these changes would be both beneficial and restrictive for taxpayers. The transitional rules mean that losses incurred in financial years commencing on or after 1 January 2013 and that had not yet been set-off at the end of the financial year commencing on or after 1 January 2021, would be carried forward indefinitely and would not expire. These old losses could be set off against taxable profits for financial years commencing on or after 1 January 2022. However, the new methodology also would apply to this loss set-off; thus, for a loss set-off against taxable profits for 2022 and subsequent years, the maximum amount that could be set off per year would be €1 million and half of the taxable profit for that year, insofar as it exceeds €1 million.
It was only as of 2019 that the carryforward loss set-off period for corporate income tax purposes was reduced from nine to six years. In that respect, transitional rules still apply with regard to the order in which losses for 2019 and 2020 can be set off. The proposed unlimited carryforward loss set-off means that these transitional rules would be canceled.
No distinction between type of losses
The proposed measure does not distinguish between the type of losses. The easing and tightening, thus, would also apply to holding company and financing losses that fall under the transitional rules for the holding company loss set-off (repealed as of 1 January 2019). However, the proposed limitation would not affect the Mining Act. The new methodology is no different if and insofar as losses are caused by claimed liquidation losses.
The memorandum contains a number of accompanying measures. For example, the changes also would have implications for setting off deferred liquidation losses in situations when a company that is included in a fiscal unity holds a participation that has incurred such a loss. Also in that respect, both the easing and the tightening would be implemented.
Job-related investment allowance
The second Memorandum of Amendment covers the “Job-related Investment Allowance” (Baangerelateerde Investeringskorting—BIK). The government intends to use the BIK to encourage companies to make investments and to retain jobs. If companies make an investment, for example through purchasing new equipment, they would receive a credit that they can use to set off against their payroll tax and social security contributions as a remittance reduction.
The BIK remittance reduction amounts to 3% per calendar year for investment amounts up to and including €5 million and 2.44% for amounts in excess thereof. The BIK scheme would apply for two years (2021 and 2022). The total budget for this scheme would be €2 billion per year. If it turns out that the available budget of €2 billion for 2021 is (significantly) overspent or underspent, this could be cause to adjust the parameters of the BIK for the year 2022 accordingly (upward or downward). A change to the parameters for the year 2022 would be announced no later than December 15, 2021.
A number of conditions would have to be met in order to be eligible for the BIK remittance reduction:
- There must be a BIK withholding agent. This is a natural person who, or an entity that has a withholding obligation for payroll tax and social security contributions and is also subject to individual (personal) or corporate income tax. Foundations that do not carry on a business (stichtingen zonder onderneming), exempt (healthcare) institutions, fiscal investment institutions and businesses without personnel would not qualify for the BIK.
- There must be one or more job-related investments; in short, that is the case if commitments were entered into for the purchase of an asset not previously used by anyone. The investment obligation must also be at the expense of the BIK withholding agent or the fiscal unity for corporate income tax purposes (discussed below). Production and improvement costs would not qualify for the BIK.
- Because a link is made to the term “investment” as it applies for the purposes of the small projects investment credit (kleinschaligheidsinvesteringsaftrek—KIA), certain investments would be excluded. For example, investments:
- In residential dwellings, land and animals
- In cars not intended for business transport
- In operating assets intended for leasing
- For which commitments were entered into toward persons belonging to the same household and certain blood relatives or relatives by marriage
- In residential dwellings, land and animals
Operating assets for which the amount invested is less than €1,500 per operating asset are also excluded.
The commitment in respect of the investment would have to have been entered into on or after 1 October 2020 but before 31 December 2022. The taxpayer must be able to convincingly demonstrate this (for example by means of a signed contract).
The investments would have to be fully paid with a final payment in 2021 or 2022, and put into use within six months of the full payment.
The BIK withholding agent must file an electronic application for the issue of a BIK statement. The BIK statement is to be issued by The Netherlands Enterprise Agency (Rijksdienst voor Ondernemend Nederland—RVO) on behalf of the Minister of Economic Affairs and Climate Policy. The application would be filed no later than within three months of the end of the calendar year in which the final payment for the job-related investment was made. Applications could be filed for the first time on 1 September 2021.
