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.

Version date: 07.05.06