On 15 December 2011, the Dutch Government published a legislative proposal to introduce a banking tax levy (“bank levy”). The Government had already announced its intention to introduce a bank levy in July of this year and repeated the intention in the parliamentary discussion of the 2012 Budget. The main purpose of the proposed bank levy for the Government is to receive some form of compensation for the implicit guarantee by the Dutch State that, if and when needed to safeguard the financial stability of the Netherlands banks, they will receive assistance from the Dutch State. In addition to the measures following from Basel III, the bank levy aims to strengthen the financial system and to be better able to control risks which might be incurred by banks operating in the Netherlands.
The bank levy to a large extent follows the principles of the bank levy recently introduced in the United Kingdom. The tax base for assessing the bank levy are the total liabilities of the bank less (i) the core capital and additional capital based on the EU Capital Requirements Directives, (ii) the obligation under the Dutch deposit guarantee scheme, and (iii) the so-called efficiency exemption of EUR 20bn. It is proposed to create two tax brackets - one for short term debt and one for long term debt.
In this note we give a short overview of the most relevant aspects of the proposed bank levy.
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Which banks will be subject to the bank levy?
The proposal now stipulates that each banking entity that operates as a bank in the Netherlands qualifies as potential taxpayer (standalone taxpayer). The taxpayer could also be the Dutch parent of a group or part of group (group head as taxpayer). Whether or not the banking entity which operates as a bank in the Netherlands has its seat in the Netherlands is irrelevant.
Potential taxpayers are identified as:
- Dutch resident entities with a banking licence issued by the Dutch Central Bank (De Nederlandsche Bank). This includes subsidiaries of foreign banks which have their corporate seat in the Netherlands and are authorised to operate as a bank in the Netherlands. The Explanatory Memorandum refers for the definitions of “authorisation” and “bank” to the Dutch Act on Financial Supervision (Wet op het financieel toezicht);
- EU/EEA passport entities. This includes Dutch branches of an EU/EEA entity which operate on the basis of a banking licence from another jurisdiction. These branch offices do not need a banking licence from the Dutch Central Bank to fall under the proposed legislation. For the bank levy to apply to these branch offices it is sufficient that the branch office has received a confirmation from the regulator that the regulator is aware that the foreign bank intends to operate as a bank in the Netherlands. For the avoidance of doubt, the branch should have a physical presence in the Netherlands. Foreign banks offering their services in the Netherlands through the internet do not fall within the scope of the proposed legislation.
- Branch offices of other foreign licensed banks. This includes Dutch branch offices of foreign entities with a physical presence in the Netherlands that do not hold a EU/EEA passport, but that are nevertheless licensed to operate as a bank in the Netherlands by the Dutch Central Bank.
If any of the entities mentioned above either alone, or together with other entities, is part of a wider group of entities headed by a Dutch parent which prepares consolidated accounts, the bank levy is not levied from that individual entity but from the Dutch parent that prepares the consolidated accounts. This is the case even if the Dutch parent itself does not operate as a bank. When establishing the extent of the consolidation, the accounting principles of the consolidating entity are paramount. These accounting principles will either be IFRS or Dutch GAAP. This means that “control” will be the principal test on which to base the consolidation requirement. If the Dutch group parent has control and supervision over a subsidiary, it is in principle required to consolidate its subsidiary’s accounts with its own. This includes subsidiaries resident in other jurisdictions.
In the Explanatory Memorandum the following examples are given:
Example 1: Dutch group
In this example Dutch entity (2) has a banking licence issued by the Dutch central bank. Under the proposed legislation it is not just Dutch entity (2) which will be subject to the bank levy, but the entire group of entities consisting of Dutch entities (1) to (4), as well as the two foreign entities. The obligation to actually pay the banking levy in this example shifts from Dutch entity (2) to the group Dutch parent entity (1).
Example 2: Dutch group as part of a wider international group
In this example, Dutch entity (1) has a banking licence issued by the Dutch Central Bank. Under the proposed legislation it is not just Dutch entity (1) which will be subject to the bank levy, but the entire Dutch group of entities consisting of Dutch entities (1) to (3), as well as the foreign subsidiary of Dutch entity (3).
Under certain circumstance the consolidating entity will not be the taxpayer for bank levy purposes, but the bank levy will be levied from the entity that actually operates as a bank. This will be the case if the activities of the Dutch group or the Dutch part of the wider international group only consist of banking activities to a limited extent. In this context “limited” means that the balance sheet of the Dutch group entity, or the Dutch part of the international group, is less than the “efficiency exemption” threshold of EUR 20bn or is less than 10 per cent of the consolidated balance sheet total of the Dutch parent company (group head).
