Jan Kees de Jager, last week unveiled his plan in a letter [in Dutch] sent to the lower chamber of the Dutch parliament.

Under present rules, Dutch corporate taxpayers may, subject to recapture, deduct foreign permanent establishments (PE) losses from their worldwide taxable profits. The deputy ministernow proposes to limit this deduction, with the exception, in principle, of losses upon discontinuation of the PE. De Jager believes this deduction limitation would bring the taxation of PEs more in line with the taxation of participations in subsidiaries.

This change to the PE rules has shocked one tax professional.

“The present system for handling permanent establishments has been around for 50 or 60 years and so I was quite amazed that a new system is being considered,” said Rudolf de Vries, a tax partner at Ernst & Young in the Netherlands.

In a measure to appease taxpayers, the minister proposed to abolish the subject-to-tax requirement that applies for the avoidance of double taxation with respect to profits of active PEs. The minister believes that, in this way, he can achieve a more equal treatment of foreign participations and foreign PEs.

“These changes are completely out of the blue and came as quite a shock as they were not on the table in any previous discussions,” said Maarten de Bruin, of Stibbe, a Dutch law firm.

The letter also included plans to introduce targeted interest deduction tax measures and a limitation on the deductibility of interest in relation to excessive acquisition debt.

Once the letter has been reviewed by parliament, a legislative proposal is expected to be released in spring 2010 followed by implementation in early 2011.