Minimum profit tax per 2024 (Pillar Two)

This article was last updated on 19 December 2023.

The Dutch Minimum Taxation Act 2024, also known as Pillar Two, provides for a minimum effective tax rate of 15% per jurisdiction for large international enterprises (annual turnover exceeding 750 million euros). On 19 December 2023, this legislative proposal was adopted by the Senate. This article provides background to the new legislation by means of an overview of the parliamentary process, including the Memorandum in response to the Report of the House of Representatives dated 11 September, the Memorandum of Amendment dated 13 October 2023 and the Memorandum in response to the second report by the Senate dated 1 December 2024. It also addresses the second Memorandum of Amendment of the 2024 Tax Plan. The memoranda address several interesting aspects, including the interaction between Pillar Two and corporate tax, the incorporation of the OECD administrative guidance and multilateral dispute resolution.

What does Pillar Two mean for your organisation?

The complexity, novelty, and uncertainty associated with Pillar Two will pose a challenge when complying with the rules for multinational enterprises. Is Pillar Two applicable to your organisation?

We advise you to consult with your tax advisor as soon as possible to determine if your company is ready for it. You may need to investigate whether the necessary data to calculate the effective tax rate is available worldwide, and whether systems, technology, and processes need to be prepared to ensure global legal compliance.

You may consider registering for the training sessions offered by PwC NL. Our goal is to support your readiness and implementation by offering a practical and systematic approach to the rules and their implications to the various stakeholders within MNEs.

Minimum Taxation Act 2024 (Pillar Two)

Background

The idea of a minimum profit tax comes from the OECD. The EU has adopted this idea and incorporated it into a Directive. This Directive must be implemented in the various Member States, and for this purpose, on 31 May 2023, the draft bill Minimum Taxation Act 2024 ("Pillar Two") was submitted to the House of Representatives. The draft bill introduces a separate tax that ensures a minimum level of taxation for large enterprises (annual turnover exceeding 750 million euros). For the Netherlands, the estimated annual revenue is 466 million euros. The law will come into effect on 31 December 2023, and will first apply to financial years starting on or after this date.

Pillar Two provides for a profit taxation system for large enterprises with a minimum effective tax rate of 15% per jurisdiction. When the effective tax rate in a jurisdiction where that enterprise is active with one or more group entities is below the agreed minimum, the 15% minimum rate will be levied based on this law.

The Memorandum in response to the Report dated 11 September was the next step towards the implementation of Pillar Two in the Dutch tax legislation. On 13 October 2023, an Memorandum of Amendment was published, in which, among other things, the Qualifying Domestic Minimum Top-up Tax Safe Harbour (QDMTT Safe Harbour) and Temporary Undertaxed Profits Rule Safe Harbour (Transitional UTPR Safe Harbour) were added, on which the Inclusive Framework reached an agreement in July. After the publication of the Memorandum of Amendment, the draft law was further discussed in the House of Representatives. On 26 October 2023, the House of Representatives adopted the legislative proposal. On 17 November, the Memorandum in Response to the report of the Senate was published. On 1 December 2023, the State Secretary for Finance presented the Memorandum in response to the second report on the Minimum Tax Act 2024 to the Senate, which adopted it on 19 December 2023.

Memorandum in response to the report

Coherence with Corporate Income Tax

The memorandum indicates that the Minimum Tax Law 2024 (Pillar Two) interferes with the Corporate Income Tax Law 1969. Despite the possibility of implementing Pillar Two in the corporate income tax, a separate tax law has been chosen due to the difficulties it entails. However, this choice does not eliminate the interference between both laws. Due to the regular Dutch corporate income tax rate of 25.8%, the effective tax burden in the Netherlands is generally above the minimum level. In specific cases, the effective rate may be lower, for example, if the liquidation loss scheme, the innovation box, or the tonnage regime are applicable. The memorandum indicates that only in very specific cases will the effective rate fall below the minimum level, as taxpayers almost always also generate profits that are subject to taxation at the regular rate. The government will continue to monitor this.

Compatibility with Tax Treaties

The note indicates that the Directive and the draft legislation are based on international political agreements within the Inclusive Framework. The note states that, at the request of the OECD, the Inclusive Framework has stated that tax treaties do not preclude the imposition of withholding taxes. This is with reference to the commentary on the OECD Model Convention, which states that CFC measures are allowed under tax treaties and are comparable to income inclusion withholding. The OECD has also argued that income inclusion withholding and under-taxed profit withholding do not burden the group entity in the low-tax jurisdiction. The note points out that, now that the Directive has been adopted, it can be inferred that the Member States, as well as the government, share this position. Therefore, it can be inferred from the note that the issue of incompatibility will be resolved.

Memorandum of amendment Pillar Two bill

On 13 October 2023, the State Secretary for Finance presented the Memorandum of Amendment to the Bill on Minimum Taxation 2024 (Pillar Two) to the Dutch parliament.

Administrative guidance by the OECD

Administrative guidance was published by the OECD in February and July 2023 to provide clarification on the implementation of the OECD Pillar Two rules. The guidance aims to facilitate consistent implementation and provide administrative relief for taxpayers. The explanatory note of the Memorandum of Amendment states that the document is also intended to record some of these guidelines in the Bill on Minimum Taxation 2024. It is further noted that certain other parts will be further elaborated in lower legislation and decrees.