Each application would include at least €20,000 of BIK investments (efficiency threshold).
No more than one application could be made per quarter, with a maximum of four per calendar year. On the basis of the issued BIK statement, the credit could be applied to the payroll tax and social security contributions to be remitted in that calendar year.
Incorporation into the payroll tax and social security contributions return
As of the start of the tax return period in which the BIK statement is dated, the BIK remittance reduction could be credited against the payroll tax and social security contributions to be remitted, but no further than nil. If an amount of BIK remittance reduction remains, it could be credited in the following month during the calendar year in which the BIK statement was issued.
If, at the end of the calendar year, there is still an amount of uncredited BIK remittance reduction, it could be credited (via a correction notification) against the payroll tax and social security contributions for a tax return period that ended earlier in the calendar year in which the BIK statement is dated.
As of 2022, withholding agents can use the “BIK remittance reduction” section in the payroll tax and social security contributions return. Until then, withholding agents would use the “remittance reduction maritime shipping” section to apply the BIK remittance reduction.
The BIK withholding agent to whom a BIK statement was issued must keep accounts and records about the job-related investments that were entered into in this respect. If it turns out that the BIK remittance reduction was wrongly issued or applied for, or the wrong amount was issued or applied for, a correction BIK statement could be issued. In addition, administrative penalties may be imposed for a maximum of €100,000 or, if greater, 20% of the amount set as the remittance reduction in the BIK statement.
If various withholding agents are members of a fiscal unity for corporate income tax purposes, only one of these withholding agents could apply for a BIK statement (the designated BIK withholding agent). The job-related investments of all the companies within the fiscal unity could be included in the application. The designated BIK withholding agent would allocate the amount of BIK remittance reduction applied for in the application to the other withholding agents that are members of the fiscal unity. If the designated BIK withholding agent does not indicate an allocation, the amount of the BIK remittance reduction would be fully allocated to the designated BIK withholding agent.
Depreciation and other investment tax relief not affected by the BIK
The BIK remittance reduction would be a supplement to existing incentive schemes—such as the energy investment allowance (energie-investeringsaftrek—EIA), the environmental investment allowance (milieu-investeringsaftrek—MIA), the KIA and the free depreciation of environmental investments (willekeurige afschrijving milieu-investeringen—VAMIL)—and could coincide with these schemes. It is also explicitly stated that the amount of the BIK is not part of the acquisition costs, so that depreciation and investment tax relief could be used as if no BIK had been received. Without such a provision, the BIK may have to be regarded as an item-related subsidy.
The Council of State has advised the government to report the scheme to the European Commission in order to rule out that there is prohibited state aid. According to this advisory body, the stipulated conditions may mean that certain companies are given a selective advantage. However, according to the government, the BIK is a generic tax measure and there is thus no prohibited state aid. Therefore, the government will not report it in Brussels.
For many individual and corporate income taxpaying businesses, the BIK would provide a welcome contribution to their investments. What is striking is that some of the businesses cannot or can hardly benefit from this incentive scheme because the measure would only apply to investments in operating assets, and moreover not all types of operating assets would qualify for the scheme. The BIK also raises many technical questions. Also note that an application for a remittance reduction under the BIK could only be made as of 1 September 2021. It is also far from clear what the consequences would be in the case of inclusion in (or removal from) a fiscal unity, or in the case of a legal merger or division.
In many cases, loss set-off would be more complex and the new rules could create more differences between carrying on a business as a sole proprietor or as a private limited liability company. Roughly speaking, this may also lead to more differences between large and small businesses. Add to that the fact that due to the coronavirus crisis, many losses are being incurred earlier and that larger businesses are also facing a limitation of the liquidation and cessation loss schemes, then it is clear that loss set-off for corporate income tax purposes would (have to) be high on the agenda in the coming period.
Read an October 2020 report prepared by the KPMG member firm in the Netherlands
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