Tax Accounting impact Tax Plan 2025
19/09/24
On Budget Day 2024, the Dutch government announced several tax law changes as part of the Dutch 2025 Tax Plan. The key tax accounting considerations are outlined below per measure. The measures are expected to apply as from 2025, unless stated otherwise. In addressing the tax accounting implications, we take the International Financial Reporting Standards (IFRS) as the main applicable accounting standard.
1. Policy adjustment act for the qualification of foreign legal forms
The qualification of foreign legal forms will be regulated by law. There are several material changes. The qualification of foreign legal forms that are comparable to Dutch entities will continue to take place using the legal form comparison method. However, for foreign legal forms that are not comparable to Dutch entities, two additional methods are introduced: the 'symmetrical method' and the 'fixed method'.
2. Abolition of ‘open CV’ as non-transparent taxpayer
The distinction between open (= non-transparent) and closed (= transparent) CVs (Limited Partnerships or LPs) is eliminated. All LPs will now be transparent. The aim is to reduce the number of hybrid mismatches in an international context.
The above-mentioned measures are aimed at combating hybrid mismatches (i.e. double deduction and deduction with no inclusion) and will likely give rise to less permanent non-deductible items based on ATAD 2. In addition, the transition of open CVs from non-transparent to transparent without the use of the transitional rules could trigger a current tax impact and (potentially) deferred tax impact.
3. Debt forgiveness profit exemption
A new debt forgiveness profit exemption scheme will be introduced for taxpayers with losses exceeding EUR 1 million. Under this scheme, debt forgiveness profit will be fully exempt to the extent that it exceeds the losses from the current year. Additionally, the carry-forward losses from the past will be reduced.
The adjustment in the debt relief exemption results in a lower immediate (current) tax expense as loss compensation can be fully utilised. Applying the debt relief exemption also impacts the tax losses available for carry forward. Therefore, applying for the debt relief exemption can also affect the (un)recognised deferred tax assets (DTAs) in the financial statements regarding the tax losses available for carry forward.
4. Liquidation loss scheme: intermediate holding provision
The so-called intermediate holding provision of the liquidation loss scheme prevents an operational loss of a participation or a non-deductible sales loss from being converted into a deductible liquidation loss for an intermediate holding company. However, in some cases, this provision does not work as intended, failing to achieve its goal. Therefore, it will be adjusted to account for value declines after both the direct and indirect acquisition of the participation in the dissolved entity.
When it is probable that a liquidation loss can be deducted in the future, this will create a deductible temporary difference for which a DTA might be recognised in the financial statements (subject to the usual recognition criteria). Attention must be paid to the strict conditions and anti-abuse provisions in the liquidation loss regulation. The amendments of the liquidation loss regulation will lead to less uncertainty regarding the possibility of claiming future liquidation losses and the associated recognition of DTAs in this respect.
5. Limitation on the EBITDA-rule threshold for real estate companies
The EUR 1 million threshold for the application of the earnings stripping (EBITDA) rule will be removed for companies whose assets mainly consist of real estate rented out to third parties. This prevents real estate companies from being split into multiple entities to make use of the threshold more frequently.
This measure will (likely) result in more non-deductible interest for companies mainly involved in real estate activities and could result in a higher current tax charge. An assessment should be made whether a DTA can be recognised for the non-deductible (carry-forward) interest.
6. EBITDA rule: adjustment to earnings stripping rule percentage
The percentage for applying the earnings stripping (EBITDA) rule will be increased from 20 per cent to 25 per cent of the adjusted taxable profit (taxable EBITDA). This leaves more room for interest deduction.
For tax accounting purposes, the carry forward of net financing costs that have been treated as non-deductible under this rule in a certain year can be considered as a tax attribute (i.e. an unused tax credit). For such unused tax credits, an assessment should be made whether a DTA can be recognised. In this respect, it should be assessed whether it is probable that sufficient future taxable profits will be available against which the unused tax credits can be utilised.
The impact of this change on the deferred tax position might already have an impact on the 2024 financial statements, but only once the Tax Plan 2025 has been adopted by the Senate. When the gross DTAs for the non-deductible interest is recognised on the basis of the available deferred tax liabilities (DTLs), the 25% limitation must be considered. The increase from 20% to 25% should be considered in the DTA recognition assessment of the carried forward non-deductible interest. The increased offsetting capacity can be helpful in substantiating the recoverability of the DTA compared to the previous 20% offsetting capacity.
Once the tax law change is (substantively) enacted, it could potentially result in a lower current tax charge as of 2025 as more interest could be deductible.
7. First Public CbCR report for most companies in 2025
On 22 June 2024, the Dutch Public Country-by-Country Reporting Directive came into effect. This is an EU-initiated, mandatory, public reporting for large, international companies. Companies with a fiscal year that corresponds with the calendar year will report for the first time on 2025. This report must be made public no later than 31 December 2026.
The CbCR data will soon have to be made publicly available. With all the developments in sustainability reporting (CSRD, GRI etc.) it is becoming increasingly important to not only test data in the public CbCR report against fiscal and financial annual overviews, but also against the ESG policy (environmental, social and corporate governance) and any ESG reports (and vice versa).
8. Pillar Two: act to amend Minimum Tax Act 2024
Some technical changes will be made to the Minimum Tax Act 2024 (Pillar Two), which was introduced on 31 December 2023. The bill also closely incorporates additional regulations from the administrative guidelines of the Inclusive Framework on Base Erosion and Profit Shifting (IF) from 2023 and 2024. Qualifying tax credits will be expanded to include qualifying tradable tax credits. Further details will be provided on the qualifying domestic top-up tax and the qualifying domestic top-up tax safe harbor rule. Measures related to hybrid arrangements will be introduced under the Country-by-Country Reporting safe harbour rule. The measures will take effect from 31 December 2024, with some provisions retroactive to 31 December 2023.
On 23 May 2023, the IASB issued narrow-scope amendments to IAS 12. The amendments provide a temporary exception from the requirement to recognise and disclose deferred taxes arising from enacted or substantively enacted tax law that implements the Pillar Two model rules published by the OECD, including tax laws that implements QDMTT described in those rules. A second impact is that the narrow-scope amendments to IAS 12 introduced targeted disclosure requirements for affected companies.
In view of FY24 year-end, in scope multinational entities need to analyse the impact of Pillar Two on the financial position of the group and consider the afore-mentioned disclosure requirements. Given the retroactive application of most of the technical amendments to the Minimum Tax Act 2024, these should be considered in that analysis as well.
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