Netherlands Minimum Tax Executive Decree 2024 published

What does this mean for your company?

The measures come into play when your company falls within the scope of the Pillar Two rules. Pillar Two concerns the 15% global minimum tax system for large companies introduced in various countries at the end of 2023. The Netherlands has introduced Pillar Two in the Dutch tax legislation with the Dutch Minimum Tax Act 2024.

The Decree of 19 December 2024 incorporates several parts of the Agreed Administrative Guidance of the Inclusive Framework on BEPS. Since the publication by the Inclusive Framework of the model rules in 2021 and the commentary on these in 2022, the Inclusive Framework published several sets of administrative guidance in 2022, 2023 and 2024. Some of these have already been included in the Dutch legislation introducing Pillar Two in the Dutch legal order, some have not. Where the guidance not only provides interpretative guidance and requires a legal basis whereby lower legislation suffices, the Decree has incorporated these guidances into the Dutch Pillar Two legislation.

Pillar Two is a challenge from a compliance perspective. The measures may give rise to far-reaching compliance costs and/or an increases or decreases in top-up taxation as provided for in the Pillar Two legislation. It is advisable to properly map out the implications of the measures now implemented for your company.

General

The NL MTA 2024 applies as of 31 December 2023. The NL MTA 2024 provides for a minimum tax level of 15% per jurisdiction for large companies (annual turnover more than 750 million euros). If the company tax burden is lower than 15% in the Netherlands or in another jurisdiction, a top-up tax will be levied up to that level. In this way, the Netherlands is implementing Pillar Two, the second pillar of the international two-pillar solution on which approximately 140 countries reached political agreement within the Inclusion Framework on Base Erosion and Profit Shifting (IF) in 2021. The NL MTA 2024 applies to fiscal years starting on or after 31 December 2023.

Within the EU, the introduction of Pillar Two takes place via Directive (EU) 2022/2523 of 14 December 2022. This Directive is based almost entirely on the model rules published by the OECD on 20 December 2021. The OECD published a commentary on the model rules on 14 March 2022, which can be used in the interpretation of the new rules in the implementing countries. In 2023 and 2024, the OECD published several sets of Agreed Administrative Guidance, many of which have now been adopted in the Minimum Tax Act 2024.

The purpose of the Decree is to transpose the Agreed Administrative Guidance of the IF into the Dutch tax legislation as soon as possible. This is to promote the consistent application of the OECD model rules and to avoid mismatches with other jurisdictions. The retroactive effect to 31 December 2023 is considered justified. The measures are not considered problematic for taxpayers.

Excess negative tax carry-forward

The NL MTA 2024 (Sec. 7.2 par. 5) imposes additional top-up tax when the constituent entities in a jurisdiction have no net qualifying income in a reporting year (i.e., loss situations) and the amount of adjusted covered taxes for that jurisdiction is negative, and less than the amount equal to the net qualifying loss as multiplied with the minimum tax rate. For example, a scenario with a tax rate of 15% where the tax loss due to a permanent difference is greater for tax purposes (150) than for financial accounting purposes (100), as a result of which the amount of covered taxes (15%*150=22.50) exceeds the so-called expected covered taxes concerned (15%*100=15). In the aforementioned loss situation, an additional top-up tax is levied up to the difference (22.50-15 = 7.50).

In line with the Agreed Administrative Guidance of February 2023 (Sec. 2.7), the Decree provides for an election on the basis of which no additional top-up tax has to be taken into account. The excessive part (7.50 in the example) is carried forward as a so-called excess negative tax expense to the next fiscal year in which the qualifying income and the sum of adjusted covered taxes involved are positive. The said excess part is deducted from the covered taxes concerned in the jurisdiction in question in the following year (no further than nil; remainder is carried forward; tax expense decreases accordingly). The election made is valid for a period of 1 reporting year. The election is automatically renewed (unless revoked by the constituent entity submitting the GIR).

Substitute loss carry-forward deferred tax asset

The NL MTA 2024 (Sec. 7.3(5)(e)) establishes that the total deferred tax adjustment amount does not include the amount of deferred tax expense with respect to the generation and use of tax credits. This holds unless in the case of a so-called substitute loss carry-forward deferred tax asset. The exception applies to constituent entities with local losses that derive profits abroad which are included in the tax base for company tax purposes in the relevant country of residence. The matter may arise with regards to controlled foreign entities (loss-making parent entities of controlled foreign companies), permanent establishments and flow-through entities.

