Implementation of amendments to Parent-Subsidiary Directive 2015 previous message

Implementation of amendments to Parent-Subsidiary Directive 2015

The Dutch government announced proposals to implement the amendments to the Parent Subsidiary Directive that were agreed last year in Dutch tax law. Originally the Parent-Subsidiary Directive aimed to prevent double taxation on the profits of subsidiaries through the obligation of the Member States to apply an exemption or to provide a tax credit for the taxes already paid by the foreign subsidiary.

As a result of the OECD’s BEPS project not only the avoidance of double taxation is considered relevant but also the avoidance of double non-taxation. As a result the Dutch participation exemption will be amended as from 2016.

The first amendment regards situations where the subsidiary makes a payment to the Dutch parent company and whereby (1) the payment is deductible in the country of the subsidiary, while (2) in the Netherlands the corresponding income falls under the participation exemption. This happens, for example, when the debtor’s country qualifies the payment as an interest expense and at the same time the income qualifies for Dutch tax purposes as a dividend that is eligible for the participation exemption (i.e. a so-called hybrid loan with features of both equity and loan capital).

It is good to consider that the amendment is not limited to only hybrid loans but will affect all cases where the payment to the Dutch parent company is deducted from the subsidiary’s profit. Also a cumulative preference dividend that is deductible in the country of the subsidiary will be affected.

The amendment of the participation exemption rules means that the Dutch participation exemption no longer applies insofar as the payment can be deducted for profit tax purposes “by right or in fact, directly or indirectly” at the level of the entity in which the participation is held.

The proposal goes beyond the requirements of the amended Parent-Subsidiary Directive since the additional requirement will be applied unilaterally and not only to subsidiaries located in EU or EEA countries. This worldwide application of the new condition is in line with results of the BEPS project and also applied by the UK, Belgium, France and Germany.

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