Pillar Two Bill submitted to Dutch Parliament

06/06/23

On Wednesday 31 May 2023, the legislative proposal of the Netherlands to transpose Pillar Two into the Dutch company tax system entitled ‘Minimum Tax Act 2024 (Pillar Two)’ was submitted to the Dutch Parliament. The Netherlands is the first country within the European Union to have released its domestic Pillar Two legislation. By doing so, the Netherlands takes the next step in implementing Pillar Two as per 31 December 2023. The proposal aims to implement EU Directive 2022/2523 of 14 December 2022 (the Directive), published by the European Commission on 14 December 2022. The proposal is almost entirely in alignment with the Directive.

This article was last updated on 26 October 2023. On 26 October 2023, the legislative proposal of the Minimum Tax Act 2024 was adopted by the House of Representatives. The legislative process will continue in the Senate.

What does this mean for your business organisation?

The adoption of Pillar Two by the Senate will drastically modify the Dutch corporate tax system. The complex Pillar Two legislation effectively introduces a new corporate tax system in addition to the existing company tax framework. The legislative development, in principle, that is in view of the anticipated adoption of the 15%-minimum taxation framework by countries on a global basis as agreed upon within the OECD/Inclusive Framework (IF), impacts the entire (global) business organisation of any in-scope business enterprises.

The Dutch legislative proposal lays down the new rules in a separate legislative act thereby creating a separate levy. The new tax act will apply alongside and in addition to the existing and already complex Dutch (inter)national (corporate) tax rules, double taxation treaties, various EU Directives and government decisions. The legislative 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; see below) will be moderate for many of the in-scope companies involved. However, additional compliance and tax return obligations will arise from this legislative act, in addition to the existing obligations from the current Netherlands’ 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.

Reasons for and background of the legislation

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. On 14 March 2022 the OECD published the Explanatory Commentary and Illustrative Examples to the Model Rules to aid governments in the implementation of the envisaged new global minimum taxation framework.

The Dutch Government’s legislative proposal of 31 May 2023 serves to implement the text of the EU’s Pillar Two Directive that was adopted by the Council on 14 December 2022. On 22 December 2021, the European Commission published the Pillar Two Directive proposal that is based on the OECD’s Model Rules. In anticipation of the proposed Directive being adopted by the Council, the Dutch Government submitted a draft Pillar Two legislative proposal for an online public consultation on 24 October 2022. In follow-up to some further outputs from the OECD, i.e. the Administrative Guidance as published on 2 February 2023 in response to the input of consultation processes in this regard, further (technical) modifications have been incorporated into the legislative proposal that has now been submitted to Parliament.

Implementation in Dutch legislation

Substantively, the legislative proposal is based almost entirely on the EU Directive and the international political agreements reached within the IF. Entities established for tax purposes in the Netherlands and that are part of a (multinational or large domestic) group with a consolidated group turnover of at least €750 million fall within the scope of the proposed legislation. Certain sectors of industry, such as investment funds and pension funds, are exempted from the scope of Pillar Two, all in alignment with the internationally politically endorsed Pillar Two framework.

The proposal introduces a top-up mechanism in accordance with the system as laid down in the EU Directive, and which in turn follows the lines that have been internationally politically agreed upon within the IF. The effective tax rate to which a group entity is subject to under the introduced legislative proposal is calculated by reference to the covered 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 in this regard. A number of adjustments are then made to arrive at qualifying income, again, in line with the international Pillar Two framework.

Based on the legislative proposal, top-up 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, or if the effective tax rate of any of the group entities established abroad, is lower than this minimum tax rate. In such a case, top-up tax will be levied on the group’s business profits up to 15%. To arrive at this top-up tax, the proposal introduces three tax levy mechanisms:

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 domestic taxation and accompanying tax revenues on Dutch source business income up to the internationally agreed upon 15% minimum tax rate.

