DUTCH HOLDING-, FINANCE- AND ROYALTY COMPANIES (A tax advantageous passage through The Netherlands to 80+ tax treaty countries)

Transcription

1 DUTCH HOLDING-, FINANCE- AND ROYALTY COMPANIES (A tax advantageous passage through The Netherlands to 8+ tax treaty countries)

2 December 27 C/A/K GROUP N/A/K B.V. Prinsengracht HN AMSTERDAM Telefoon 31 () Fax 31 () C/A/K Trustkantoor N.V. Scharlooweg 61 Willemstad, Curacao Telefoon Fax The material contained in this publication is not intended to be advice in any particular matter. No reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. C/A/K Group, expressly disclaim all and any liability to any person, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance upon the contents of this publication. C/A/K GROUP IS A MEMBER OF CIFA, CURACAO BASED NETWORK OF INDEPENDENT TRUST COMPANIES

3 Holding-, Finance- and Royalty-companies in THE NETHERLANDS This brochure is an introduction to the main tax matters regarding Dutch Holding-, Finance-, and Royalty-companies. The Netherlands is fiscally attractive to establish an intermediary holding, finance or royalty company because of: - the participation exemption (CIT) regarding dividend and capital gains from qualifying subsidiaries; - absence of capital tax as of 26; - absence of interest- and royalty-withholding tax; - extensive treaty network of more than 8 tax treaties with relatively low (inbound/outbound) dividend- and (inbound) interest/royalty-withholding tax rates; - special tax treaty with The Netherlands Antilles; - use of EC Parent-Subsidiary Directive and EC Interest- and Royalty Directive; - advance tax ruling policy; - political and economic stability. Although this brochure covers a number of relevant areas, this brochure is not exhaustive and is intended to serve as a guideline of some of the favourable Dutch and Netherlands Antilles tax implications for intermediary companies in the Netherlands. We strongly recommend that anyone intending to make use of the facilities referred to in this brochure seek professional advice before undertaking any action. There are often complex financial and legal implications as well which need to be considered in consultation with a professional advisor. C/A/K Group offers a full range of corporate trust services. A staff of specialists is available to assist with most aspects establishing tax efficient structures through The Netherlands and the Netherlands Antilles. C/A/K GROUP mr Alex P. Berkhout December 27 3

4 Holding-, Finance- and Royalty-companies in THE NETHERLANDS CONTENT 1 General tax issues in The Netherlands -7 - A - Dutch corporate income tax - Group taxation (fiscal unity) - Deductible costs - Base erosion provisions - Group Interest box - Patent box - Set off of losses - Functional currency - B - International tax planning - C - Abolition Dutch capital tax - D - Dividend withholding tax - E - Value added tax (VAT) 2 Holding, Finance and Royalty companies Holding companies / participation exemption - Finance companies - Royalty companies 3 Distribution / Coordination Centers 12 4 Avoidance of double taxation for intermediary companies 12 - Credit method - Deduction as costs EC Directives 13 - Parent-Subsidiary Directive - Merger Directive - Transfer Pricing Arbitration Treaty - Savings tax Directive - Interest and Royalty Directive 6 The Dutch Antilles - Netherlands Relationship Tax Regulation of the Kingdom (TRK) - Netherlands Antilles corporate income tax 7 Legal and management aspects Legal form - Exchange control - Audit requirements - Client identification (WID) and reporting unusual transactions (MOT) - Act on supervision of trust companies (Wtt.) Appendix: Withholding tax % in Dutch Double Taxation Agreements 4