In line with the Agreed Administrative Guidance of February 2023 (Sec. 2.8) and June 2024 (Sec. 4.1), the Decree further details the conditions for recognizing a substitute loss carry-forward deferred tax asset. Because of the analytical similarity to vertical loss compensation eligibility, a deferred tax asset is usually recognized in such cases in the financial statements in the reporting year in which the right to the tax credit involved arises, which is settled again in the later settlement year. The Decree allows a deferred tax asset to be taken into account for NL MTA 2024 purposes. The Decree sets conditions. For example, the relevant right to tax credit must be used to offset domestic tax on income included in the calculation of the qualifying income or loss of the relevant constituent entity. The deferred tax expense to be taken into account is recalculated in the usual way up to a maximum of the minimum rate.

The consistency standard and application of QDMTT safe harbour

The NL MTA 2024 provides for the QDMTT safe harbour (Sec. 8.13). The provision sets forth that the top-up tax of the constituent entities established in a jurisdiction is zero. This is if a QDMTT in this jurisdiction meets the QDMTT accounting standard, the consistency standard, and the administration standard. The Agreed Administrative Guidance provides jurisdictions several options. These may result in the application of the QDMTT leading to a different outcome than the application of the qualifying income inclusion rule (IIR) or qualifying undertaxed profits rule (UTPR).

In line with the Agreed Administrative Guidance of July 2023 (Sec. 5), the Decree provides further rules for the consistency standard. The standard is met if the calculation of a QDMTT in principle leads to the same result as the result if a qualifying IIR or a qualifying UTPR were applied. For the purposes of the comparison, the derogations for a QDMTT are taken into account, as prescribed pursuant to the Agreed Administrative Guidance of February 2023 (Sec. 5) and July 2023 (Sec. 4) (such as Sec. 7.5(9) of the NL MTA 2024, or an equivalent provision in another jurisdiction, regarding the allocation of certain taxes concerned). It is also established that the standard is met in the three cases approved by the IF (the jurisdiction in question does not apply a or more limited variant of a provision comparable to Sec. 8.3 or Sec. 8.7, or applies a higher rate than the minimum tax rate).

In line with the Agreed Administrative Guidance, the Decree also sets out the circumstances in which the QDMTT safe harbour does not apply to constituent entities in that jurisdiction, the so-called ‘switch-off rule’. This is the case with (stateless) flow-through entities, investment entities, joint ventures, and joint venture groups. In such cases, the top-up tax must be calculated in the regular manner for such entities (Sec. 8.2.(2) NL MTA 2024), whereby an amount of QDMTT in that other jurisdiction is deducted against top-up tax under the IIR and/or UTPR. However, the QDMTT safe harbour may apply to the other constituent entities in that jurisdiction.

Asset carrying value and deferred taxes under transitional rule for intragroup asset transfers

The NL MTA 2024 (Sec. 14.1 par. 3) provides a transition rule that prevents a group from increasing the book value of an asset (other than inventory) for the NL MTA 2024, by transferring it between constituent entities after 30 November 2021 and before the transition year (asset onshoring). The acquiring constituent entity records the asset for the purposes of the NL MTA 2024 at the book value used by the transferring constituent entity at the time of disposal.

In line with the Agreed Administrative Guidance of February 2023 (Sec. 4.3), the Decree provides for conditions on the basis of which the acquiring constituent entity may take into account a deferred tax asset for NL MTA purposes on the assets acquired (deferred tax asset variant), or utilize for NL MTA 2024 purposes the book value from the financial reporting (step-up variant). The acquiring constituent entity may take this deferred tax asset into account if the group makes it plausible that the transferring constituent entity has paid tax in respect of the transfer on the capital gain, and could have taken into account a deferred tax asset for the purposes of the NL MTA 2024, but this deferred tax asset has either been released or used or has not been created as the gain from the asset transaction was included in the taxable income of the transferring constituent entity (other tax effects). If a group taxation regime applies to the transferring constituent entity, the aforementioned condition is applied at group level. The deferred tax asset amounts to a maximum of, in short, the hidden reserve as multiplied by the minimum rate (or if lower, the applicable tax rate). The step-up variant is available in case the acquiring constituent entity also evaluates the asset at fair value in its financial reporting.