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.
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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 Denakvit 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.
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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 followed
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 EUR5m of
debt capital but only EUR100,000 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.
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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.
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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 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 5% under certain circumstances. 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
January 1, 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.
2007
Reforms
Several
changes to the Corporate Income Tax regime came into
force in January 2007 which had an impact on the areas
mentioned above.
The
reforms, first put forward by the Finance Ministry in
May 2006, were designed to increase the attractiveness
and competitiveness of the Netherlands from a tax point
of view.
Key
changes included a reduction in the general corporate
income tax rate to 25.5% (from 29.6% previously). Profits
below EUR25,000 would be subject to a 20% rate, and
profits between EUR25,000-EUR60,000 would face a rate
of 23.5% (the government announced in 2008 that the
the
lowest corporate tax rate of 20% will apply to the first
EUR250,000 of profit, and the stardard rate of 25.5%
would apply to the excess).
In
terms of withholding tax on dividends, this was reduced
by 10%, from 25% to 15%.
The
participation exemption rules became more strictly observed,
although the 5% requirement remained in place.
Other
provisions which came into force on 1st January 2007
were:
- New
depreciation rules.
- New
restrictions on the carryback and forward of losses
(to 1 year and 9 years, respectively).
- More
streamlined anti-abuse rules.
The
2007 reforms also introduced some improvements to the
taxation of intra-group interest payments. Known as
the 'interest box,' the new law subjects the balance
of interest proceeds and costs within a group to an
effective tax rate of 5%. This scheme was cleared by
the European Commission after a state aid investigation.
Following
up on the 2007 reforms, the Dutch government has discussed
the possibility of removing the tax deductibility of
interest and and announced refinements to the 2007 package
which are slated to enter into force in 2010.
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