5 Holding-, Finance- and Royalty-companies in THE NETHERLANDS Chapter 1 General tax issues in The Netherlands The main reasons for establishing an intermediary holding-, finance- or royalty company in The Netherlands are: - participation exemption: favourable Dutch tax treatment regarding dividend and capital gains from equity investments (subsidiaries); - abolition of capital tax as of 26; - extensive network of 8+ tax treaties and use of EU Parent/Subsidiary- and EU Interest/Royalty-Directives; - absence of domestic withholding tax on royalty and interest payments (outbound); - relatively low withholding tax rates on royalty and interest receivables (inbound) from tax treaty countries; - relatively low dividend withholding tax rates on (outbound) dividend payments to or (inbound) dividend receivables from tax treaty countries; - use of EC Parent-Subsidiary Directive and EC Interest- and Royalty Directive; - basic dividend tax rate of % as of 27 (26: 2%). A. Dutch Corporate income tax (CIT) A profit-generating corporation (domestic or foreign with Dutch permanent establishment) pays corporate income tax. Corporate income tax is levied on the taxable profits made by a company in a given year less deductible losses. Corporate income tax is levied at a 28 rate of 2% on the first 4. (27: 2.) and 23% (27: 23,%) on the next 16. (27: 3.) of the taxable profits and at 2,% on the excess. Profits must be determined on the principles of sound business practice and in a consistent manner. A company is required to file an annual corporate income tax return with the tax administration within 6 months of the end of its financial year. An extension regulation can apply for another 9 months. Group taxation (tax treatment of fiscal unity) Under certain conditions (for instance holding at least 9% of the shares in a subsidiary) a parent company may be taxed as a group together with one or more of its subsidiaries. For corporate income tax purposes this means that the subsidiaries are deemed to have been absorbed by the parent company. The main advantages of group taxation are that the losses of one company can be set off against profits from another group company, and that fixed assets may in principle be transferred tax-free from one company to another. When are (interest)costs deductible? In principle, when determining profits all the business expenses may be deducted. However, the deductibility of certain business expenses is subject to restrictions. The interest paid on intercompany loans may sometimes only be partly deducted from profits. This may be the case when a company, according to thin capitalisation rules, has too many debts in relation to its equity capital (when the debt-to-equity ratio of the taxpayer exceeds 3:1). The first EUR. excessive debt is not considered to be excessive and the interest paid upon this is deductible. The taxpayer can also apply, on a year to year basis, for a so called Group s debt-to-equity ratio test. As of 27 thin cap rules also apply to financial lease. When expenses exceed businesslike amounts due to the intervention of shareholders and for the benefit of shareholders, the excess be considered a non-deductible distribution of profits (dividend). Likewise, when transactions with related parties are carried out at less than at arm s length conditions, income may be imputed to one party and a corresponding notional deduction (informal capital) may be available with the other party. Intra-group financing through a tax haven company will normally be disputed by the Dutch tax authorities by different approaches: informal capital in stead of loan, no domiciliation in tax haven, non businesslike intercompany pricing, fraus legis, the shadow and substance approach and base erosion provisions.

6 Base Erosion Provisions Before 27 the principal Dutch base erosion provisions were listed in two separate articles. The provisions deny the deduction of interest expense incurred on loans from related parties to the extent that the loans have been used for some tax driven transactions (for example, the acquisition of shares in a related company or the acquisition of shares in a third party that subsequently is included in a fiscal unity: BV1-BV2 structures). Related means a shareholding of 33,33% or more. Normally when the group borrows from third parties, the business reason exception can be invoked. Furthermore, interest expenses regarding dividend and capital repayments declared but unpaid, or paid but financed by an intercompany loan, may not be deductible. In the tax bill 27 the provisions are amalgamated. As a result, the business reason and reasonable rate of taxation exceptions would apply to all these intercompany transactions. According to the new rules a rate of taxation is reasonable if the foreign related creditor is subject to an effective rate of at least 1% in accordance with Dutch taxation standards. As of 28 the tax inspector can try to proof that the intercompany-loan or -legal transaction is not largely businesslike. Group Interest box (27?) The interest box relates to group financing activities for which equity is used. To apply the group interest regime (interest box), a collective election must be made by the Dutch corporate taxpayer and all related companies subject to Dutch CIT. Related means a shareholding of % or more or related through unity of management. After the election, 8% of the balance interest income and interest expenses on intercompany loans to and from related parties, is eliminated from taxable income by using the calculation factor /2,. The intercompany interest would be subject to an effective rate of % (/2,x2,% CIT). In order to apply for the participation exemption the interest box can rather be structured in a holding-company than in a subsidiary. The benefit is limited to a maximum percentage (at the rate of the quarterly legal interest due to tax authorities; Q4 27:,4%) of the average equity of the tax payer. Withholding taxes on interest can be credited against the Dutch CIT paid, taking into consideration the normal limitations. At this point it is unclear whether or not the EU will approve this regime as not being governmental aid. Only after EU approval the whole new regime will take effect. The EU already approves using the interest box regime on interest from short term investment, used as (takeover) cash box for acquisition of % or more participations. Patent box (27) Firstly costs related to the self development of intellectual property do not have to be capitalized, but instead can immediately be deducted against taxable income. Alternatively the taxpayer can choose to let the intellectual property, for which a patent is granted (28: also recognized R&D program without patent; max. patent income 4. per taxpayer/per year), be taxed in the patent box after the profits have exceeded the self development costs of the patents. After the election, 6% of the net patent income, is eliminated from taxable income, by using the calculation factor 1/2,. The remaining net patent income would be subject to an effective rate of 1% (1/2, x 2,%CIT). The total profits from intellectual property that are eligible for the patent regime, are limited to four times the amount of the development costs. This will be monitored by the tax inspector on a yearly basis. Withholding taxes on royalties can be credited against the Dutch CIT, subject to the normal limitations. The regime does not apply to brand names, company logos, and so on; its primary focus is research and development activities. Because the patent box is in line with EU policy on R&D investments, the Netherlands has entered the patent box into force as of January 1, 27, without approval of the EU. Set off of losses A company may set off its losses against its taxable profits for the three (as of 27:one) preceding years (carry back) and against its taxable profits for all (as of 27: nine) years to come (carry forward). There is a transitional regime until 211. As of 27 it is important again to make a planning when to deduct large costs, to prevent losses to evaporate after nine years. The losses incurred by an investment institution or a company ceasing operations entirely may only be set off against future profits if at least 7% of its shares continue to be held by the same shareholders. Losses of a holding company or group financing company may only be set off against later profits of years in which the company activities still consist of at least 9% group financing or of holding participations. Liquidation losses regarding a liquidated subsidiary are under certain conditions also CIT deductible. 6

