News and Insights

Public Entities Engaged in (In)Direct Economic Activities Subject to Corporate Tax from 1 January 2016

Tax Development Apr 08, 2014

To prevent unfair competition and following measures announced by the European Commission in May 2013, the Dutch government has decided that public entities directly or indirectly engaged in economic activities, will be subject to corporate tax from 1 January 2016. This will apply to public entities engaged in the exploitation of local swimming pools, ports, waste management and land management for example. The government aims to submit the draft legislation for this in September this year.

In recent years, activities undertaken by public entities and private sector companies have increasingly overlapped in many areas. As a result of this, concerns have been raised about possible distortion of competition in the case of activities that are undertaken by both exempt public entities and private parties. The European Commission could even classify this as State aid. And therefore there is a need to intervene.

Based on the current Corporate Income Tax Act 1969, direct and indirect public entities are only subject to tax if they engage in certain entrepreneurial activities as set out in the legislation, including industry, trade, mining and agriculture. Services are not mentioned in the legislation at this moment. It is possible to question whether this situation is still in line with the original thinking behind the legislation in this regard, because private companies have been engaging in activities that were historically carried out by the public sector and vice versa.

Plan and structure
Former State Secretary of Finance Weekers, writes in his letter to the Dutch House of Representatives, dated 11 May 2012, that the public sector should not be faced with significant increases in its administrative obligations. This is why former State Secretary Weekers has made a proposal that he says fulfils two goals: On the one hand preventing unfair competition between companies and the public sector and on the other hand preventing a high administrative burden for public entities. Weekers wanted to achieve this by introducing the ‘indirect entrepreneur option’ in which the public entity should perform the competing economic activities through a separate civil legal entity. The ‘direct entrepreneur option’ in which the public entity performs the activity themselves would lead to a high administrative burden according to the State Secretary. In this option, an opening balance would have to be made and a separate administration held. This is not desired says Weekers.

However, during a round of information gathering among the various departments and local authorities, it seemed that there were many objections to this indirect entrepreneur option. Stakeholders almost unanimously objected to the mandatory placement of taxable activities in a separate civil legal entity. They mainly worry about the leadership and corporate governance aspects that the use of a civil legal entity will bring with it. They also object to the costs involved in setting up and keeping a civil legal entity up and running. It can be concluded from the meetings held in the information gathering phase, that the stakeholders feel that the administrative burden in the ‘direct entrepreneur’ option is much less of a problem than the use of separate civil legal entities would bring.

To meet their needs, the intention is therefore to use an option in which competing public entities become taxable, no matter which legal structure they have adopted, and in which there is an exemption for public activities. This adapted option offers stakeholders more choice when it comes to the way in which they want to give substance to their organisation. This adapted option does not have consequences for the size of the group of public entities that is set to become liable to pay corporate tax.

The exemption for public activities and the various other aspects that are involved in an option whereby the legal structure of the entity does not play a role are being discussed by the government with the European Commission. 

How Can Ryan Help Public Entities Companies?
Although the exact details are not yet known, fact is that the competing public activities will become taxable. We look forward to helping you, partially without obligation, to analyse the activities of your organisation in order to establish if, and if so which, activities are set to become liable to corporate tax in 2016. If it is established that none of your activities qualify as such, you owe us no further reimbursement. If however (a part of) your activities does qualify as such and the option is chosen in which competing public entities companies are taxable with an exemption for public activities, we will gladly help you to define the taxable activities, to establish the correct legal structure and with the drawing up of your opening balance.

If you have questions regarding the above, please do not hesitate to contact one of our specialists. To read this information in Dutch, please click here.


John P. Linders
+31 (0) 20 570 3520