Editor's note: This article has since been revisited, click here for a 2017 outlook on the tax advantages of the Netherlands.
Historically, many multinational companies, from all continents, have used the Netherlands as a holding jurisdiction and as their European business hub. Notwithstanding the recent turbulent times, direct investments into Europe increased lately. Also the Netherlands, with its strong, internationally focused economy and open business environment witnessed an increase.
Foreign investors are attracted by the beneficial tax system, by the business climate, strong financial sector, geographical location, quality of life, and, importantly, the pro-business government.
Before commencing business activities in Europe many companies consider the Netherlands for structuring their holding and finance activities. Given the excellent business climate, the Netherlands is subsequently the usual suspect for operating activities like sales, marketing, distribution or research and development also.
Corporate law: more flexibility
Last year the incorporation procedure of private limited liabilities companies (BV) was simplified. In addition new legislation concerning BVs will enter into force on October 1 2012. The new legislation will result in a further simplification and increased flexibility of the rules to set-up and operate a BV.
The most notable changes of the new legislation are:
- Minimum capital requirement of €18,000 ($22,000) will be cancelled; it will be possible to incorporate a BV with one share having a par value of €1. Denomination in a foreign currency will also be possible;
- More flexibility regarding voting rights attached to shares;
- Possibility to create shares without profit rights;
- No auditor's statement required anymore for contributions in kind nor for acquisition of assets from the shareholder within two years from incorporation;
- Financial assistance rules will be abolished; this will increase the possibilities of financing acquisitions; and
- More flexibility as to repurchase and redemption of own shares.
The new legislation will make a BV even more attractive as corporate vehicle for multinational companies and private investors.
Developments regarding cooperatives
In last year's edition, the Netherlands chapter looked at the opportunities of a cooperative as attractive vehicle for international tax structuring. The cooperative is often chosen in international structures given that no dividend withholding should be levied on profit distributions. Reason for not being subject to dividend withholding tax is that the cooperative does not have a capital divided into shares.
While the cooperative remains attractive, certain amendments in Dutch tax law have been enacted that affect the use of cooperatives in specific abusive situations. The amendments concern both the Dutch Dividend Withholding Tax Act 1965 (DTA) and the Dutch Corporate Income Tax Act 1969 (CITA).
For the DTA, as of 2012, a cooperative is deemed to have a capital divided into shares and its members will thus be subject to dividend withholding tax if the following two conditions are met:
- The member does not carry on an active trade or business to which the membership rights in the cooperative can be allocated; and
- The main purpose (or one of the main purposes) of the structure is to avoid Dutch dividend withholding tax or foreign tax.
What remains unchanged is that a foreign member in a cooperative with a substantial interest may also become subject to Dutch income tax as a foreign taxpayer under the CITA. Similar rules apply to foreign shareholders with a substantial interest in a BV. This substantial interest provision for foreign members or shareholders have been relaxed given that it is enacted now that they will only be subject to Dutch income tax in artificial abuse situations.
With the new rules for the cooperative, the Dutch government intended to underline the anti-abuse character of the legislation. In the explanatory notes reference has been made to the concept of wholly artificial arrangements as used in Cadbury Schweppes(ECJ, C-196/04). The Dutch Ministry of Finance indicated they only wish to challenge wholly artificial structures without any business reason that are set-up with the main reason to avoid taxes.
Hence even if tax avoidance is one of the main purposes of a structure, the new provisions should not be applicable if it can be demonstrated that the structure is not wholly artificial. To assess whether the structure is wholly artificial, it should be determined whether the legal form of the structure supports the economic reality. The Ministry of Finance indicated that as long as the Dutch holding company is: effectively managed and controlled in the Netherlands; has sufficient substance in the Netherlands; and does incur real risks, the structure is real and not wholly artificial. If it comes to substance it has been informally clarified that for obtaining certainty in advance it is considered important that the Dutch holding company has personnel on its payroll capable of performing the activities the company has.
In general, if a foreign multinational holds its group companies via its Dutch intermediate holding cooperative, no dividend withholding tax and no Dutch income tax will be levied. The cooperative therefore remains attractive to many investors that are interested in a 0% exit from the EU through a holding entity, located in a jurisdiction with an excellent treaty network (both double tax treaties and bilateral investment treaties). Attention should be paid to individuals that (wish to) participate directly or indirectly in a cooperative and also in structure involving mere portfolio investments.
Debt funded acquisitions of Dutch target companies
Effective as of 2012, new rules for debt-funded acquisitions of Dutch target companies were enacted. These rules aim to prevent the deductibility of excess interest expenses of the acquiring company against profits of the target company within a fiscal unity (or after a legal merger). The rules apply to third party debt as well as related party debt.
In a nutshell, the restriction will not apply if and to the extent:
- The interest on the acquisition debt does not exceed a €1 million threshold; or
- The acquiring company is not thinly capitalised, expressed as a decreasing percentage over time of the acquisition price.
The interest for which deduction is denied can be rolled forward to subsequent years. The rules do not limit the deduction of interest expenses against the profits of the acquiring company (and its consolidated subsidiaries that were already included in the fiscal unity).
Limitation of deductibility of interest related to participations
Following the ruling in the 2003 Bosal case (ECJ, C-168/01), interest expenses related to the acquisition (and capital contributions) of participations were tax deductible in the Netherlands. For budgetary reasons, thin capitalisation rules were introduced soon thereafter. It appeared however that these thin capitalisation rules did not have the desired effect. New legislation has been announced and approved that should further restrict the deductibility of interest related to the acquisition of participations. The new rules will be applicable as of January 1 2013 and aim to restrict the deductibility of excessive interest expenses on debts related to the acquisition of participations.