7 Functional currency Dutch corporate tax payers may adopt a currency which differs from the euro as their functional currency. Upon request the Dutch tax payer may not only account in the functional currency but also file its annual corporate income tax return in the same currency. B. International Tax planning In international tax planning The Netherlands is attractive because of their extensive tax treaty network (see Appendix) and the participation exemption (see chapter 2.1). In this paragraph two additional Dutch international tax planning tools: Participation loans A participation loan is a hybrid loan of which (a) the remuneration is 87,% or more profit depending (b) the loan is subordinated to all normal creditors (c) the loan has no specific term (> years or only repayable in case of bankruptcy, insolvency, liquidation). For Dutch tax purposes a participation loan given to a % of more subsidiary, by a parent-company or by a with the parent related (33,33% or more) group company, is deemed to be a participation. In other words the interest received is exempt under the participation exemption. As of 27 this is also applicable when the foreign group company debtor can deduct the interest paid (codification of Pret partipatif-case). BV1-BV2 Structure with US parent company As of 27 BV1-BV2 structures are possible again, especially popular with a US parent company. An US parent company borrows from banks and grants a loan to Dutch subsidiary (BV1) and checks the box of BV1. BV1 becomes hybrid/transparent and (loan) is not visible from the US. BV1 makes capital contribution in BV2. BV1 and BV2 are in a fiscal unity for Dutch CIT purposes. BV2 grants a loan to a group company. The arm s length remuneration for the flow through of the loans is taxed in the Netherlands. As a result in the fiscal unity interest income in BV2 can be set off against interest expense of BV1 and there is interest deduction at the group company and deduction in the US for interest payments to banks. However US does not recognise interest income from hybrid BV1. Dutch co-op The Dutch co-operative investment fund (with or without a Dutch BV as subsidiary) can be very useful as a Dutch holding company in active investment structures (f.i. with Curacao super holding) because the Dutch coop is not taxable for Dutch dividend withholding tax purposes and can benefit from the Dutch participation exemption. Advance Tax Ruling can be applied for at the tax authorities. C. Abolition Dutch capital tax as of 26 (Informal) capital contributions made to a Dutch company were until 2 subject to a one time,% Dutch capital tax. A full exemption of capital tax was possible for both mergers and internal reorganisations provided certain conditions were met. The Dutch capital tax is abolished as of 26. D. Dividend withholding tax (27) As of 27 the dividend withholding tax rate in The Netherlands has been lowered from 2% to %. This is tax advantageous for dividends paid to non-treaty countries and reduces the administrative burden for portfolio dividend payments to treaty countries for which the Dutch dividend withholding tax was already reduced by tax treaty to %. If still applicable Form IB 92 or IB 93 Universeel must be filed to obtain an exemption or refund of Dutch dividend withholding tax on portfolio dividends. No forms but only a request has to be filed regarding exemption or refund of Dutch dividend withholding tax on dividends paid to substantial shareholders. However for substantial shareholders from Luxemburg and Singapore special forms are applicable. Requests for refunds must normally be filed within 3 years following the year of dividend payment. For Swiss and US shareholders other rules apply. E. Value added tax (vat) Every taxable entrepreneur must pay turnover tax on turnover regarding deliveries and/or services. Turnover tax is also known as vat (value added tax). In the Netherlands normally 19% VAT is levied at each stage in the chain of production and on the distribution of goods and services based on the 6th European vat Directive. Passive holding activities do not qualify as VAT taxable activities but management activities normally do. Intellectual services, such as consultancy services, rendered to foreign clients are normally not taxed with VAT in The Netherlands because of the reverse charge rule (place of service abroad). Finance activities do not qualify for VAT purposes either (exempt), unless the activities are carried out with a contracting party outside the European Union (article (2) VAT Act 1968). License activities do qualify for VAT purposes. Normally the reverse charge rule is applicable on the services of transferring and rendering of patent rights and licences and similar rights. 7