Administrative aspects

The legislative proposal introduces a separate substantive tax act alongside the current Dutch corporate income tax framework. The legislator has chosen to formalise any top-up tax due on the basis of a self-assessment tax filing mechanism. The tax return period for this purpose, in principle, is 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 legislative proposal regulates interest on tax charges due, establishes liabilities for any unpaid tax debts and sanctions and fines, in case of a violation of the administrative information and filing obligations. For objections and appeals, existing remedies as available under current legislation based on the Dutch General Law on Taxation (in Dutch: 'Algemene wet inzake Rijksbelastingen (AWR)') are generally adhered to. Worthy of note is that the legislative proposal also includes an obligation to disclose any information to the Dutch tax authorities - including a sanctioning provision in the event of non-compliance - that may be of importance or relevance for a correct imposition of the minimum tax.

Notable differences with the consultation draft

Aside from some technical modifications and clarifications, the legislative proposal is largely in line with the consultation document of 24 October 2022. Save from some notable exceptions - see below - much has remained unchanged.

Safe harbour rule

The most striking modification in the 31 May 2023 draft legislative bill as compared to the 24 October 2022 consultation document is that the draft bill includes safe harbour rules. The consultation document merely contained a regulatory framework for a temporary safe harbour mechanism, whereas the now released draft legislative act provides some detailed provisions on a temporary safe harbour and introduced a regulatory framework for a permanent safe harbour. On 15 December 2022, the IF reached political agreement on a temporary safe harbour rule, and the IF also drew up a regulatory framework for a permanent safe harbour rule. The safe harbour rule aims to reduce the additional administrative burden and compliance pressure for companies and tax authorities.

The temporary safe harbour rule has been drafted in alignment with the framework as agreed upon within the IF. The safe harbour rule essentially establishes that a multinational or domestic group that falls within the scope of the Pillar Two measures while meeting certain conditions is eligible to opt for applying a simplified regulatory framework instead of applying the detailed Pillar Two rules as currently proposed. Matters mainly involve the application of the rules for calculating the effective tax burden for Pillar Two purposes. The safe harbour rule allows eligible group entities to make use of existing financial data and already existing country-by-country reporting data as a basis for the Pillar Two effective tax rate calculations. If the simplified conditions in the safe harbour rule are met, any additional top-up tax under any of the proposed top-up tax mechanisms will be set at nil for application of the detailed Pillar Two rules.

The legislative proposal introduces a regulatory framework for a permanent safe harbour rule, stipulating that the manner in which the simplified calculations need to be performed under the permanent safe harbour will be laid down at some later point in time on the basis of an order of council. With this, the legislator anticipates any possible further guidelines from the IF and related political decision-making in this regard. As any more substantive provisions are yet to be released in this regard it is not yet known at this time to what extent the permanent safe harbour rule will provide companies some administrative relief.

Other modifications

In the legislative proposal, a number of specific additions and adjustments have been made as compared to the consultation document. As to the calculation of the effective tax rate, some technical adjustments have been introduced with regard to the calculation of the numerator and denominator of the effective rate fraction, respectively the so-called taxes involved (i.e., Covered Taxes in OECD terminology) and the so-called qualifying income or loss (i.e., GloBE Income in OECD terminology). Clarifications have also been made in relation to the exemption of income from international shipping.

It may also be noted that the bill does not seem to comprehensively include the administrative guidelines that the OECD published with political support from the IF on 2 February 2023 (Administrative Guidance). The explanatory memorandum refers to the guidance in a general sense, but the content of the guidelines cannot be comprehensively found throughout the legislative proposal. The 2 February 2023 guidelines provide guidance for e.g. the concurrence between qualifying domestic top-up tax and Controlled Foreign Company (CFC) rules. The guidelines also forward that the US Pillar Two GILTI legislation qualifies as a CFC regime for Pillar Two purposes. Any tax levied on the basis of CFC rules and the US GILTI regime is allocated for the tax burden calculation to the countries where the relevant subsidiaries are located. This allocation applies to the income inclusion measure and undertaxed profit measure. The allocation however does not apply to the qualifying domestic additional tax.

