Netherlands: Domestic Corporate Taxation
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.