New Corporate Tax Regime for Universities
What will be the effects of the legislative proposal of the Dutch government which aims to subject public enterprises to corporate taxation. Will universities have to pay corporate tax?
The government presented a legislative proposal in which it will subject public enterprises to corporate taxation. This proposal was pushed by the European Commission that has requested that the Dutch authorities take ‘appropriate measures’ to end the fiscal inequality between public and private enterprises. In its request, the Commission also mentioned that education institutes undertake economic activities, such as the renting out of lecture halls or contract research. These activities are currently not taxed under the Wet op de Vennootschapsbelasting (Dutch Corporation Tax Act) 1969 (hereafter: Wet Vpb). However, in the new proposal education and research institutes will be included in the Wet Vpb. What should universities expect from this proposal?
Firstly, it is expected that this proposal will end the fiscal inequality between two categories of not-for-profit universities. The first category of universities is organized in public legal entities, such as Leiden University or Maastricht University. These universities are currently not liable for corporate tax. This is also the case if the commercial activities are not carried out ‘directly’ by these universities, but ‘indirectly’ through a separate legal entity. A second category of not-for-profit universities is organized in foundations, associations or churches. Examples of such universities are the Radboud University Nijmegen (foundation), Free University of Amsterdam (association) or the Protestant Theological Institute (church). These universities are liable for corporate tax insofar as they carry on a business, that is any activity through which an entity competes with other enterprises. It is worth noting that the policy rule ‘Belastingplicht van Verenigingen en Stichtingen’ (Tax Liability of Foundations and Associations) states that activities that are essentially (at least 70%) publicly-funded are not considered as business activities. Furthermore these universities are exempted from corporate tax if the profits of their business activities do not exceed 15,000 Euro in the course of a year or were below 75,000 Euro in the past four years (article 6 Vpb). Still, the second category of universities are fiscally disadvantaged compared to the first category of universities that do not have to consider whether they should pay corporate taxation. This advantage is unjustifiable, because both types of universities have the same rights and obligations under the Wet op het Hoger onderwijs en Wetenschappelijk onderzoek (Dutch Higher Education and Research Act).
The proposed amendment of the Wet Vpb assumes that both categories of universities are liable for corporate tax. The specific exemption of the proposed article 6b (1) Vpb exempts both categories of universities if they exclusively or almost exclusively undertake education and research activities that are essentially publicly-funded. The government clarifies that universities are not liable for corporate tax if 90% of all their activities are composed of essentially (at least for 70%) publicly-funded education and research activities. The Universities that exceed these norms are liable for tax insofar as they carry on a business. Since these new rules are for all not-for-profit universities, the fiscal and legal inequality between the aforementioned categories of universities will be ended.
Secondly, it is arguable that the proposed specific exemption for education and research is not geared for the future. It seems that the government assumes that most universities almost exclusively undertake publicly-funded activities. After all, one of the goals of the exception is to limit the administrative burden for universities. However, sociological and policy literature suggests that universities increasingly have to rely on private funds and therefore undertake many private activities. It is therefore unsure whether the 90%-norm is attainable by most universities.
Thirdly, it is expected that the content of the specific exemption for education and research will cause confusion. How should universities calculate whether 90% of all its activities are essentially publicly-funded activities? The Dutch Supreme Court has decided that a similar norm for the exemption of Public Benefit Organizations should not be purely calculated mathematically (for example by calculating the amount of hours spent on public interest activities), but that each activity should be taken into consideration and that some activities can be assigned a different weight or importance (ECLI:NL:HR:1997:AA3214). This is quite a vague norm and it is unsure how case law will develop for universities.
In conclusion, not-for-profit universities can expect an end to the fiscal inequality between them. However, they will probably be faced with many uncertainties regarding the interpretation of the content of the proposed exemption for education and research. It would be desirable for the government to create guidelines for schools and universities regarding this proposed exemption.