2024 Dutch Minimum Tax Act

On 31 May 2023 the Dutch government published a legislative proposal for the 2024 Dutch Minimum Tax Act. This proposal intends to implement the EU minimum tax directive that was adopted on 14 December 2022. The EU minimum tax directive seeks to ensure a minimum effective profit taxation of 15% for large groups. The Netherlands aims to implement these so-called “Pillar 2” rules effective as of 1 January 2024.

The rules would apply to multinational groups and large domestic groups with an annual consolidated turnover of at least € 750 million. This threshold of € 750 million is determined based on the turnover reported in the consolidated financial statements of the group in the four reporting years immediately preceding the reporting year to be assessed. In principle, the proposed rules apply if the turnover in two of those four reporting years amounts to at least € 750 million for the respective financial year. This threshold amount is reduced or increased on a pro rata basis in case the respective financial year deviates from a 12-month period.

2. Excluded Entities
Certain entities such as pension funds, investment funds (which qualify as an ultimate parent company), government entities and others are excluded from the scope of Pillar 2. The turnover of an excluded entity is taken into account for purposes of calculating the threshold mentioned above, if and to the extent that the turnover of such excluded entity is part of the turnover in the consolidated financial statements of the ultimate parent entity (“UPE”).

3. Pillar 2 Mechanics
The Pillar 2 rules consists of three interrelated rules which seek to secure a minimum taxation for large groups at an effective profit tax rate of 15%.

The EU Directive gives countries the option to implement a so-called Qualified Domestic Minimum Top-Up Tax (“QDMTT”). The Netherlands will implement the QDMTT on the basis of which it can levy a top-up tax to increase the effective profit tax rate of low-taxed group entities which are established in the Netherlands to 15%. Note that in the context of the proposed rules a permanent establishment is considered to qualify as a (separate) ‘group entity’ and that the term ‘entity’ not only includes legal entities, but also other legal forms which prepare separate financial statements.

If the (deemed) UPE of the group is established in the Netherlands, the Netherlands will also apply the so-called Income Inclusion Rule (“IIR”). The IIR includes in the taxable base of the (deemed) UPE (deemed) low-taxed profits of direct and indirect subsidiaries as well as any (deemed) low-taxed profits of the (deemed) UPE itself and of subsidiaries established in the same jurisdiction as the UPE. Based on the IIR the (deemed) UPE jurisdiction is to levy a top-up tax to increase the effective profit tax rate on these profits to 15%. In principle, top-up tax due under application of a QDMTT may be credited against a top-up tax due under application of the IIR at the level of (deemed) UPE.

Effective as of 1 January 2025, the Netherlands is also proposing to introduce the so-called Undertaxed Payments Rule (“UTPR”) as a ‘backstop’ to the IIR (insofar the IIR cannot be applied). The UTPR would for example impose a top-up tax in case a group entity established in the Netherlands is part of a multinational group which includes low-taxed group entities and where the UPE is an excluded entity or a foreign entity resident in a non-EU state that does not apply an IIR. The top-up tax following from the UTPR is allocated between the different jurisdictions in the group structure applying the UTPR.

Note in respect of the UTPR that a specific exception applies in case a Dutch group entity is held by a UPE that is established in an EU Member State which has opted not to apply the IIR and UTPR with respect to reporting years starting before 31 December 2029. In that specific case the Netherlands will already apply the UTPR as of 1 January 2024.

Also note that specific temporary relief rules may apply to large domestic groups and - subject to specific criteria - multinational enterprises (“MNE Groups”) that are deemed to be in the start-up phase of their international activities.

4. Safe Harbour Rules
The legislative proposal includes the following safe harbour rules: (i) “De-minimis-exception-rule”, (ii) “Transitional-Qualifying-Country-by-Country-Report-safe-harbour-rules”, and (iii) “Permanentsafe-harbour-rule” (or “Simplified-calculation-safe-harbour-rule”).

De-minimis-exception-rule
Based on the de-minimis-exception-rule, subject to specific exceptions, the top-up tax in a jurisdiction for a fiscal year shall be deemed to be zero if the ‘average qualifying turnover’ of all group entities resident in that jurisdiction does not exceed EUR 10 million and the ‘average qualifying income (or loss)’ of all group entities resident in that jurisdiction does not exceed EUR 1 million. The ‘averages’ are, in principle, calculated over a three-year reference period, including the reporting period and two prior reporting periods. When applying this exception rule the ‘qualifying turnover’ and ‘qualifying income (or loss)’ are to be calculated in accordance with the (detailed) Pillar 2 calculation rules as laid down in the legislative proposal.

