The Netherlands is an extremely attractive jurisdiction in which to locate a royalty conduit companies. A Netherlands royalty conduit company is a company which intercedes between the owner of intellectual property rights (e.g. a patent owner) and the final user of those rights (i.e. licensee of the patent) with a view to realizing fiscal advantages. The advantages of using a Netherlands royalty conduit company are best illustrated using an example.
X, a German company and the owner of a patent, gives Y, a Dutch company, the right to license that patent to any licensees based in Japan. Y grants a license to Z, a Japanese company, to use the patent for 5 years subject to a royalty fee. The fiscal consequences of this transaction are as follows:
- Royalty payments made by the Netherlands company to the German company for the right to sub-lease the patent to the Japanese company at a fee are free of withholding taxes since in Holland no withholding taxes are levied on royalty payments.
- Because of the provisions of double taxation treaties payment of royalties by a Japanese company to a Dutch company for the right to use the patent in Japan may be either free of or subject to a very low rate of withholding taxes.
- The Dutch company will only pay tax on the difference between the royalties paid by the Dutch company to the German company and the royalties received by the Dutch company from the Japanese company. The taxable profits of the Dutch intermediary will be considerably less than the withholding taxes that might have been deducted had a different route had been used for the leasing of the patents. Advance tax rulings are available to determine whether or not the royalty differential margin is an acceptable margin for tax purposes.
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
Under the amended policy, structures that do not have
real substance in The Netherlands, such a pure flow-through
royalty 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 royalty 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 royalty payments (or 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 royalties 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.