Dutch Budget: Pillar 2 proposals

On 17 September 2024, the Dutch Budget Day proposals were published (the Proposals), which include several proposals relating to the Dutch implementation of the Pillar 2 Rules and contained in the Dutch Minimum Tax Act 2024 (MTA 2024).

These Proposals include significant changes which are both designed to align the rules with further OECD guidance published after the MTA 2024 was enacted and also clarify some of the existing provisions.

Introduction

In December 2021, the OECD published model rules to assist in the domestic implementation of the Pillar 2 minimum global tax rate of 15% for multinational groups with a consolidated revenue of EUR 750 million or more. Since then, the OECD has published further administrative guidance on the application of the Pillar 2 Rules.

The overall design of Pillar 2 consists of two interlocking domestic rules (together the Global anti-Base Erosion Rules (GloBE) Rules): (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a subsidiary entity; and (ii) an Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of a subsidiary entity is not subject to tax under an IIR.

In addition, jurisdictions may implement Qualifying Domestic Minimum Top-up Taxes that are consistent with the OECD Pillar 2 Rules (QDMTT). The QDMTT is a domestic tax that jurisdictions can introduce to collect the top-up tax themselves, rather than having it collected by other jurisdictions through the IIR or the UTPR. The QDMTT is creditable as a covered tax under the GloBE Rules to prevent double taxation.

Within the EU, implementation of the Pillar 2 is governed by Council Directive (EU) 2022/2523 (EU Minimum Tax Directive) which obliged Member States to implement the rules by 31 December 2023.The EU Minimum Tax Directive has been implemented by the Netherlands in the MTA 2024.

Implementation of additional OECD Guidance

According to the MTA 2024 explanatory memorandum, the OECD Pillar 2 Model Rules, its related Commentary, and the OECD Administrative Guidance serve as interpretation aids for the MTA 2024. Accordingly, the Proposals are designed to implement in the MTA 2024 certain topics only covered in the OECD Administrative Guidance after the MTA 2024 entered into force, to the extent they require a legal basis. These include the February 2023, July 2023 and some parts of the December 2023 Guidance. Whether the other parts of the December 2023 and the June 2024 Guidance (including, for example, useful guidance on securitisation vehicles) require incorporation in or amendments to the MTA 2024, is still under review.

Technical amendments to MTA 2024

Additionally, the Proposals include two significant technical amendments to the existing MTA 2024:

• Application of the QDMTT to Joint Ventures:

In the MTA 2024, it was ambiguous whether the Dutch QDMTT  also applies to Joint Ventures and, if so, which Constituent Entity is responsible for the payment of any Top-up Tax due. This ambiguity has been addressed in the Proposals, making Joint Ventures and JV Subsidiaries subject to the Dutch QDMTT. This amendment has retroactive effect to 31 December 2023.

• Accounting standard used for QDMTT Safe Harbour and application of QDMTT Safe Harbour:

The Proposals ensure that the Dutch QDMTT is eligible for the QDMTT Safe Harbour. It introduces a tie-breaker for the Local Financial Accounting Rule when not every Dutch Constituent Entity of a Group maintains financial accounts under the same Local Financial Accounting Standards (e.g. both IFRS and Dutch GAAP accounts). In these instances, the Dutch GAAP accounts take precedence. The tie-breaker change applies for financial years starting on or after 31 December 2024.

Interaction of Pillar 2 with the Dutch Corporate Income Tax Act 1969 (CITA)

Set to be effective from 1 January 2025, the Proposals furthermore clarify that, for some subject-to-tax rules included in the CITA, Qualifying Pillar 2 Top-up Taxes are recognised as tax on profits.

• The anti-base erosion rule (Article 10a CITA), broadly, denies interest deduction from intra-group loans under specific circumstances unless the interest income is subject to tax on profits at a reasonable level. Under the Proposals, Top-up Taxes under a QDMTT, (Qualified) IIR, and (Qualified) UTPR should qualify as taxes on profits for these purposes.
• The participation exemption (Article 13 CITA) and the "object exemption" for foreign permanent establishment income (Article 15e CITA) include subject-to-tax rules to be eligible for these exemptions. Under the Proposals, Top-up Taxes under a QDMTT should qualify as tax on profits in the context of these exemptions (the IIR and the UTPR are not mentioned), as well as in the context of various other provisions related to the participation exemption and object exemption with similar subject-to-tax rules.

The amendments do not cover (anti-abuse) rules addressing corporate tax system disparities, like transfer pricing or classification mismatches (ATAD2). However, the Proposals' explanatory memorandum specifies that compliance with these other subject-to-tax rules can be achieved if taxpayers demonstrate that a Qualified Pillar 2 Top-up Tax leads to a 15% Top-up Tax rate specifically for the transaction, asset, or relevant entity under these rules.

Comment

The proposed changes are welcome clarifications and aids the interpretation of the MTA 2024. Further changes to the MTA 2024 are expected in the future to implement additional OECD Guidance.