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Tax measures announced by the new Dutch government will benefit retail and manufacturing companies, while high-tech and leveraged companies will bear the brunt of the compensatory measures, practitioners say.
The new Dutch government announced a series of changes to its tax laws almost a week ago, and a clearer picture is emerging of the cumulative effects of the measures unveiled in the Oct. 10 ruling agreement. Retail companies like Koninklijke Philips N.V., the Heineken beer company, clothes maker Suitsupply and online retailer Coolblue will especially reap the benefits of the new measures, while high-tech companies like the microelectronics company ASML and chipmaker NXP will most feel the negative impact of the legislative changes, according to tax professionals interviewed by Bloomberg Tax.
Although the surprise reduction of the headline rate and the abolition of the 15 percent dividend withholding tax announced Oct. 10 were quick to draw praise from business lobbies and companies, practitioners are now warning that the government also plans to implement several measures that will cost companies money.
These include the introduction of a general earnings-stripping or interest limitation rule—estimated to cost companies 1.3 billion euros ($1.5 billion) according to a Oct. 10 government analysis—and a measure that will limit carried forward tax losses from nine to six years, with a cost of 891 million euros for corporate taxpayers. In addition, the effective rate of the innovation box, which applies a preferential tax treatment to profits derived from innovation, will be increased from 5 to 7 percent so that companies will have to pay 113 million euros more in taxes.
Stef van Weeghel, a tax partner at PwC, said the introduction of the general earnings stripping measure was likely to hurt companies with significant debt and high interest expenses. Such companies, he told Bloomberg Tax Oct. 13, were often acquired by non-Dutch private equity groups and financed with debt.
“I could see that the deductibility of the interest paid on those debt obligations would be jeopardized by this earning stripping rule,” he said.
Several large and high-profile Dutch companies were acquired by foreign investors in recent years. The DIY Maxeda Group, the largest DIY retailer in the Benelux, was for instance acquired by the U.S. private equity fund KKR in 2004, although it was still called VendexKBB back then. A spokesperson for DIY Maxeda Group declined to comment. The country’s most famous coffeemaker, D.E Master Blenders, was similarly acquired by the German investment group Joh A Benckiser in 2013. The company didn’t respond to requests for comment.
The ruling agreement is likely to sting corporate taxpayers that are current beneficiaries of the innovation box regime, Van Weeghel said. This preferential regime is open to any eligible company performing research and development, but it’s most used by two types of industry, high-tech and pharmaceutical companies, and they would be “particularly affected” by the increase of the effective rate, he said.
In sum, Van Weeghel said, the ruling agreement creates one “very broad category of winners": profitable “companies that do not have high leverage and that are not benefiting, or not fully benefiting, from the innovation box.”
He added that most local retail and manufacturing companies would likely fall into this category.
Fokke de Jong, CEO of the Suitsupply clothing company, welcomed the rate reduction in an Oct. 13 email, telling Bloomberg Tax that the lowered rate would make it more appealing for companies to do business in the Netherlands. He said that the company did use the innovation box regime, and that it was one of the reasons that the company decided to set up its international head office, with “all the tech developments” it oversees, in Amsterdam.
A representative for the online retailer Coolblue declined to comment.
A spokesperson for the Heineken beer company declined to comment in an Oct. 13 email, noting that the company wasn’t responding to media requests until they released their third-quarter trading update.
In an Oct. 13 email, a spokesperson for Phillips said they were still assessing the measures, and that it was too early to say how the company would be affected by the changes.
Meanwhile, the rule restricting carried forward tax losses will likely particularly hurt companies in cyclical industries, which are very sensitive to economic cycles, making steep profits in one year and losses in the next, Van Weeghel said. “High-tech companies and particularly chip makers” will particularly feel the brunt of this measure, he said, with chipmakers often experiencing waves of high and low demand for their products.
In an Oct. 13 email, a spokesperson for microelectronics company ASML said the more stringent carry-forward rules probably wouldn’t have “any consequences” for the company.
A spokesperson for chipmaker NXP acknowledged in an Oct. 13 email to Bloomberg Tax that tighter time limits on loss carry-forward could indeed hurt companies of a cyclical nature. He said, however, that NXP currently doesn’t have any offsettable tax losses. “Everything has been offset, so NXP will not be negatively affected if the planned change is indeed implemented,” said Martijn van der Linden.
All the measures agreed to as part of the ruling agreement must be ratified by the Dutch House of Representatives and the Senate before they become law.
In an Oct. 13 emailed statement sent to Bloomberg Tax, Lodewijk Berger, a partner at the Jones Day law firm, added that the government’s abolition of the 15 percent dividend withholding tax would benefit multinational corporations currently headquartered in the Netherlands. “Such headquarters until now frequently faced pressure from investors based abroad to relocate to countries that don’t impose a withholding tax on dividend distributions, such as the U.K.,” he said.
For Dirk-Jan Sinke, who specializes in tax affairs at the Confederation of Netherlands Industry and Employers (VNO-NCW), the clearest outcome of the ruling agreement at this early stage is that it makes it easier for the Netherlands to retain companies already there. In addition, the Netherlands will be better able to compete with other countries when it comes to attracting new companies and new investments, he said. “This is also important in light of Brexit and President Trump’s tax plans,” he said, referring to the U.K.'s decision to leave the EU and the U.S. president’s proposal to cut the 35 percent headline corporate tax rate to 20 percent.
In an Oct. 11 email, Sinke said it’s still too early to say what industries will reap the benefits of the tax measures announced in the Oct. 10 ruling agreement. “We can’t say in advance what the complete tax package will look like per sector for small and large entrepreneurs because they are confronted with not just income and corporate taxes, but also higher energy taxes.”
Still, Sinke said he expected “many small entrepreneurs” to particularly benefit from the new agreement.
According to estimates from the CPB Netherlands Bureau for Economic Policy Analysis, the government unit that assesses the impact of current and future government policies, the energy measures announced in the ruling agreement, which for instance apply higher levies for electricity production and waste incineration, will cumulatively cost resident corporate taxpayers 726 million euros.
Raymond Jolink, CEO of Parenco, one of the Netherlands’ biggest paper manufacturers, said the company would see “a seven-figure” reduction in taxes under the announced rate cut from 25 to 21 percent in 2021. “When you look at companies in our range of results, every percent decrease represents hundreds of thousands of euros,” so that the promised 21 percent rate would earn the company tax savings of at least one million euros, he said. The company, which was acquired by the H2 Equity Partners private equity and venture capital firm in 2012, earned a turnover of 165 million euros in 2016.
“For us concretely, this means we’ll get to keep more of the gross money we earned because less of it will have to go to the tax administration,” he said, adding that this would leave more funds for investments.
He said that the company would only be able to actually benefit from the rate reduction in two years because Parenco is carrying forward offsettable tax losses so that it currently doesn’t pay corporate taxes.
Still, he added that the ruling agreement also included “counterproductive” measures like increased energy taxes. “So you ultimately have to look at the full picture, and I don’t yet have an overview of everything,” he said, adding that the “devil was in the details.”
While Jolink commended the government for lowering the headline rate, he also urged lawmakers to decrease the current regulatory burden for companies.
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The ruling agreement (in Dutch) is at http://src.bna.com/tor.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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