Netherlands types of company

Although the Netherlands has a sophisticated tax system with high tax rates some aspects of its fiscal system are extremely attractive and make it the ideal location in which to base international trading operations. Attractive fiscal incentives are further enhanced by a complex network of double taxation treaties (few of which contain any anti avoidance provisions) and by the existence of a procedure of advance tax rulings whereby the tax authorities who are autonomous and approachable can at short notice specify the fiscal consequences of certain business structures provided that material financial interests are involved and the propositions are reasonable.

The Dutch government announced in 2004 that it would cut the country's corporate tax rate to 31.5% in 2006 from 34.5%, with a further cut to 30% slated to take place by 2007. This reduction will bring the country's corporate tax rate below the average rate in the old EU15, which currently stands at 31.4%. The move has likely been made in the knowledge that the average corporate tax rate in the new member states, located mainly in the former Eastern bloc, is 21.5%.

In 2005, the government put forward further reductions in corporation tax: as from 1st January, 2007, the starting rate of corporation tax will be lowered to 20% on the first €41,000 of profit, compared with the current 27%, and the headline rate of corporation tax will be reduced from 31.5% to 26.9%. Owners of small and medium-sized enterprises will benefit from an exemption of at least 5% of their profits.

The proposals also include a proposal to reduce the tax rate for profits derived from intercompany financing and treasury activities to 10%, and confirm the already announced abolition of the capital duty of 0.55% on the issue of share capital.

In anticipation of confirmation of the Marks & Spencer ruling on cross-border loss relief by the European Court of Justice, the government proposes to allow relief for losses incurred in other EU Member States. In addition, participation rules will be relaxed by eliminating the nonportfolio and "subject to tax" requirements. For "passive" participations, a "sufficient" tax rate test (possibly 10%) would be introduced.

The total package is however designed to be revenue-neutral, and the give-aways will be financed inter alia by reducing the carryback of losses from three years to one year, by limiting carryforwards, by abolishing the temporary deduction for losses on newly acquired participations, and by capping the depreciation of real estate to the extent the book value of a property is below the fair market value.

NETHERLANDS DUTCH HOLDING COMPANIES

For a country to be an attractive location in which to set up a holding company 4 criteria must be satisfied:

Incoming Dividends: Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary's jurisdiction.

Dividend Income Received: Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company's jurisdiction.

Capital Gains Tax on Sale of Shares: Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company's jurisdiction. Outgoing Dividends: Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company's jurisdiction. By these criteria Holland is a fiscally attractive jurisdiction in which to locate a holding company. Indeed the holding companies and "participation exemption rules" are one of the Netherlands most attractive features as a tax-planning center.

Withholding Taxes on Incoming Dividends

Under the terms of the EU parent/subsidiary directive, if a Dutch company owns 25% or more of the shares of another EU company, no withholding taxes will be levied on dividends remitted by the subsidiary. Where a foreign subsidiary is not covered by the EU parent/subsidiary directive the terms of a double taxation treaty will often substantially reduce the amount of withholding taxes deducted on the remittance. Dutch holding companies can rely on an extensive network of double taxation treaties the effect of which is to obtain a reduction in withholding tax rates on dividends remitted to the Netherlands from the subsidiary jurisdiction. The Netherlands has 100 tax treaties in place. (Belgium has 66, Denmark has 78 and the UK has 110).

The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on incoming dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction.

Corporate Income Tax on Dividend Income Received

The general rule is that all dividend payments remitted by subsidiaries to Dutch parent corporations are subject to corporate income tax in the hands of the parent company (with tax credits being due where there is an element of double taxation).Where a Dutch holding company comes within the "participation exemption rules" all income received by the holding company from the subsidiary whether by way of dividends or otherwise is tax free.

To come within the "participation exemption rules" the following criteria must be satisfied:

5% rule: the Dutch holding company must hold at least 5% of the subsidiary's shares. The 5% rule makes Holland a particularly attractive jurisdiction in which to base international holding companies. Similar regimes in other countries require much higher percentage shareholdings if the company is to qualify for favorable tax treatment and require that the company be a proper holding company in the sense that its sole economic activity is to hold shares in other subsidiaries. In Holland by contrast a company which trades but also happens to own shares in another corporate entity can be deemed a holding company for the purposes of the participation exemption rules.