Qualifying Domestic Minimum Top-up Tax Safe Harbour (QDMTT Safe Harbour)

An important introduction is the QDMTT Safe Harbour. The application of the QDMTT Safe Harbour can reduce administrative burdens for taxpayers. If this safe harbour rule applies in a jurisdiction, no regular Pillar Two top-up tax needs to be calculated for group entities established in that jurisdiction. This ensures that a multinational group does not have to make two different calculations for the same group entities. The Netherlands has chosen for the calculation to be based on the local financial reporting standard.

Temporary Undertaxed Profits Rule Safe Harbour (Transitional UTPR Safe Harbour)

One of the top-up tax mechanisms under the Pillar Two rules is the undertaxed profits measure (Undertaxed Profits Rule; UTPR). This measure will come into effect one year later and will apply to financial years commencing on or after 31 December 2024. The measure applies when the corporate tax burden in a foreign jurisdiction falls below the minimum. In such cases, the UTPR ensures that top-up tax is levied if an income inclusion rule (IIR) or the domestic top-up tax (QDMTT) do not apply.

Within the context of the OECD it has been established that it may be undesirable to apply the UTPR in relation to states that have not timely implemented a qualifying domestic top-up tax (QDMTT) or domestic income inclusion measure (IIR). The Amendment Note temporarily prevents the application of the UTPR with the introduction of the Transitional UTPR Safe Harbour. This safe harbour rule can be invoked for entities established in states with a statutory tax rate of at least 20 per cent. The under-taxed profits measure safe harbour rule has a temporary character and applies to reporting years ending before 31 December 2026.

Second Memorandum of Amendment to the Tax Plan 2024

On the same day, the Dutch State Secretary for Finance also presented the second amendment note to the Tax Plan 2024. This Amendment Note contains a number of complementary Pillar Two measures that have an impact on the relationship between the minimum tax and corporate income tax.

Non-deductibility of Minimum Tax for Corporate Income Tax Purposes

According to an amendment of the Dutch Corporate Income Tax Act the minimum tax as referred to in the Bill on Minimum Taxation 2024 is not deductible for corporate income tax purposes. This prevents circularity issues involving deductibility for corporate income tax and additional taxation for Pillar Two taxes (in particular the domestic minimum top-up tax) from arising.

Offsetting Qualifying Foreign Domestic Top-up Tax for CFCs

A new article of the Dutch Corporate Income Tax Act introduces the offsetting of a qualifying domestic minimum top-up tax (QDMTT) levied in another state at the level of a Controlled Foreign Company (CFC) against the corporate income tax levied at the level of a shareholder of the CFC in the Netherlands, in the same way as the local profit tax can be offset. This offsetting possibility also applies to low-taxed permanent establishments. The reason for this offsetting eligibility is that if only the local profit tax were to be taken into account for offsetting, the qualifying domestic top-up tax levied in the other country would result in economic double taxation. For clarity: the fact that the CFC's country applies a domestic top-up tax (QDMTT) does not mean that the CFC would no longer qualify as a CFC for the application of the Dutch national corporate income tax. This measure only concerns the offsetting of QDMTT levied in the hands of the CFC against Dutch corporate income tax in the hands of the CFC shareholder entity.

Memorandum in response to the second report

The memorandum in response to the second report addresses the following topics: democratic control, developing countries, multilateral dispute resolution, complexity, status of EU countries, consequences of not adopting the implementation legislation, maritime sector, bilateral investment treaties (BITs). We will discuss the most notable elements in the memorandum for practice.

Overview of OECD Administrative Guidance incorporated into legislation

The Dutch government intends to publish an overview of the parts of the OECD Administrative Guidance that have already been incorporated into the draft legislation. The government assesses the adjustments and clarifications in the OECD Administrative Guidance on a case-by-case basis to determine whether the text of the legislative provisions and parliamentary explanations need to be supplemented. The State Secretary states that expressions of the OECD do not have a direct effect on Dutch law.

Multilateral dispute resolution

The Dutch government is committed to achieving a multilateral solution for dispute resolution. If the ongoing negotiations on a multilateral dispute resolution agreement do not lead to a satisfactory result, the government will consider whether a supplement to the EU Dispute Resolution Directive is desirable and feasible to resolve disputes within the EU regarding the application of the minimum tax.

Maritime sector

The Dutch State Secretary indicates that additional administrative guidance may be anticipated from the Inclusive Framework regarding an industry-specific explanation relating to the substance-based income exclusion under the Pillar Two rules. The Dutch government will consult with the maritime sector to address the challenges, within current international and European frameworks, that the sector faces with the Pillar Two rules. The goal is to develop a simple methodology for allocating mobile assets and employees for sectors that have a substantial share of mobile assets and employees, including the maritime sector.

Bilateral investment treaties

The Dutch State Secretary states that existing bilateral investment treaties (BITs) do not seem to hinder the imposition of minimum taxation under the Dutch Pillar Two Rules. The alleged concurrent operation of Pillar Two and BITs has not been discussed in OECD and EU bodies, as such was not considered likely. Successfully challenging any top-up taxation based on a BIT in one country would lead to top-up taxation in another country. As far as the Netherlands is concerned, the minimum tax does not violate legitimate expectations. The Netherlands does not make specific commitments to investors regarding tax benefits.