Depreciation, amortisation, and depletion
Generally, depreciation may be computed by a straight-line or a reducing-balance method or, in accordance with any other sound business practice, based on historical cost. Depreciation starts from the date the asset comes into use. Dutch tax law includes specific rules (see below) that potentially either limit or facilitate the depreciation of assets (e.g. immovable property, goodwill, and other fixed assets or environmental investments).
Limited depreciation of immovable property
There are special provisions for depreciation of immovable property. A distinction is made between immovable property held for investment purposes and buildings used in a trade or business.
Investment property cannot be depreciated to an amount lower than the official property’s fair market value for tax purposes, which is known as WOZ-waarde. In other words, a property will not be subject to depreciation unless the carrying amount of the building and the land on which it is located is higher than its value for tax purposes. This value is determined by the municipal tax authorities annually. As this value is based on the assumption that the property is free of lease, the value for tax purposes of commercial real estate may be lower than fair market value.
Until 2019, alternatively, the depreciation of buildings employed in a taxpayer’s own trade or business was only limited to 50% of WOZ-waarde. As of 1 January 2019, for corporations this is also limited to 100% of the WOZ-waarde. It should still be possible to value immovable property at fair market value if this is demonstrably lower than the current book value. In addition, anti-abuse measures apply to prevent the division of land and buildings into separate legal entities or to related individuals.
Note that maintenance costs continue to qualify for tax relief and any maintenance-related value increase does not lead to a compulsory upward revaluation of the property. Moreover, a property is not required to be revaluated as its value increases due to market developments.
Depreciation of land is not permitted.
The sale of depreciated assets triggers tax on the difference between the sale price and the depreciated book value unless a reinvestment reserve is set up (see Capital gains in the Income determination section).
Limited amortisation of goodwill and depreciation of fixed assets
With regard to goodwill, the amortisation for tax purposes is limited to 10% of the purchase price per annum. Furthermore, the tax depreciation of other fixed assets (i.e. inventory, equipment) is limited to 20% of the purchase price or production costs per annum.
The law provides accelerated depreciation of several specific assets. Accelerated depreciation applies to investments in assets that are in the interest of the protection of the environment in the Netherlands and that appear on the so-called VAMIL (Vervroegde Afschrijving Milieu-investeringen) list. The accelerated depreciation facility for investments in environment-improving assets is limited to 75% of the total (investment) costs.
Accelerated depreciation is also available for certain other designated assets (e.g. investments of starting entrepreneurs).
Investment costs minus residual value of sea-vessels that are operated mainly from the Netherlands may be depreciated straight-line over five years. Instead of accelerated depreciation, these taxpayers may choose immediate taxation (see Tonnage tax regime in the Taxes on corporate income section).
Anti-abuse rules regarding interest and loans
Due to existing anti-abuse rules, the deduction for interest paid on intra-group debts relating to certain transactions is disallowed. Transactions that are in scope of these anti-abuse rules are an internal or external acquisition, a dividend payment (distribution of profit), or a capital contribution into an affiliated company (i.e. an interest in the company of at least 1/3). Interest that relates to the financing of such transactions is only deductible if the loan and the underlying transaction are based predominantly on sound business considerations (‘the double business motive test’) or if the interest received is effectively and sufficiently taxed by Dutch standards. As such, under the ‘double business motive test’, it must be substantiated that there are sound business reasons for both the loan and the transaction. When the debt ultimately is financed externally (outside the group) and a direct relationship exists between the internal debt and the ultimate external financing, it can generally be substantiated that there are sound business reasons for the loan. Interest is deemed to be effectively and sufficiently taxed if the interest is effectively subject to a taxation on profits of at least 10% determined according to Dutch standards. The use of tax losses or similar relief claims by the recipient of the inter-company interest affects whether the interest is sufficiently taxed in the hands of the recipient. If the taxpayer makes a reasonable case that the interest is taxable at an effective tax rate of at least 10%, the tax authorities, nevertheless, have the option to substantiate that either the liability or the corresponding transaction is not based on sound business reasons.
Furthermore, interest paid on certain profit participating loans will be qualified as a dividend and will not be tax deductible. Interest received upon these loans may meet the definitions for the participation exemption if the creditor also holds a qualifying participation in the debtor. Intra-group conduits may be denied a credit of foreign WHT with respect to royalties or interest received if no economic risk is deployed.
