On January 24, 2023, a Decree of the Secretary of State for Finance was published in the Dutch State Gazette. In the Decree, the Secretary of State clarifies and limits the scope of the anti-abuse legislation as laid down in Article 8bd of the Dutch Corporate Income Tax (DCIT) Act. (Decree of January 11, 2023, nr. 2022-322315). The Decree entered into force on January 25, 2023.

Article 8bd contains anti-abuse legislation that sees on certain transactions and restructurings which involve a Dutch payer and foreign entities that are either subjectively exempt from a tax on profits, or that are established in a jurisdiction where they are not subject to a tax on profits.

Background

On January 1, 2022 Article 8bd was inserted in the DCIT. The article was part of the measures of the Act to combat mismatches in the application of the business principle for corporate income taxes. In short the mismatches the Act tries to combat regard the double non-taxation that can occur if related parties usen conditions (transfer prices) that are not at arm’s length like for example a value that deviates from the fair market value of an asset. Article 8bd of the DCIT is a supporting measure that prevents a double non-taxation that might occur as a consequence of a difference in valuation if an entity affiliated to the taxpayer transfers an asset to the taxpayer by way of a capital contribution, a profit distribution, a repayment of paid-up capital, a liquidation distribution or a comparable legal act. In such case there is no difference in transfer prices but a difference in the valuation of the asset that was obtained by the taxpayer.

The text of Article 8bd, Paragraph 1 of the DCIT Act reads as follows:

“If in the year the taxpayer acquires an asset, not being a debt, from an entity affiliated with him by means of a capital contribution, a profit distribution, a repayment of paid-up capital, a liquidation distribution or a comparable legal act, and the fair market value of that asset at the time of the acquisition is higher than the value that is included in a tax levied on profits at the level the affiliated entity with regard to the transfer of that asset, the latter value will be taken into account for the inclusion of that asset on the balance sheet (ITP: balance sheet for DCIT purposes). The value that is involved in a tax levied on the profit of the affiliated entity is to be made plausible by the taxpayer.”

If a taxpayer acquires an asset through a capital contribution through an affiliated entity that is subjectively exempt from a tax on profits or that is located in a jurisdiction where the entity is not subject to a tax on profits (jurisdictions without a tax on profits), a literal application of Article 8bd, Paragraph 1, DCIT Act entails that the taxpayer must include the asset at a value of nil on its balance sheet for tax purposes. Insofar as relevant here, Article 8bd, Paragraph 1 of DCIT Act stipulates, in short, that the asset is included on the balance sheet tax purposes for the value for which it is included in a tax on profits at the level of the transferor. In case the acquisition of the asset from the subjectively exempt or non-subject entity had not taken place by means of a capital contribution, but at an arm's length transfer price, the taxpayer would have been allowed to include the asset against fair market value on its balance sheet.

The Decree of the Secretary of State of January 11, 2023

In its Decree the Secretary of State clarifies the scope of Article 8bd, Paragraph 1 of the DCIT Act. In this respect the Secretary of State notes a.o. the following.

"In view of the purpose of the Act to combat mismatches in the application of the business principle for corporate income taxes, I consider that in a situation as described above, the obtaining of an asset from a subjectively exempt entity or the obtaining an asset from an entity that is established in a jurisdiction where the entity is not subject to a tax on profits, a valuation of nil of the asset for DCIT purposes by the taxpayer is not appropriate.

Where appropriate the inspector uses the following explanation when applying Article 8bd, Paragraph 1 of the DCIT Act:

1.   If, in the case of the taxpayer obtaining the asset by means of a capital contribution as referred to in Article 8bd, Paragraph 1 of the DCIT Act, the transferring affiliated entity is subjectively exempt from a tax on profits or is located in a jurisdiction where the entity is not subject to a tax on profits, this provision (ITP: Article 8bd, Paragraph 1 of the DCIT Act) does not apply if the fair market value is used for the capital contribution in both the civil-law design of the capital contribution and in the annual accounts of both the transferor and the Dutch taxpayer.

2.    For the application of the previous sentence, annual accounts means: the annual accounts, drawn up in accordance with the provisions of Title 9, Book 2, of the Dutch Civil Code, or of the Budget and Accountability Decree for Provincial and Municipalities, or of similar (foreign) legal regulations.

3.    This explanation applies mutatis mutandis to the obtaining by means of a profit distribution, a repayment of paid-up capital, a liquidation distribution or a legal act comparable therewith.”

The full text of the January 11, 2023 Decree as published in the Dutch State Gazette of January 24, 2023 can be found here. (The Decree is only available in the Dutch language)

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