The Netherlands Issues Executive Regulations to Implement Aspects of the OECD Administrative Guidance

General

On December 27, 2023, the Dutch Official Gazette published the Minimum Tax Act (‘the Act’) to implement the provisions of the EU Minimum Tax Directive.

However, a number of aspects were specifically stated in the Act to be subject to further rules to be provided by Executive Regulations.

This includes:

Article 6.2 (3) – The Equity Inclusion Investment election

Article 6.2(4) – The Forex Hedge Election

Article 7.2(6) – The Excess Negative Tax Carry-Forward Election

Article 7.5(10) – Blended CFC Regimes

Article 8.13(7) – The Switch Off rules for the QDMTT Safe Harbour

Article 14.1(6) – Further Deferred Tax Transition Rules

The Dutch Minimum Tax Executive Decree 2024 (‘the Decree’) was published in the Government Gazette on December 23, 2024 to address these aspects and two other issues. Article 10 of the Decree provides that the amendments apply retrospectively from December 31, 2023.

Equity Investment Inclusion Election

Article 2 of the Decree implements the Equity Investment Inclusion Election.

Article 2.9 of the February 2023 OECD Administrative Guidance provides for an Equity Investment Inclusion Election. This relates, in part, to the interaction of Articles 3.2.1(c) and 4.1.3(a) of the OECD Model Rules.

This includes gains, profits, and losses from equity investments in the computation of GloBE Income or Loss (ie they are no longer excluded) but the related current and deferred tax expenses are also included.

The election is a five-year election made on a jurisdictional basis.

Forex Hedge Election

Article 3 of the Decree includes the Forex Hedge Election.

Gains and losses from the sale of an ownership interest (except a shareholding with ownership of less than 10%) are excluded from GloBE Income under Article 3.2.1(e) of the OECD Model Rules. Similar to the treatment of excluded dividends, many jurisdictions have a participation exemption for gains on group shareholdings.

The Pillar Two GloBE rules seek to replicate this by excluding such gains and losses from Pillar Two GloBE income. However, unlike the rule for excluded dividends, the ownership period is irrelevant.

Article 2.2.3 of the February 2023 OECD Administrative Guidance provides provisions relevant to hedging instruments for currency risk related to a net investment in a foreign operation.

In particular, a Filing Constituent Entity can make a Five-Year election (Forex Hedge Election) to treat foreign exchange gains or losses reflected in a Constituent Entity’s Financial Accounting Net Income or Loss as an Excluded Equity Gain or Loss where:

• the foreign exchange gains or losses are attributable to hedging instruments that hedge the currency risk in Ownership Interests other than Portfolio Shareholdings;

• the gain or loss is recognised in other comprehensive income at the level of the
Consolidated Financial Statements; and

• the hedging instrument is considered an effective hedge under the Authorised Financial Accounting Standard used in the preparation of the Consolidated Financial Statements.

Excess Negative Tax Carry-Forward Election

Article 4 of the Decree includes the Excess Negative Tax Carry-Forward Election.

As an alternative to incurring additional top-up tax when a domestic tax loss exceeds the GloBE loss, Article 2.7 of the February 2023 OECD Administrative Guidance provides that an MNE can elect for the Excess Negative Tax Expense administrative procedure.

Where this applies the Excess Negative Tax Expense is removed from Adjusted Covered Taxes for the Fiscal Year and an Excess Negative Tax Expense Carry-forward is established equivalent to the additional top-up tax that would be due.
Then in future years when the MNE Group has positive GloBE Income for the jurisdiction the MNE Group reduces (but not below zero) the aggregate Adjusted Covered Taxes by the remaining balance of the Excess Negative Tax Expense Carry-forward.

Blended CFC Regimes

Article 6 includes provisions for Blended CFC Regimes, as included in Section 2.10 of the July 2023 OECD Administrative Guidance.

Under the GloBE Rules CFC taxes are allocated to the foreign CFC (subject to the push down restriction). The GloBE Commentary doesn’t go into detail on the allocation and just provides that the CFC tax should be allocated to each CFC based on the owner’s share of the underlying income.

However, determining the allocation can be difficult when there is a blended CFC regime.

A blended CFC regime arises when the tax charge under the CFC regime is based on a blend of income or of multiple CFCs. They therefore don’t blend CFC income on a jurisdictional basis but tend to apply globally to all foreign income.

The lack of jurisdictional blending is one of the reasons why these blended CFC rules such as GILTI wouldn’t otherwise qualify as qualified domestic minimum taxes.

For fiscal years that begin on or before 31 December 2025 but not ending after 30 June 2027, the Administrative Guidance includes a simplified formula to allocate CFC taxes in blended CFC regimes such as GILTI.

QDMTT Safe Harbour

Article 8 includes further provisions on the QDMTT Safe Harbour, in particular the Consistency Standard and the Switch Off-Rule as provided in Section 5 of the July 2023 OECD Administrative Guidance. The Consistency Standard is one of the requirements for the QDMTT Safe Harbour to apply.

