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.

Version date: 07.05.06