Shares must be held since beginning of fiscal year: The shares must be held since the beginning of the fiscal year in which the participation exemption benefits are claimed.

Subsidiary profits must be taxed: The subsidiary must pay tax on its profits in the foreign jurisdiction no matter how low those tax rates may be. Active Management: The parent company must actively involve itself in its subsidiary's management.

Tax Exempt Portfolio Company: The subsidiary must not be a "tax exempt portfolio investment company".

N.B. Advance rulings are available to determine whether or not both the corporate entities come within the participation exemption rules. A debt equity ratio of more than 85:15 may result in the company being denied the participation exemption.The participation exemption rules are subject to the following restrictions:

Expenses Incurred by Parent Corporation: The costs to the parent corporation of running the subsidiary are not deductible from the taxable profits of the parent corporation in Holland. This follow the landmark decision in the Hage Road case in which it was established that costs incurred by a Dutch company in generating foreign income which is exempt from tax in Holland is not tax deductible in the Netherlands (but see below from 2004).

Thus the costs to the Dutch parent corporation of loans taken out in Holland by the parent corporation and used to inject share capital into the subsidiary are not deductible from the parent company taxable profit. A loan taken out by a parent corporation which purchases an equity participation in a subsidiary within 6 months of the date of the loan is deemed to be a loan made to finance the subsidiary and is not deductible from the parent company's taxable profits unless the parent corporation can rebut this presumption. Thus funds to finance a subsidiary should be borrowed by the subsidiary since interest payments will be deductible from the subsidiary taxable profits.

High Debt Equity Ratio: Where the funds to the subsidiary are provided by the parent corporation too high a debt equity ratio may prevent the corporate structure being deemed a structure to which the participation exemption rules apply. Advance rulings are available to determine whether or not a company comes within the participation exemption. A debt equity ratio of more than 85:15 may result in the company being denied the participation exemption. Thus for example a company with Guilders 5m of debt capital but only 100,000 Guilders of share capital may be denied the benefit of a participation exemption. (But see below for changes from 1st January 2004).

Branch converted into a Subsidiary: If a branch is converted into a subsidiary the losses made by the branch in the previous 8 years must first be covered by profits represented by taxable dividends before the branch can become a subsidiary covered by the participation exemption rules.

Foreign Taxes: Foreign taxes paid by the subsidiary on income earned by the subsidiary can neither be credited nor debited against the taxable profits of the parent company.

Undistributed Profits from Earlier Periods: Dividends which relate to undistributed profits made prior to the subsidiary being covered by the participation exemption rules are not tax free in Holland. This follows the landmark ruling in the The Dutch Holdco BV Case.

Capital Gains Tax on the Sale of Shares

Under the participation exemption (see above), all capital gains made by a Dutch holding company on the sale of shares in a subsidiary are tax free in Holland irrespective of whether the subsidiary is resident or non resident.

Withholding Taxes on Outgoing Dividends

Under the EU parent/subsidiary directive dividends paid by Dutch subsidiaries to EU parent corporations are exempt from Dutch withholding taxes provided the EU parent corporation has held 25% of the shares in the Dutch subsidiary for at least 12 months. Where a foreign parent is not covered by the EU parent/subsidiary directive the terms of a double taxation treaty will often substantially reduce the amount of withholding taxes deducted on the outgoing remittance. Dutch holding companies can rely on an extensive network of double taxation treaties.

The Netherlands has 100 tax treaties in place. (Belgium has 66, Denmark has 78 and the UK has 110). The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on outgoing dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction.Holland has taxation treaties with its metropolitan offshore territories, Netherlands Antilles and Aruba, under which outgoing dividends are subject to withholding tax of 8.3%.

It is rare for high-tax countries to have such arrangements with offshore territories.The Dutch government has made some changes to its holding company regime which are effective from 1 January 2004.The Dutch holding company regime now allows a tax deduction of expenses, including interest on acquisition loans.This means that the Dutch holding company is now able to receive tax free dividends and capital gains originating from its subsidiaries, and at the same time is allowed to deduct expenses, including interest on loans.

