On January 1 2001, a new personal income tax regime will come into force in the Netherlands. The new rules completely overthrow the present system of income tax for private individuals by introducing a revolutionary concept of passive income taxation. Whereas now dividend and interest income is taxed at the full marginal rate of up to 60%, under the new rules tax on all investment income will be completely abolished and substituted by a flat 30% tax on a 4% deemed income on net wealth, which effectively resembles an annual net wealth tax of 1.2%. The new rules will generally not apply to non-residents. The domestic dividend withholding tax rate on dividends of 25% (for non-residents) will continue to apply.
In connection with the above, some important new rules in the field of corporate taxation will be introduced. One of the changes affecting foreign groups doing business in the Netherlands is the introduction of surtax on so-called excessive dividend distributions. Although aimed at preventing Dutch-listed companies from deferring their 1999 and 2000 dividend payments (to Dutch residents) until after 2001, the new rules may also hit certain regular intra-group dividend distributions. This will be the case, for instance, if dividends are paid within three years after a change of shareholder and if they exceed the so-called excessive dividend threshold. This threshold will be the higher of:
- the company's profit of the preceding year;
- the average of twice the company's dividend distribution during the years 1998, 1999 and 2000; or
- 4% of the company's equity at the beginning of the year. The surtax will amount to 20% on dividend distributions in excess of the threshold. It will apply during the years 2001 to 2005 inclusive.
Another change that will come with the introduction of the new tax regime is the introduction of a tax-free share repurchase scheme for Dutch-listed companies. Until now such share repurchase schemes attracted 25% withholding tax and have therefore never been very popular in the Netherlands. Under the new rules, a tax-free share repurchase scheme will be introduced. Unfortunately, the new rules are not very clear and difficult to use. Since the temporary surtax rules may also have important negative tax effects on the repurchase of shares, it is generally thought that it will take until after 2005 before actual share repurchase schemes will be introduced.
There will also be an important change in the tax treatment of real estate investments by foreign passive investment corporations. These non-Dutch corporate investors are now only taxable on the rental income from their Dutch property, whereas capital gains on the sale of such property are fully exempt from Dutch tax. Starting in 2001, this loophole will be closed and consequently all future capital gains on the sale of Dutch real estate will become subject to corporate income tax at the full statutory rate of 35%. To mitigate the effects of the new rules, a step-up in basis will be granted as of December 31 2000.
Robert W Tieskens