Dutch tax changes of 2012 - A Blog from Freemont Group
06 February, 2012
The Netherlands has made significant efforts to remain one of Europe´s top holding locations and financial centers. Several changes in laws and regulations will come into force coming January first. As can be expected from an austere country, none of the reforms are radical, and most of them are positive.
Equal treatment of permanent establishments
Dutch Tax law naturally distinguishes between a permanent foreign establishment of a Dutch company, and a foreign subsidiary. While legally different, technically they are the same and should be treated equally. This equalization has advantages and disadvantages.
Under the present rules, profits of a permanent establishment (PE), as well as losses, are taxable in the Netherlands. Exemption can be claimed and losses can be deducted. This deduction of losses proved to be especially advantageous for multinationals. As of 2012 for active business income that is derived from a foreign permanent establishment an object exemption applies, irrespective of whether a treaty applies and irrespective of whether the profits are subject to tax. The exemption is therefore very similar to the participation exemption in the Netherlands and very straight forward.
Foreign substantial shareholders of a Dutch company (those owning 5% or more of the share capital) can be subject to corporate income tax on dividends, capital gains and interest derived from the Dutch company. The law applied until 2011 when their shareholding or the loan didn’t constitute an asset of an active enterprise and this interest was held with the main purpose to avoid Dutch income tax. As of 2012 it will only apply in these cases if the motive is “abusive”; that is: if the main purpose is to avoid liability to Dutch corporate income tax or dividend withholding tax. The corporate income tax liability will be limited to 15% if the shares are held only to avoid dividend withholding tax. This change has been made in order to avoid a potential challenge by the ECJ because it could be considered a violation of the EU freedom of movement of capital.
The use of the Dutch Cooperative as a tool to move your profits offshore is also coming to an end. For a long time, dividends passed through cooperatives untaxed; Dividend withholding tax didn’t exist and the above corporate tax on foreign substantial shareholders could be avoided if the interest in the Dutch Cooperative was held as the asset of an active enterprise. However, this kind of ‘abuse’ will no longer be allowed after 2012. A dividend tax of 15% will apply if:
· the cooperative does not conduct an active enterprise or
· is part of a structure solely for the purpose of tax avoidance.
A ruling can be obtained to establish whether a Dutch cooperative can be used for a particular structure or not.
Another form of popular ‘abuse’ will also be limited in 2012, the acquisition indebtedness. The proposed measure may limit the deduction of the interest expense on excessive loans obtained by a Dutch company that acquires a Dutch target company and subsequently will form a fiscal unity or legally merge (or apply a demerger) with the acquired Dutch company. This is currently the standard route to push down funding debt to the acquired company. In situations where the interest expense is higher than 1 million and the debt-to-equity ratio of the fiscal unity is higher than 2:1, limitations will now apply. In such case, interest can only be deducted to 60% of the acquisition price in the first year. After this the maximum allowed interest deduction is reduced with 5% annually until 25% is reached.
By far the most positive development is the simplification of setting-up a Dutch limited liability company, a Besloten Vennootschap (B.V.) During 2011 the requirement to obtain a declaration of non objection from the minister of Justice was already abolished, and now other impediment requirements are taken down as well. No longer will you need a notary for incorporating a simple B.V., neither will you need to have a paid-up capital of €18.000. Other planned changes to company law are to allow for voting and non-voting shares as well as for dividend bearing and non-dividend bearing shares and to introduce the possibility of a one-tier board (with both executive and non-executive directors). Entrepreneurs currently operating as sole proprietors will especially welcome the new so called 'flex B.V.'.
Regulation of trust business, though in itself not a good development, appears to have some positive side effects. For example, the identification of Ultimate Beneficial Owners is only necessary for those UBO’s holding a beneficial ownership of more than 25%, instead of 10% previously. And even though professional service providers selling legal entities or acting as intermediaries are now regulated officially as trust businesses, those providers that are only involved in offering mailing addresses and secretarial services are officially exempt.
By closing down some loopholes and opening others, the Dutch government shows its willingness to remain competitive and at the same time compliant with international standards.
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