Meeting subject-to-tax test Dutch CIT with Pillar Two levy

What does this mean for your business?

The proposed measures come into play when your company (or fiscal unity for corporate tax purposes) in the Netherlands faces the application of, for example, one of the anti-mismatch measures, the non-application of the participation exemption, the interest deduction limitation pursuant to Article 10a of the Corporate Income Tax Act 1969, or the non-application of the object exemption for foreign business profits, and you are simultaneously confronted with a top-up tax under the Pillar Two legislation in one of the countries where your company is active. With the introduction of the Minimum Tax Act 2024 (Pillar Two), the question arose whether such a top-up tax means that there is sufficient effective tax liability for the subject-to-tax tests in the Dutch Corporate Income Tax Act. The government stipulates that a qualifying Pillar Two top-up tax counts as a tax levied on profits for corporate tax purposes. The clarification is implemented per individual section in the corporate tax legislation.

After the introduction of the newly proposed measures, it may be that in the future, the participation exemption will become applicable to one of your shareholdings or the object exemption will become applicable to profits from a permanent establishment where this was not previously the case, or that one or more of the other mentioned measures in corporate tax will no longer apply (such as the interest deduction restriction or anti-mismatch measures). 

3. Interaction subject-to-tax for CITA with Pillar Two Top-up Taxation

With the introduction of the Dutch Minimum Tax Act (Pillar Two, the question has arisen as to whether an additional levy pursuant to the Pillar Two legislation entails a sufficient level of taxation for purposes of the various subject-to-tax tests in the Dutch CITA 1969. If the answer is in the affirmative, the taxpayer involved will be eligible for a deduction and/or exemption, which accordingly brings about a reduction of the corporate income tax payable in the Netherlands. If the answer is in the negative, any deduction and/or exemption will not come available to the taxpayer involved. The possible consequence in the latter case may be economic double taxation: top-up taxation on business income items pursuant to the Pillar Two rules in the hands of one group entity and non-deduction and/or non-exemption pursuant to the Dutch corporate income tax rules in relation to business income items in the hands of the other group entity, in respect of economically the same underlying business income items, from an economic perspective that is.

With regard to the application of Article 10a CITA 1969 (anti-profit drainage measure), Article 13 CITA 1969 (participation exemption regime) and Article 15e CITA 1969 (base exemption for foreign business income), the Dutch government has now proposed to clarify, by explicitly codifying matters in the Dutch corporate income tax legislation, in general terms that is, that a tax levied on profit for purposes of the subject-to tax rules in the respective CITA provisions involved is understood to include a qualifying Pillar Two top-up tax. The measures will enter into force on 1 January 2025 and will apply for the first time to financial years starting on or after 1 January 2025.

The proposed legislative changes do not address the subject-to-tax tests in the anti-mismatch measures (transfer pricing mismatches, hybrid mismatches – ATAD 2). The Explanatory Memorandum to the draft legislative act nevertheless submits that if the taxpayer involved makes it plausible that a qualifying Pillar Two top-up tax levied produces a tax rate at a 15% level on the relevant income involved, there is a tax levied on profit for the purposes of the subject-to-tax tests in these anti-mismatch measures in the Dutch CITA. However, the top-up tax must apply to the transaction or asset in question to which the respective subject-to-tax test under the Dutch CITA rules is applied. It is also indicated that any non-qualification as a top-up tax for Pillar Two purposes, as such, does not necessarily mean that the subject-to-tax tests for Dutch CITA purposes cannot be met. Matters to this end need to be considered on a case-by-case basis.

The Dutch State Secretary for Finance had already announced changes to the subject-to-tax tests in his letter to Parliament on the Tax Policy and Implementation Agenda of 16 April 2024. It should be noted that as of 1 January 2024, the Dutch CITA 1969 has already provided that any qualifying domestic minimum top-up tax levied abroad on a controlled foreign company (CFC) can be offset against the Dutch corporate income tax levied in the hands of the CFC shareholder, that is, on the proceeds from the respective CFC. This avoids double taxation in the context of the application of the CFC-regime. As of the same date, it has also been established that the minimum tax levied pursuant to the Dutch Minimum Tax Act 2024 and its foreign equivalents are not deductible for Dutch corporate income tax purposes. This prevents circularity issues in the mutual interaction, that is, of corporate income taxation in the Netherlands on the one hand and minimum taxation in the Netherlands or abroad on the other.