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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 EUR5m 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 0.5% 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 (which were still accepted for existing companies
until 2005) with Advance Pricing Agreements and Advance
Tax Rulings. Under the amended 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.
The
Corporate Income Tax regime which came into force in
January 2007 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%. The interest box scheme is optional, but groups
wishing to avail of its provisions must be apply across
all companies in the group. However, the Dutch government
was unable to fully implement the new regime owing to
a European Commission state aid investigation into the
legislation.
The European
Commission later concluded that, in light of the comments
submitted and the modifications introduced by the Dutch
authorities, the the interest box measure does not constitute
state aid as it will apply equally to all companies
receiving interest from related companies.
In December
2008, the Dutch government announced plans to amend
legislation regarding the tax treatment of corporate
group interest. The ministers intended to present legislation
to the Lower House of Parliament after conducting an
investigation into possible amendments. The investigation
focused on the possibility of making group interest
non-deductible for the debtor and non-taxable for the
creditor. If this system is not feasible the government
will look at the option of reducing the effective tax
rate for both interest payments and receipts on group
loans and cap deductions on participation-related borrowing.
The Dutch government's proposals
follow a study by the Netherlands Bureau for Economic
Policy. The study showed that amending the group interest
system would help break a trend which currently encourages
the use of borrowed capital. The government also said
that the move would decrease the taxation on companies
and make the Netherlands a more attractive jurisdiction
for companies to establish tax offices and operations
in.
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