After the publication of the Dutch legislative proposal, additional administrative guidelines were published by the OECD on 13 July 2023. Part of the remaining February 2023 guidance and the July guidance has been added to the legislative proposal by a Memorandum of amendment to the legislative proposal which has been adopted by the House of Representatives on 26 October 2023.

During the internet consultation, questions were also raised about the suggested provisions regarding fines and penalties. It should be noted that the documents now released by the Dutch legislature forward that taxpayers who make reasonable efforts to be compliant during the transition period should not be confronted with fines or other sanctions. During this period, the tax authorities will exercise restraint in imposing sanctions. However, this lenient approach does not apply in cases of fraud and intent. The restraint to impose sanctions also does not apply to fines for omissions and neglect.

Notable differences between the proposed Dutch Pillar Two rules and the Dutch CITA

When adopted, the Pillar Two legislative proposal introduces an entirely new corporate tax system by reference to a separate tax legislative act alongside the Dutch Corporate Income Tax Act (‘Dutch CITA’). The newly proposed tax legislative act introduces new sets of autonomous definitions, tax bases and tax calculations. These do not or do not fully align with its equivalents in the current Dutch corporation tax system and its methodologies, interpretations and applications.

The explanatory memorandum does not elaborate much on the concurrent operation of the current legislative proposal and the existing Dutch CITA system. Without being exhaustive, we would like to share some observations on potential implications of the concurrent operation of the disparate company tax rulebooks below:

The legislative proposal applies different conditions for the application of the participation exemption than the Dutch CITA vis-a-vis its Pillar Two counterpart. The participation exemption may apply for corporate tax purposes, while it is not taken into account for Pillar Two purposes under the proposal, thereby lowering the effective tax burden and leading to a possible top-up taxation.

The legislative proposal does not address the concurrent operation with the current Dutch fiscal unity regime. The Pillar Two calculation is determined per entity and the calculations are subsequently aggregated on a jurisdictional level. In the presence of a fiscal unity for Dutch corporation tax purposes any corporation tax is levied in the hands of a single taxable parent company, a tax consolidation that is, raising the question as to how this fits in and interacts with the calculation of the effective tax burden on an entity-per-entity basis for Pillar Two purposes.

The exception of international shipping income is in non-alignment with the current Dutch tonnage tax regime, which may result in fluctuations of the effective tax rate for Pillar Two calculation purposes.

Provisions in existing Dutch company tax legislation, such as the liquidation loss offset regime and the innovation box regime (liquidatieverliesregeling and innovatiebox) do not find any counterpart regimes in the proposed Pillar Two rules. From this it follows that their operation under the Dutch CITA in consequence will reduce the effective tax rate under Pillar Two.

Next steps/implementation

The legislative proposal has been discussed in Parliament. The Dutch Parliament adopted the Minimum Tax Act 2024 on 26 October 2023. The proposed legislation will be further discussed in the Upper House in the coming months. It is envisaged that the legislative bill will enter into force on 31 December 2023. The Pillar Two rules will apply to accounting years beginning on or after this date.

Additions to the OECD-commentary and further administrative guidance is expected in the following weeks. As the legislative proposal is based on the OECD-model rules, the OECD-commentary can be used to interpret the Dutch legislative proposal if it aligns with the model rules. It is expected that further additions to the OECD-commentary and additional administrative guidance will have an impact on the current legislative proposal and may, at some point, potentially also be incorporated into the Dutch legislation.

Time for action

The complex Pillar Two legislation impacts the entire (global) business organisation of in-scope companies. It is therefore essential to start determining the financial and administrative impact of these new rules on your business organisation. PwC has developed the Pilot Phase to support you in this. Please refer to our special Pillar Two page for more information on our approaches towards the introduction of Pillar Two into the international tax architecture. Please contact your trusted PwC advisor or any of the members of the PwC NL Pillar Two Expert Group, should you have specific questions involving any of the above mentioned developments.