The Netherlands publishes draft Pillar 2 legislation

This article is based on the information as it was known on 24 Oktober 2022.

On Monday 24 October 2022, the Dutch Government submitted the draft legislative proposal ‘Minimum Tax Act 2024 (Pillar 2)’ to public consultation. By doing so, the Netherlands takes the next step in implementing Pillar 2 as of 1 January 2024.

The proposal aims to implement the most recent compromise text of the Pillar 2 Directive, published by the European Commission on 16 June 2022. The proposal is almost entirely in line with the last compromise text of the Pillar 2 Directive. EU Member States have not yet reached political agreement on the currently presented compromise text of the Pillar 2 Directive.

The proposal follows the joint declaration by France, Germany, Italy, the Netherlands and Spain of 9 September 2022 based on which these countries committed to implement Pillar 2 by 1 January 2024. The legislative proposal anticipates the adoption of the Pillar 2 Directive in the EU.

What does this mean for your organisation/company?

The (possible) adoption of Pillar 2 will radically change the Dutch corporate tax system. The complex Pillar 2 legislation effectively introduces an entirely new corporate tax system and, in principle, impacts the entire (global) organisation. The draft legislative proposal lays down new rules in a new Act. This Act will apply alongside the existing and already complex (inter)national (corporate) tax systems, double taxation treaties, various (European) Directives and government decisions. The 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).

It is expected that the financial impact (in terms of top-up taxation) will be minimal for many companies. However, additional compliance and tax return obligations will arise from this Act, in addition to the existing obligations from our current corporate tax system. It is therefore essential that companies start determining the (potential) financial and administrative impact on their organisation. PwC would be happy to help you understand this impact. Please contact your PwC advisor or one of the contacts below.

Reason for the legislative proposal

By the end of 2021, 137 jurisdictions reached agreement within the OECD Inclusive Framework (IF) on a global minimum profit tax rate of 15%. Following the agreement, the OECD published Model Rules on 20 December 2021. Countries can use these Model Rules to implement Pillar 2 in their national legislation. Two days later, on 22 December 2021, the European Commission published the Pillar 2 Directive proposal based on the Model Rules prepared by the OECD.

On 14 March 2022 the OECD published the Explanatory Commentary and Illustrative Examples to the Model Rules. Based on these and other (political) developments, a new compromise text of the EU Pillar 2 Directive proposal was published on 16 June 2022. The Dutch Government’s consultation legislative proposal of 24 October 2022 serves to implement the text of the Directive.

The current compromise Directive proposal and the draft legislative proposal serve as a basis for the final legislative proposal. We expect that in the coming period (technical) adjustments will be made.

Implementation in Dutch legislation

The draft legislative proposal is almost entirely in line with the last compromise text of the Pillar 2 Directive. Entities established in the Netherlands that are part of a (multinational or large domestic) group with a consolidated group turnover of at least €750 million will fall within the scope of the new legislation. Certain sectors, such as investment funds and pension funds, are exempted from the scope of Pillar 2.

The proposal introduces a top-up mechanism along politically agreed lines and in accordance with the system laid down in the Pillar 2 Directive proposal. The effective tax rate to which a group entity is subject, is calculated based on concepts introduced in the legislative proposal, the 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. A number of adjustments are then made to arrive at qualifying income.

Based on the proposal, 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 is lower than this minimum tax rate. In such a case, a top-up tax will be levied up to 15%. To arrive at this top-up tax, the proposal introduces three methods of levying:

the Qualified Domestic Top-up Tax (QDMTT),
the Income Inclusion Rule (IIR) and
the Under-Taxed Profits Rule (UTPR).

In essence, by introducing the QDMTT, the Netherlands secures a domestic top-up tax.

Administrative aspects

The draft legislative proposal introduces a separate substantive tax Act alongside the current Dutch corporate income tax for which a tax return needs to be filed. The return period is, in principle, 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 draft legislative proposal regulates interest on tax charges due, liability for unpaid tax debts and sanctions in case of violation of the information and filing obligations. For objections and appeals, current legislation based on the Dutch General Law on Taxation (in Dutch: 'Algemene wet inzake Rijksbelastingen (AWR)') is mainly followed.

Differences between Pillar 2 and the proposal that stand out

If adopted, the proposal will introduce an entirely new corporate income tax system by reference to a separate tax legislative Act alongside the Dutch Corporate Income Tax Act (Dutch CITA). This Act, with its own definitions, bases and calculations, does not fully align with the current Dutch tax system. The explanatory memorandum also does not elaborate much on the concurrence between the legislative proposal and the current Dutch CITA. Without being exhaustive, we would like to share some observations below:

The draft legislative proposal applies different conditions for the application of the participation exemption than the Dutch CITA. The participation exemption may apply for corporate tax purposes, while it is not taken into account for Pillar 2 purposes under the proposal (thereby lowering the effective tax burden and leading to a possible top-up taxation).
The draft legislative proposal does not address concurrence with the current Dutch fiscal unity regime. The Pillar 2 calculation is determined per entity and then aggregated at jurisdiction level. In the presence of a fiscal unity there is a single taxable parent company, raising the question of how this fits with the calculation of the effective tax burden on an entity basis for Pillar 2 purposes.
The exception of international shipping income is inconsistent with the current Dutch tonnage regime (which can result in an ETR fluctuation).
Provisions of Dutch tax law, such as the liquidation loss regime and innovation box (liquidatieverliesregeling and innovatiebox), reduce the ETR under Pillar 2.

Next steps

The consultation period for the draft legislative proposal lasts until 5 December 2022. We also expect the Implementation Framework from the OECD by the end of the year. These are workflows to promote coherent and coordinated implementation of the Pillar 2 rules on specific topics, such as dispute resolution and administrative guidance. The draft legislative proposal also contains a safe harbour rule that will be worked out (in a ministerial regulation) based on the Implementation Framework. This measure can provide administrative relief if it can be established that a state’s effective tax burden is above 15%. Further (technical) adjustments to the legislative proposal are anticipated to be made in the coming period, as a result of the developments mentioned above and the consultation process.

Time for action

The complex Pillar 2 legislation has a potential impact on all of your organisation. It is therefore essential to start determining the impact of these new rules on your organisation. PwC has developed the Pilot Phase to support you in this. Please refer to our special Pillar 2 page for more information on our Pillar 2 approach.