Furthermore, until 31 December 2018, a provision limited the deduction of excess interest on debts that are deemed to be related to the financing of participations. Under this rule, the taxpayer is deemed to have debt relating to the financing of participations to the extent that the average cost price of its participations exceeds its average equity. This is a mathematical test. However, a few exceptions apply. For example, the cost prices of the participations that at the time of the initial acquisition led to an extension of the operational activities of the group are not taken into account for the purpose of the mathematical test. The ‘participation debt’ calculated may consist of both loans from affiliated and third parties. The interest on the deemed participation debt is not deductible to the extent the amount of the interest exceeds EUR 750,000. The provision for excessive participation interest also contains a number of specific anti-abuse measures. This provision has been abolished as of 1 January 2019.
In addition, until 31 December 2018, the deduction of interest (including costs and currency exchange results) on excess acquisition debt was restricted if the acquired company subsequently joined a Dutch fiscal unity with the taxpayer. The acquisition debt is considered excessive insofar as it exceeds 60% of the acquisition price. The interest expenses may only be deducted from the acquiring company’s ‘own profits’, meaning that the profits of the target company that was added to the fiscal unity are not taken into consideration. The restriction is not applicable if the interest on the debt does not exceed EUR 1 million. Contrary to the other existing interest deduction restrictions illustrated above, this measure also relates to interest on loans obtained from third parties. This provision has also been abolished as of 1 January 2019.
The abolishment of the interest deduction limitation rules regarding excessive participation debts and excessive acquisition debts is connected with the introduction of a new interest deduction limitation: the earnings stripping rules as of 1 January 2019 (implementation of the EU ATAD 1). The new earnings stripping rule limits the deduction of the on balance interest cost to 30% of the taxpayer’s EBITDA, with a threshold of EUR 1 million and a carry forward rule for the (part of the) interest that may not be deductible in a tax year to later tax years.
Until recently, the application of the rules on ‘the deduction of interest on loans that are directly or indirectly granted by a group company in order to finance an acquisition or capital contribution deduction’ and on the ‘deduction of excess interest on debts that are deemed to be related to the financing of participations’ could be avoided in fiscal unity situations domestically, and based on an analogue fiscal unity approach in EU situations. The Dutch legislator has ‘switched off’ the fiscal unity in respect to these interest deduction limitation rules, both domestic and foreign situations and with retroactive effect to 1 January 2018. Please note, however, that the Dutch fiscal unity has maintained its normal effect in relation to the earnings stripping rules.
Provision for bad debt
It is possible to make a provision for future expenses with a cause existing on the balance sheet date (during the financial year) of the tax year in question.
Charitable contributions are deductible if certain conditions are met. The gift must be documented in writing and contributed to a qualifying charity (ANBI or SBBI). The deductible amount may not exceed 50% of the taxable profits, with a maximum of EUR 100,000.
Limited deductibility of costs relating to remuneration by way of shares
Any remuneration by way of shares, profit-sharing certificates, option rights on shares, or similar rights is not deductible.
Costs related to so-called stock appreciation rights for employees that earn an income that exceeds EUR 572,000 are not deductible.
Fines and penalties
Most criminal fines and penalties are not tax deductible. This applies, for instance, to fines imposed by a Dutch criminal judge, administrative fines, disciplinary fines, and penalties from a European institution.
Certain taxes, such as the tax on insurance transactions, are deductible. Tax paid on the transfer of immovable property must be included in the cost price and taken into account in the course of normal depreciation. The CIT itself is not deductible.
Other significant items
Deduction of certain expenses (e.g. costs for food, drink, and entertainment) paid by employers for employees are not deductible, in part. These costs are often referred to as mixed costs. The non-deductible portion is 0.4% of the total taxable wages of all employees but never less than EUR 4,600 per year. Alternatively, the employer may choose to deduct only 73.5% of the actual expenses.
Net operating losses
Tax losses can be carried back one year and carried forward six years (up to and including 2018, the carry forward period was nine years). This also applies to start-up losses.
Complex rules may prohibit the utilisation of net operating losses after a change of 30% or more of the ultimate control in a company (anti-loss trafficking rules). Furthermore, until 31 December 2018, limitations exist on loss utilisation for holding/finance companies. Based on these rules, losses incurred by a mere holding or group finance company can be offset only against holding or finance income in preceding and following years, provided that certain strict conditions are met.
Until recently, the application of these rules could be avoided in fiscal unity situations and possibly in EU situations based on an analogue fiscal unity approach based on CJEU case law.
Payments to foreign affiliates
A Dutch corporation can generally claim a deduction for royalties, management service fees, and most other charges paid to foreign affiliates, to the extent that the amounts are not in excess of what it would pay an unrelated entity (i.e. arm’s-length principle). Dutch companies are obligated to produce transfer pricing documentation describing the calculation of the transfer price and the comparability of the transfer price with third-party prices.