Synopsis
The Netherlands, more commonly known as Holland, is situated west of Germany and north of Belgium along the North Sea coast. It has an area of approximately 16,000 square miles and a population of approximately 16.3 million inhabitants making it the most densely populated country in Europe.
The Netherlands is one of the ten largest exporters in the world and it ranks in the world's top twenty for Gross National Product even though it is one of the smallest countries of the world. The Netherlands was one of the first EU member states to qualify for the Economic and Monetary Union (EMU). Since January 2002, the monetary unit of the Netherlands has been the Euro, replacing 700 years of the Dutch Guilder. The official languages are Dutch and Frisian but English, German and French are widely spoken in the business community.
The Netherlands is a constitutional and hereditary monarchy but executive power lies with the cabinet council presided over by the Prime Minister. Members of the cabinet council are formally appointed by the Queen and reflect the political majority of the second chamber of the Dutch Parliament which consists of 150 representatives directly elected for 4 year terms on the basis of proportional representation. The first chamber of the Dutch Parliament exists to review draft legislation which has already been passed by the second chamber.
Tax Planning through The Netherlands
Although the Netherlands should not be considered as an offshore finance centre, it provides outstanding opportunities to use Dutch corporations in structuring international financial transactions. This is due to its extremely wide network of double taxation treaties (over 78 taxation treaties have been concluded including treaties with most of the major developed nations of the world), its participation exemption, its 0% withholding tax on interest & royalty distributions and its tax ruling system in conformity with OECD standards. A corporate tax of 29,6% is currently levied on worldwide income (with a 25,5% rate for the first EURO 22,986). Under a legislative proposal (expected to be in force as from 1 January 2007), the corporate tax rate will be reduced to 25,5% (with a 20% rate for the first EURO 25,000 and a 23,5% rate for the next EURO 35,000). Further, legislative concessionary treatment of some forms of income has been proposed, such as an effective corporate tax rate of 5% for interest derived from group financing activities and an effective corporate tax rate of 10% for income derived from newly developed intangible assets. These new concessions are likely to be introduced as from 1 January 2007. In addition, it has been proposed to reduce as from 1 January 2007, the normal dividend withholding tax to 15% and to abolish this withholding tax for all European companies which have a 5% minimum interest in a Dutch company.
Dutch companies may be advantageously put to the following uses:-
A) Holding Companies: Subject to certain conditions a resident Dutch company may qualify for the "participation exemption" which exempts such companies from corporate tax on income and capital gains resulting from the holding or disposal of qualifying shareholdings. Under a legislative proposal (expected to be in force as from 1 January 2007), some of these existing conditions will be abolished, resulting in a wider application of the participation exemption. The new requirements would be that the company need to hold only a minimum of 5% of the equity in an active company. However if the company in which equity is owned is passive then there is an additional requirement that the company must be subject to an effective rate of tax of at least 10%.
B) Finance Companies: The Netherlands imposes no withholding taxes on interest paid by a Dutch company to a non resident. Additionally, many of the Dutch tax treaties allow foreign companies to pay interest to a Dutch company without a requirement to withhold tax or subject to a requirement to withhold tax at a reduced level. The Netherlands may therefore provide a suitable conduit through which inter-company loans may be made. There is a requirement that the arrangements made between related lendors and borrowers must be demonstrably commercial and that the margin of profit made in the Netherlands must be negotiated according to arm’s length principles. The Dutch Revenue may require the Dutch company to produce comprehensive documentation proving the arm's length nature of the transaction and that the company has taken a genuine commercial risk. It is therefore recommended that a "transfer pricing" study be prepared by a relevant expert so that the the arrangements can be established as correct from the start and so that a request from the Netherlands Revenue can be met promptly and within the allowable time. The previous fixed profit margins which applied to finance companies in the Netherlands are no longer applicable.
C) Licensing Companies: There is no withholding tax on royalty payments made by a Dutch company to a non resident and, as with interest payments, many of the tax treaties signed by the Netherlands allow foreign companies to make royalty payments to a Dutch company without a requirement to withhold tax or subject to only a reduced rate of withholding tax. There is a requirement that the arrangements made between the related licensors and licensees must be demonstrably commercial and that the margin of profit made in the Netherlands must be negotiated according to arm’s length principles. The Dutch Revenue may require the Netherlands company to produce comprehensive documentation proving the arm’s length nature of the transaction and that the company has taken a genuine commercial risk. It is therefore recommended that a "transfer pricing" study be prepared by a relevant expert so that the arrangements can be established as correct from the start and so that a request from the Netherlands Revenue can be met promptly and within the allowable time. The previous fixed profit margins which applied to licence companies in the Netherlands are no longer applicable.
There is a requirement for all of the above companies to have substance in the Netherlands.
Advance tax rulings and advance pricing agreements are available on application to the Netherlands tax authorities so the tax payer may obtain certainty. Sovereign has in-house expertise in obtaining these and can assist with these matters upon request.
The transfer pricing studies recommended under paragraphs B and C above need to be comprehensive and can only properly be prepared by experts with access to the relevant databases giving comparative information. Sovereign has arrangements with a number of different firms with the necessary expertise and will be pleased to make appropriate introductions upon request.
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Last reviewed: Wednesday, May 26, 2010
Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, it does not constitute legal or other professional advice. We do not accept any responsibility, legal or otherwise, for any error or omission.
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