Corporate income tax interest rate of 8 unreasonably high

15/11/24

The tax interest rate for corporation income tax of 8 percent is too high, according to the District Court of the Northern Netherlands. Tax interest is a fee that the taxpayer must pay if the tax inspector imposes a higher assessment than the taxpayer initially indicated, for example as an estimate. This 8 percent tax interest rate for corporate income tax will apply from the beginning of 2022 and has even increased to 10 percent as from 2024.

Due to the amount of the tax interest, the court ruled that it was contrary to the so-called 'proportionality principle' and was therefore non-binding. On the basis of the current substantiation, the court held that the (legislator) and regulator could not reasonably have decided on this high tax interest. The applicable tax interest rate has therefore been reduced to 4 percent in this case. This percentage of 4 percent corresponds to the percentage that applied to the other tax resources, such as income tax, in 2022 until 1 July 2023.

This is a court ruling and we expect the Dutch Tax Authorities to appeal.

What does this mean for your business?

Based on this judgment, you can object to tax interest charged on a corporate income tax assessment of 2021 or later 'in order to preserve your rights'. You can then request for the calculation of the tax interest to be based on a maximum of 4 percent instead of 8 percent.

Two things to pay close attention to. Firstly, the period within which you must raise objections. In the case of tax interest charged on a final assessment, you must file an objection within six weeks of the date of this final assessment. In the case of tax interest charged on a provisional assessment, you can submit a request for a review of the tax interest up to six weeks after the date of the final assessment for that year.

Secondly, you can request a deferral of payment for the disputed tax interest, but since we do not expect the court ruling to be final yet, we recommend that you refrain from doing so and that you do pay the tax interest now. If the judgment is upheld in appeal and you are successful, you will be reimbursed the tax interest in that case. If you apply for a deferral of payment and you are unsuccessful, the deferred amount of tax interest would be increased by (recovery) interest and would still have to be paid.

With effect from 1 January 2024, the interest rate for corporate income tax has been increased to 10 percent. Given that the percentage of tax interest seems to be in line with the previously applicable rate of 4 percent for income tax, among other things, and this percentage has been increased to 7.5 percent from 1 January 2024, it is still unclear what this ruling could mean for calculated tax interest from 1 January 2024.

Background: The court ruling

The judgment of 7 November 2024 of the District Court of the Northern Netherlands concerned a 2021 corporate income tax assessment, in which the applicable rate of 8 percent was used for the calculation of the tax interest. In its judgment, the District Court declared the Tax and Recovery Interest Decree, which a.o. regulates the tax interest for corporate income tax, to be non-binding because it violated the principle of proportionality. According to the court, the negative consequences of such a high interest rate (8 percent) are disproportionate to the goals that the regulator intended.

The court finds that the adverse consequences (the high interest rate) are not proportionate to the objectives to be served by the rule. In addition, the court finds the choice to take the statutory interest for commercial transactions as the starting point for the tax interest illogical. In addition, the purposes of calculating tax interest are also unclear.

So far, the amount of the tax interest has been submitted to the court several times in vain. Previously, the rate was regulated by law and the court is not allowed to review a law in the light of general principles of law, such as the principle of proportionality. Now that the rate of tax interest has been regulated in a decree, since 2020, there is the possibility of judicial review against these principles. The District Court of the Northern Netherlands considered the rate of 8 percent for tax interest to be disproportionate. At the hearing, the parties stated that if the tax interest paying party would be right, the tax interest should be calculated at a rate of 4 percent. In its judgment, the court agreed with this and reduced the tax interest rate on this corporate income tax assessment from 8 percent to 4 percent.

As mentioned, this percentage is in line with, among other things, the tax interest rate that applied to income tax at the time, and also with the reduced tax interest rate of 4 percent that applied to corporate income tax between 1 October 2020 and 1 January 2022 due to the Covid-19 crisis. Between 1 January 2022 and 31 December 2023, a rate of 8 percent applied and from 1 January 2024, the interest rate will even be 10 percent.