ADVANTAGES OF DUTCH COMPANIES:
- Unrivalled tax treaty network with direct access to low tax regime of the Netherlands Antilles.
- Generally very favourable treaties due to the country's prestigious reputation and status as a major industrial power. In particular, the treaties with Switzerland, Luxembourg and Malta can afford benefits.
- Unlike smaller tax planning jurisdictions, treaty partners are very unlikely to unilaterally rescind or vary previously negotiated instruments.
- Full membership of the European Union can have beneficial consequences on dividend distributions to other member states. For example, the E.U. Parent/Subsidiaries Directive (90/435), means that once a Dutch parent holds, at least, 25% of the paid up capital of a subsidiary company located in another E.U. member state, then the participation exemption will apply even if the investments are of a portfolio nature.
- Highly qualified professionals and regulatory bodies.
- Excellent communications.
DISADVANTAGES OF DUTCH COMPANIES:
The Netherlands high profile use in tax planning has resulted in the introduction of anti-avoidance provisions by certain countries, including the United States, and the United Kingdom. In many cases, it is necessary to establish a 'Qualifying Participation Exemption' (Q.P.E.) if a significant reduction in withholding taxes is to be afforded. In fact, in many cases such establishment can result in no or little tax liability. The requirements of a Q.P.E. are as follows:
The Dutch resident company has a 5% or more direct equity stake in the paid up capital of the payer company. Alternatively, it must be shown that the dividend payments have been received in the normal course of the Dutch company's business
The non-resident dividend payor must be subject to a variable tax rate depending on gross profits. In other words, territories such as Cyprus would be fine as this is subject to a 10.00% tax rate on its worldwide profits. However, traditional offshore havens, such as Jersey or the Isle of Man, could not benefit as they are only subject to flat rate duties
Non-resident payers must be seen to be part of a company's, or group of companies, business structure. Dutch law specifically prohibits the use of the participation exemption in circumstances where the payer can be seen to be making general and/or passive portfolio investments. Therefore, the Netherlands would not be suitable for those purchasing general stock from international stock exchanges or other similar bodies
Dutch companies are only subject to tax on their world-wide income and not on their world-wide assets. The standard corporate tax rate is 35% and is payable by all companies deemed Dutch resident. Whether a company is resident for tax purposes depends on where effective management and control are exercised. In particular, it is important to note that the Dutch, in common with most western European tax authorities, will seek to tax any entity which is locally managed and controlled. Therefore, the full 35% tax rate will be payable even if there exists a foreign entity already subject to tax. In other words, a possible double taxation position could exist especially where no, or unfavourable, tax treaties exist.
EXAMPLES OF DUTCH COMPANIES BEING USED IN TAX PLANNING
FINANCE COMPANIES: The establishment of a finance/lending company is one of the most common tax planning methods. Most importantly, interest payments made by British, American and many other countries, to a Dutch financing company are not subject to withholding taxes. Where withholding taxes do apply they are normally at a significantly discounted level.
THE TAXATION OF FINANCE COMPANIES
(i) Non-related loans: Where loans are made by a Dutch company to non-residents of Holland, then the Dutch company will be taxed on the profits made as a result of the transaction minus overheads at the normal rate of 35%. Of course, the real benefits of a Dutch structure can be enjoyed when the sums have originally been lent by a third party company, normally from a tax free or low tax jurisdiction. It is always wise to get tax clearance to confirm that the Dutch tax authorities accept the 'non-related' status.
(ii) Related Loans: Where loans are for the benefit of subsidiaries and/or connected companies, the Dutch authorities require a 'turn', normally based on 1/8 of a percent of the loan amount
INTELLECTUAL PROPERTY COMPANIES: The Netherlands can afford significant benefits to those licensing intellectual property rights. As with finance companies, it provides both an unrivalled treaty network and favourable tax treatment.
THE TAXATION OF INTELLECTUAL PROPERTY COMPANIES
(i) Non-related licensing: Where royalty payments are made by a Dutch company to non-residents of Holland, then the it will be taxed on the profits made as a result of the transaction, minus overheads at the normal rate of 35%. It is important to note that the spread between the company's inputs and outputs must correlate with those expected from a similar firm operating in Holland.
(ii) Related Licensing: Once again the Dutch authorities expect to receive a 'turn' on the licensing transaction involving non-residents which will vary from 7% to 2% depending on the amount of royalties received. The Dutch corporation tax rate of 35% will apply to the 'turn 1 amount.
* Source CIA World Fact Book 2007