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.
BACK
TO TOP
Withholding
Taxes on Incoming Dividends
Under the
terms of the EU parent/subsidiary directive, if a Dutch
company owns 10% (15% prior to 2009) 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 around 100 tax treaties in place. 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.
Ruling
in December 2006, the European Court of Justice announced
that withholding taxes that result in a higher tax bill
for the foreign subsidiary than would have been levied
in the member state of the parent company are illegal
because they restrict freedom of establishment - a fundamental
tenet of EU law.
The
case concerned Netherlands-based firm Denkavit Internationaal
BV which between 1987 and 1989 received 14.5 million
French Francs by way of dividends from its two French
subsidiaries, Agro-Finances SARL and Denkavit France.
In accordance with the Franco-Netherlands Convention
and the French legislation, a withholding tax of 5%
of the amount of those dividends was levied, corresponding
to 725,000 French Francs.
Denkavit
Internationaal and Denkavit France claimed repayment
of that sum from the French government, which subsequently
asked the ECJ to rule on the compatibility of the French
withholding tax system with Community law.
Tax
experts observed that the ECJ's ruling could have ramifications
across the EU.
KPMG
noted that member states had already begun to amend
their tax legislation in anticipation of the ruling.
The Netherlands, for example, has introduced exemptions
from withholding tax for certain non-residents, such
as, in this case, pension funds.
BACK
TO TOP
Corporate
Income Tax on Dividend Income Received
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 3:1
may result in the company being denied the participation
exemption. The participation exemption rules are as
follows:
BACK
TO TOP
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.
BACK
TO TOP
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 10% (15% prior to 2009) 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 over 100 tax treaties in place. 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 5% under certain circumstances.
It is rare for high-tax countries to have such arrangements
with offshore territories.
The
Dutch holding company regime allows a tax deduction
of expenses, including interest on acquisition loans.
This means that the Dutch holding company is 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 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 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 applies 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.
BACK
TO TOP |
Lowtax Network Portal
Front Page
Tax Jurisdictions
Featured Content