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As mentioned above, the tax base for assessing the bank levy are the total liabilities of the bank. If the bank levy is payable by an individual entity that is entitled to operate as a bank in the Netherlands, the tax base will be the balance sheet total of the standalone commercial annual accounts (of the preceding year). In case of a Dutch branch office, the tax base will be assessed on the part of the standalone commercial annual accounts of the head office that can be attributed to the Dutch branch office. It is uncommon to make such a detailed attribution of assets and liabilities for a branch office under commercial accounting rules. Therefore it is proposed to apply the system as laid down in the Dutch tax regulation in respect of profit allocation of permanent establishments (branch). The Dutch tax regulation to a large extent follow the rules described in the 2008 OECD Report on the Attribution of Profits to Permanent Establishments. The Authorised OECD Approach (AOA) is the basis for the allocation of assets and liabilities to a branch and requires a functional analysis taking into account significant people functions / key entrepreneurial risk-taking (KERT) for day to day activities of the branch. When allocating equity and debt to the branch the Dutch policy as expressed in the Dutch tax regulation is to apply a methodology which result in a profit allocation and an allocation of interest to a branch that is in line with the profit realised if the branch would have been a separate third party entity with similar activities and operating under similar circumstances (functionally separate entity approach). Consequently, the Dutch Government is in favour of the capital allocation approach for allocating equity and debt to the branch. Although, in the Explanatory Memorandum relating to the bank levy proposal it is mentioned that assets and liabilities must be allocated based on the methodology laid down in the tax regulation, the corporate commercial accounts of the (Chinese, Japanese, US, etc) head office will be the starting point and not the tax accounts. The Dutch tax regulation relating to the profit allocation of permanent establishments explicitly provides for the possibility to obtain advance certainty from the tax authorities for Dutch corporate income tax. It is unclear whether this possibility of advance certainty also applies with respect to allocation of assets and liabilities for the purposes of the proposed bank levy applicable to branch offices. If the bank levy is payable by the Dutch group parent that prepares consolidated accounts, the tax base is the Dutch group’s part of the balance sheet total of the consolidated commercial annual accounts. Note that the annual accounts as referred to in the legislative proposal are the annual accounts for financial reporting purposes and not the annual accounts for (Dutch) tax purposes (which may differ substantially).
Certain specific liabilities may be deducted from this tax base. To calculate the tax base the balance sheet total as referred to above will be reduced by:
- the qualifying capital based on EU Directives 2006/48/EC, 2009/83/EC and 2009/111/EC (as generally defined in articles 57 through 66 of these Capital Requirements Directives);
- the deposits that will be repaid pursuant to the Dutch Deposit Guarantee Scheme (“depositogarantiestelsel”);
- where the tax payer also carries on insurance activities, the specific liabilities relating to these insurance activities, in particular specific supervisory legislation applicable to insurers based on Solvency II;
- a threshold of Euro 20bn (the so called “efficiency exemption”).
The taxable amount can never be less than nil. In other words, there can never be a negative tax assessment or tax loss carry forward.
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A pro rata distinction is made in the proposal between long and short term liabilities. That part of the taxable amount that relates to short term liabilities (i.e. a term of less than one year) will be subject to a levy at a rate of 0.022 per cent. Long term liabilities (all other liabilities) are subject to a levy at a rate of 0.011 per cent. According to the Explanatory Memorandum, a higher rate for short term debt is justified because short term debt financing was one of the main reasons for the recent liquidity problems in the banking sector. The more short term debt on the bank’s balance sheet, the more difficulty the bank will have when it has to refinance itself. Note that the UK bank levy provides for a similar rate differentiation.
Excess bonus multiplier
In addition the rate structure of the proposed bank levy is linked to the bank’s remuneration policy. The rates will be increased in case the taxable entity has paid an excess bonus to any statutory board member in the relevant year. According to the Explanatory Memorandum an “excess bonus” is defined as a variable remuneration which exceeds 100 per cent of the fixed remuneration of a board member. This is line with the preferred remuneration system as laid down in the Dutch Banking Code (“Code Banken”). If this norm is breached, the above mentioned rates are increased by 5 per cent to 2.31 basis points and 1.155 basis points respectively. The Dutch Banking Code operates on a "comply or explain" basis. It is perfectly fine to grant a bonus of more than 100 per cent of the fixed remuneration as long as there are reasons to do so and this is properly explained. The measure proposed in the bank levy legislation is rigid. If the variable remuneration of board member exceeds the maximum, this immediately results in the sanction of additional bank levy being due. In this respect the proposal clearly lacks balance.
In case of a foreign bank operating in the Netherlands via a branch office this basically means that the Netherlands must be able to assess the remuneration level of each board member of the foreign bank to see whether it meets the Dutch standard, i.e. whether or not the variable bonus exceeds 100 per cent of the fixed remuneration. This seems to be a bridge to far.
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The bank levy must be included in the corporate income tax return of the taxable entity. The levy is due on the first day of the 10th calendar month after end of the reporting year. If the annual accounts are not adopted within the period referred to above the bank levy is due on the first day of the calendar month after the financial statements are adopted. It will not be permissible to deduct the bank levy from the corporate income tax due by the taxpayer.
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Double taxation relief
Although, the proposal recognises that the bank levy may lead to double (bank) taxation, the current wording does not include specific relief provisions. Neither existing tax treaties nor the Dutch unilateral relief rules provide for a solution for potential double taxation. In the Explanatory Memorandum it is mentioned that additional measures are required to avoid potential double taxation. These additional measures could take the form of new or revised bilateral agreements or unilaterally by amending the Dutch Decree for the Avoidance of Double Taxation 2001 (“Besluit voorkoming dubbele belasting 2001”). When introducing a relief, the Netherlands will aim to adhere to internationally accepted principles as much as possible, i.e. the primary right to levy tax should be with the jurisdiction where the parent entity resides and the jurisdiction in which the subsidiary or branch office is resident should grant a double taxation relief.
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Entry into force
It is intended that the bank levy legislation enters into force on 1 July 2012. However, the legislation has to be debated in the Dutch Parliament and subsequently approved by the Senate. This means that the proposed legislation is still subject to change.
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