In brief, debt qualifies as excessive as far as the fiscal value of the participations exceeds the fiscal equity of the company. As such, the participations are deemed to be financed with the existing equity and only for the remaining amount with debt. The limitation only applies if and to the extent the interest on the excessive debt exceeds €750,000. Furthermore, there is an important rebuttal rule which provides, as a general rule, that acquisitions of or capital contributions into participations are disregarded to the extent the taxpayer makes it plausible that they relate to an increase of operational activities of the group. A grandfathering rule has been introduced in this respect: taxpayers may elect to disregard 90% of the cost base regarding acquisitions and capital contributions made in taxable years that commenced on or before January 1 2006.
The rebuttal rule is, however, not applicable in case of internal reorganisations or when capital injections are made via hybrid instruments and in case of double dip structures.
Due to the fiction that participation is deemed to be financed out of the existing equity first, the exception for operative participations and the threshold of €750,000, the Dutch Ministry of Finance believes the number of taxpayers that will be effected by these new rules is limited.
The Netherlands remains to have a well-developed infrastructure to assist multinational companies to design, set-up and maintain tax efficient corporate and holding structures. Highlights include:
- Fully-fledged participation exemption regime provides for a 100% exemption of dividends and capital gains;
- No subject to tax requirement for active operations;
- Beneficial rules for real estate participations resulting in an increasing interest for Dutch holding companies;
- A territorial tax system for foreign permanent establishments (PEs) has been introduced. In general, results from active PEs (which is deemed to include real estate) are eliminated from the worldwide profits. It is not relevant whether the PEs are subject to any tax, which is especially beneficial for PEs located in non-treaty jurisdictions;
- Extensive tax treaty network (around 90 double tax treaties), including the recent treaties with Azerbaijan, Bahrain, United Arab Emirates, Hong Kong, Oman, Qatar, Panama and Saudi Arabia;
- Extensive network of around 100 bilateral investment treaties (BITs), including a large number of investor friendly BITs that offer direct access to international arbitration as opposed to being obliged to exhaust proceedings with a local court first. The Dutch BITs generally offer protection for indirect investments made by a Dutch holding company through local subsidiaries. Hence, it can be beneficial to interpose a Dutch holding company (refer also to the ExxonMobile case).
Many multinational companies use the Netherlands for R&D activities. In the World Bank's 2012 Knowledge Economy Index, the Netherlands ranks worldwide fourth. To further strengthen its strong position as knowledge based economy, the Netherlands took certain important measures, among which a number of tax incentives for R&D and innovation.
If qualifying R&D activities are performed, a Dutch taxpayer can apply for a subsidy of between 18% and 64% of the related employment costs. The company may credit the subsidy against payroll tax and social security contributions due. Generally speaking, the subsidy will be granted if the company has employees on the payroll engaged in qualifying R&D such as development of innovative products, processes and software. For obtaining the subsidy an R&D certificate must be obtained with Agentschap NL, a Dutch government agency.
The RDA (Research and Development Deduction) was introduced in 2012 and provides an additional deemed deduction of 40% of all expenses (with the exception of labour costs) and capital expenditures that are directly attributable to R&D activities for which a R&D certificate has been granted. This way, the RDA reduces the taxable amount for Dutch (corporate) income tax purposes. For claiming the RDA a certificate needs to be obtained which can also be applied for with Agentschap NL.
The innovation box is a special tax regime for income generated with innovative assets and provides for an effective tax rate of 5%, instead of the statutory tax rate of 20-25%. To qualify for the innovation box, a company needs to generate (royalty) income from innovative assets for which a patent exists or for which an R&D certificate has been granted. To get certainty in advance on the applicability of the regime and the profit allocation method a ruling can be concluded with the Dutch tax authorities. Also contract R&D may be eligible for the innovation box.
In case the R&D activities are contributed into a Dutch group company, the Dutch tax authorities are, under circumstances, prepared to agree on a step-up in value and an amortisation scheme.
Many foreign investors have indicated that the IP incentives were a significant factor when the decision for the Netherlands was made.
Active Dutch government involvement
From most surveys it appears that the Netherlands ranks high as location for foreign investors. Next to the geographical location and competitive tax system, decision makers highly appreciate the business climate, the IT and logistical infrastructure.
The Dutch government acknowledges the importance of a good business climate for headquarters. Last year the Ministry of Economic Affairs, Agriculture and Innovation appointed a specific headquarters team. One of the main objectives for the Netherlands is to stay in the top 10 of locations for the global 500 companies. Dutch government committed itself to create the conditions and circumstances to maintain an attractive business environment.
What is also unique for the Netherlands is horizontal monitoring. This is a concept in which an agreement is concluded between the Dutch tax authorities and the taxpayer in which both parties commit themselves to discuss potential tax issues real time. For example, transactions should be discussed just before execution rather than when assessing the tax return in which the transaction is reported. Obviously this provides certainty for the taxpayers and open attitude of both parties; trust and a high speed of response are essential to make the concept work.
Another example of the active involvement are the governmental bodies that promote the Netherlands and its business climate. The Netherlands Foreign Investment Agency (NFIA) has a global presence and through its branches they assist foreign multinational companies in exploring the opportunities of the Netherlands.
Gateway to Europe
Numerous multinationals already benefit from the Netherlands as a holding location and access to the European markets. Many foresee that the Netherlands will maintain this position as gateway to Europe. Next to the beneficial tax features of the Netherlands, key factors remain its attractive geographical location, its excellent infrastructure and main ports.
Overlooking the recent developments in the Netherlands, it can be said that, although the competition in Europe is extreme, there has been an increasing interest in the Netherlands as a prime location for multinational companies and for foreign investors wishing to avoid (supposed) tax havens and black listed jurisdictions.