Transitional Country-by-Country Report (“CbCR”) Safe Harbour
The Transitional CbCR Safe Harbour in principle relies on CbCR data as the basis for calculating an MNE Group’s revenue and income on a jurisdictional basis, subject to specific adjustments. Background of this transitional safe harbour is that CbCR data may be more readily available / verifiable data toMNE Groups subject to Pillar 2.

Based on the (optional) Transitional CbCR Safe Harbour, subject to specific exceptions, the top-up tax in a jurisdiction for a fiscal year shall be deemed to be zero in any of the following situations:

1. the MNE Group reports in a jurisdiction a total revenue of less than EUR 10 million and profit (loss) before income tax of less than EUR 1 million on its Qualified CbC Report for the fiscal year (“CBCR-de-minimis-test”);
   
   
2. the MNE Group has in a jurisdiction a simplified effective tax rate that is equal to or greater than the transition rate for the fiscal year (the “CBCR-effective-tax-rate-test”; transition rate is 15% for Fiscal Years beginning in 2023 and 2024; 16% for Fiscal Years beginning in 2025; and 17% for Fiscal Years beginning in 2026);
   
   The ETR is calculated using Profit (Loss) before Income Tax data from CbCR and the income tax expense reflected in the Qualified Financial Statements. The income tax expense used for the ETR test therefore includes deferred items and only needs to be adjusted for taxes which are not Covered Taxes and Uncertain Tax Positions.
   
   
3. the MNE Group’s Profit (Loss) before Income Tax in a jurisdiction is equal to or less than the Substance-based Income Exclusion Amount for group entities resident in that jurisdiction (the “CbCR-routine-profits-test”); group entities in this context in principle only include entities qualifying as such on the basis of the CbCR rules in the Dutch Corporate Income Tax Act. The Substance-based Income Exclusion is a specific carve out amount calculated based on eligible payroll costs and tangible assets maintained in a jurisdiction, as calculated under the Pillar 2 rules.

Even if an MNE Group qualifies for the Transitional CbCR Safe Harbour on a jurisdictional basis it would still need to prepare and file an ‘information return’, including the information concerning the application of the Transitional CbCR Safe Harbour in a jurisdiction where applicable.

Note also that this safe harbour is limited to a transitional period that applies to fiscal years beginning on or before 31/12/2026 but not including a fiscal year that ends after 30/6/2028.

Finally, please note that if an MNE Group for a particular reporting period decides not to opt for application of the CbCR safe harbour rule in respect of a specific jurisdiction, it is disqualified from invoking this safe harbour rule in respect of that jurisdiction for a later reporting period.

Permanent Safe Harbour
Where an MNE Group’s operations in a jurisdiction do not meet the requirements of the Transitional CbCR Safe Harbour, it may still qualify for the Permanent Safe Harbour, also known as the Simplified Calculations Safe Harbour.

The Simplified Calculations Safe Harbour can be invoked if the conditions are fulfilled for either the so-called “simplified-de-minimis-test”, or the “simplified-effective-tax-rate-test” or the “simplified-routine-profits-test”. Note, however, that the actual simplified calculation rules in these tests are not included in the legislative proposal, as those calculation rules still need to be agreed upon at OECD level.

5. Compliance Obligations
In respect of Dutch resident group entities which are subject to a top-up tax a designated Dutch group company needs to file a tax return and pay the total tax due in the Netherlands to the Dutch tax authorities within 17 months after the last day of the reporting year (this period is extended to 20 months in respect of the first reporting year).

Prior to the (electronic) filing of the tax return, an ‘information return’ needs to be filed within 15 months after the last day of the reporting year (this period is extended to 18 months in respect of the first reporting year).

The information return can be (electronically) filed by the relevant Dutch taxpayer, by a designated Dutch resident entity filing on behalf of all Dutch resident group companies or by a (designated) other group company residing in a country which automatically exchanges information with the Netherlands with respect to the Pillar 2 information return. In the latter case, the relevant Dutch taxpayer needs to file a notification with the Dutch tax authorities informing them which group company will submit the Pillar 2 information return. This notification needs to be (electronically) filed within the same term as the deadline applicable for the filing of the Pillar 2 information return.

6. Liability for top-up tax
The proposed rules include a joint and several liability for group companies in respect of any top-up tax due in the Netherlands. Based on the legislative proposal this liability is proposed to also extend to non-Dutch-resident group companies.