The interest deduction is subject to limitations, but in essence the new regime offers the possibility to create tax losses which can be offset against other sources of income. The ultimate effect can be that at the Dutch level effectively very little or no tax at all is due on taxable sources of income, such as interest, royalties and service fee income.Limitations now apply to the carry forward or carry back of tax losses by holding/financing companies. In essence, the tax losses which originate from a year in which the main activity of the company is the holding of shares or group financing activities may only be carried back or carried forward to tax years in which the company had or has similar activities. Both the nature of the activities and the volume of the activities (balance sheet ratios) are relevant.

Also a general thin capitalization provision has been introduced applying to interest (and other funding) expenses originating from qualifying intra-group loans. The maximum debt-equity ratio is 3:1; there are special rules for calculating the debt-equity ratio.

NETHERLANDS INTEREST CONDUIT COMPANIES

The Netherlands is an extremely attractive jurisdiction in which to locate interest conduit companies. A Netherlands interest conduit company is a company which intercedes between a borrower and a lender with a view to realizing fiscal advantages on a loan. The advantages of using a Netherlands interest conduit company are best illustrated using an example.

X, a Dutch company, takes out a loan for Euros 5m from Y, an affiliated German company, at an interest rate of 8% and in turn lends that money to Z an affiliated Spanish company for 8.5% with the consequence that X makes a profit of .5% on the loan. The fiscal advantages of using a Netherlands interest conduit company in this situation are as follows:

The annual 8% interest payments made by the Dutch company to the German company are free of withholding taxes in the Netherlands since the Netherlands does not levy withholding taxes on interest payments.

Because of double taxation treaties re-payment of 8.5% loan interest by the Spanish company to the Dutch company may be either free of withholding taxes or will have a very low rate of withholding tax deducted.

Although tax is payable in Holland on the profits made on the loan the taxable profit is likely to be extremely low since the Dutch fiscal authorities will accept a wafer thin loan differential margin. The higher the value of the loan the lower the loan differential margin that the tax authorities will accept. The taxable profits of the Dutch intermediary will be considerably less than the withholding taxes that might have had to be paid if a different route had been used for the loan. Advance tax rulings are available to determine whether the interest differential margin is an acceptable margin for tax purposes.

After 2001 the Dutch began to substitute fixed differentials as above (still accepted for existing companies until 2005) with Advance Pricing Agreements and Advance Tax Rulings. Under the new policy structures that do not have real substance in The Netherlands, such a pure flow-through financing structure, are in essence no longer eligible for a ruling, unless they agree in advance to certain exchange of information procedures with other countries.

Rulings can however still be obtained for financing companies provided that the Dutch company meets substance requirements of both an operational and economical nature. As from the tax year 2004 the EU Directive for interest and royalties entered into force. Under the Directive a 0% withholding tax rate applies for qualifying interest payments between qualifying associated corporations established in the EU. A corporation is considered associated if it has cross holdings of at least 25% or a third corporation has a direct minimum holding of 25% in two other EU corporations.The conditions to be met for this EU exemption are:

The beneficial owner of the interest is a qualifying corporation of another EU Member State or is a EU permanent establishment of such a corporation; Is considered to be a resident in that Member State (and thus not outside the EU); and Is, without exemptions, subject to tax in that Member State.

NETHERLANDS TAXATION OF FOREIGN BRANCHES

Dutch laws regarding the taxation of branches are extremely attractive: Profits of a Foreign Branch: All profits, capital gains and income of the foreign branch of a Dutch registered parent company (whether those profits are repatriated or not) are exempt from corporate income tax in Holland (unless those profits have not been taxed in the foreign jurisdiction in which the branch operates).

Losses of a Foreign Branch: The losses of the foreign branch of a Dutch registered company are tax deductible from the taxable profits of the Dutch registered company. Thus where a project is likely to initially run at a loss it may be advisable for the Dutch company to set up a foreign branch since the tax losses of the foreign branch are tax deductible in Holland (whereas the tax losses of the foreign subsidiary of a Dutch parent company are not).