The ‘Switch-Off Rule’ prevents Groups from applying the safe harbour to all or some Constituent Entities located or created in the QDMTT jurisdiction and requires the MNE Group to switch to the general credit method for the offset of the QDMTT.

The Dutch Decree specifies that this applies where:

– A QDMTT jurisdiction decides not to impose a QDMTT on Flow-through Entities created in its jurisdiction;

– A QDMTT jurisdiction decides not to impose a QDMTT on Investment Entities subject to Articles 7.4, 7.5, and 7.6 of the GloBE Rules (Provisions for the Effective Tax Rate Computation for Investment Entities, Investment Entity Tax Transparency Election, or the Taxable Distribution Method Election);

– A QDMTT jurisdiction applies the UTPR exclusion for MNEs in their initial phase of international activity without any limitation;

– A stateless entity that is not subject to a QDMTT in the State in which it is incorporated;

– A QDMTT jurisdiction includes members of a Joint Venture Group (which includes Joint Ventures) within the scope of the QDMTT but imposes the liability on Constituent Entities of the main group instead of directly on the members of the JV Group.

The consistency standard, (and the switch off rule to turn off the QDMTT safe harbour) is not specific to any MNE Group or entity. It is a jurisdictional evaluation that takes place in the peer review process. The QDMTT is assessed against the standard to see if it qualifies.

Asset carrying value and deferred taxes under the transitional rule for intragroup asset transfers

Article 9 includes Deferred Tax Transition Rules from Article 4.3 of the February 2023 OECD Administrative Guidance.

Article 9.1.3 of the OECD Model Rules (Article 14.1, third paragraph of the Act) includes a transitional rule that prevents an MNE/Domestic group from increasing the book value of an asset (other than inventory) by transferring it between group entities after 30 November 2021 and before the transition year.

It provides that the acquiring group entity must record the asset for GloBE purposes at the book value used by the transferring group entity at the time of disposal. It only applies if the transferring and acquiring group entities would already have been group entities of the same MNE/Domestic group if they had been subject to the GloBE rules at the time of the transfer.

Article 9 of the Decree includes the amendments in the OECD Administrative Guidance to permit the acquiring entity to take into account deferred tax assets in respect of the acquired assets, or to adopt the carrying amount of the acquired assets for financial reporting purpose (both subject to various conditions).

Other Amendments

The Decree also includes other amendments that were not specifically provided for in the Act. These include:

Substitute Loss Carry-Forwards

Article 5 of the Decree includes provisions for Substitute Loss Carry-Forwards.

Article 2.8 of the February 2023 OECD Administrative Guidance provides for the inclusion of deferred tax in the GloBE deferred tax adjustment amount for ‘Substitute Loss Carry Forwards’.

This arises due to the differing tax treatment of foreign source income amongst jurisdictions.

If a jurisdiction permits tax on foreign source income to be offset with foreign tax credits (FTCs) in a year with a domestic loss, a loss will generally be generated that can be carried-forward.

If the jurisdiction required the domestic loss to first offset foreign source income before FTCs are used, no loss or a reduced loss would be generated compared to the above.

In this case, jurisdictions generally permit future domestic source income to be recharacterized as foreign source, up to the amount of the prior year domestic source loss, to allow the use of FTCs in lieu of the loss that was not generated.

However, the GloBE rules do not include deferred tax arising from foreign tax credits in the calculation of covered taxes.

The deferred tax expense attributable to the Substitute Loss Carry-forward deferred tax asset is included in the entity’s Total Deferred Tax Adjustment Amount in the year that it arises and in the year(s) it reverses.

A Substitute Loss Carry-Forward deferred tax asset arises where:

• the jurisdiction requires that foreign source income offset domestic source losses before foreign tax credits may be applied against tax imposed on foreign source income;

• the Constituent Entity has a domestic tax loss that is fully or partially offset by foreign source income; and

• the domestic tax regime allows foreign tax credits to be used to offset a tax liability in a subsequent year in relation to income that is included in the computation of the Constituent Entity’s GloBE Income or Loss

Where the above conditions are met, the deferred tax expense attributable to the Substitute Loss Carry-forward deferred tax asset is included in the Constituent Entity’s Total Deferred Tax Adjustment Amount to the extent the foreign tax credit that gave rise to the Substitute Loss Carry-forward deferred tax asset is used to offset a tax liability on income included in the Constituent Entity’s GloBE Income or Loss.

The Substitute Loss Carry-forward deferred tax asset is equal to lower of:

• the amount of the foreign tax credit in respect of the foreign source income inclusion that the domestic tax regime allows to be carried forward from the year in which the Constituent Entity had a tax loss (before taking into account any foreign source income) to a subsequent year; and

• the amount of the Constituent Entity’s tax loss for the tax year (before taking into account any foreign source income) multiplied by the applicable domestic tax rate.

Operating Leases

Article 7 includes rules for Assets held under an operating lease to qualify for the Substance-based Income Exclusion. This implements the provisions of the Article 3 of the July 2023 OECD Administrative Guidance.