8 Holding-, Finance- and Royalty-companies in THE NETHERLANDS Chapter 2 Holding, Finance and Royalty companies TAX RULING POLICY IN THE NETHERLANDS The Netherlands has an Advance Pricing Agreement (APA) and an Advance Tax Ruling (ATR) practice as of March 1, 21. The former model ruling practice for intermediary companies was abandoned. There was a grandfathering rule until 2. As of 26 only the arm s length case by case APA/ATR practice is applicable. The new ruling policy for intra-group finance and licensing companies is based on the OECD transfer pricing guidelines as laid down in article 8b and 8c of the Dutch CIT Act. An Advance Pricing Agreement gives advance certainty on the fiscal acceptability of the price (arm s length transfer pricing) that the Dutch group company pays to or receives from a foreign group company for receiving or delivering a service or goods (binding on both tax authorities and tax payer). An Advance Tax Ruling is an advance opinion from the tax authorities on the tax characterization of international corporate structures, such as advance certainty on the application of the participation exemption, hybrid financing or hybrid legal entities and permanent establishments and is binding on the tax authorities. The apa/atr-team of the Rotterdam branch of the Rijnmond tax administration department deals with Advance Pricing Agreements and Advance Tax Rulings. 2.1 HOLDING COMPANIES The main reasons for establishing an intermediary holding-company in The Netherlands are: - participation exemption: The Netherlands exempts from CIT dividends from and capital gains regarding shares in subsidiaries. This is based on the principle that profits which were already taxed should not be taxed again; - abolition of capital tax as of 26; - extensive network of 8+ tax treaties and use of EU Parent-Subsidiary Directive; - relatively low dividend withholding tax rates on outbound dividend payments to or inbound dividend receivables from EU or tax treaty countries; - special tax treaty with the Netherlands Antilles. Participation exemption (until 27) Normally a Dutch company is taxed on its world wide income, including dividends received. However the Corporate Income Tax Act provides for a participation exemption, which is applicable to both domestic and foreign shareholdings. All benefits gained from shareholdings are exempt. In principle the term benefits covers profits and losses. Profits comprise dividends and hidden profit distributions. Exempt returns also cover the profit realised on the sale of a participation. However, losses realised are not deductible. If the value of a participation decreases as a result of losses suffered, its write-down by the parent company is not deductible anymore as of 26. Losses arising from liquidation of a shareholding may be set off under certain conditions. The (financing) costs associated with a shareholding are in general deductible. Because of thin capitalization rules as of 24, the interest paid on (intercompany) loans may sometimes not or only partly deductible from profits (see chapter one). Purchase costs of participations are not deductible as of February 2. As of 27 this is the same for sales costs of participations. The conditions attached to the participation exemption until 27 are: - the receiving parent company must be subject to Dutch CIT; - the subsidiary must have a capital divided into shares; - the parent company must hold % or more of the paid-up capital of the subsidiary; less than % may qualify if ownership of the shares is necessary for the conduct of normal business; 8

9 - the share in the subsidiary should not be held as stock in trade. For foreign subsidiaries there are two additional requirements: - the subsidiary must be subject to a profits tax at a national level in their country of incorporation; - the shareholding must not be considered as a portfolio-type investment. Under the Parent-Subsidiary Directive the participation exemption is extended (under certain conditions) to EU portfolio investments. Furthermore dividend withholding tax is not withheld on dividend paid to a company established in another Member State. In these cases, the EU recipient company must have an interest of at least % (but only % in NL subsidiary as of 27) in the company paying the dividend. However always anti-treaty shopping legislation should be reviewed before implementing an EU structure. Passive intercompany financing is regarded as portfolio participation, for which the participation exemption is not applicable. The distinction active / passive is described in detail in CIT legislation. If the parent company or the subsidiary is considered to be a fiscal investment institution, the participation exemption does not apply. It is possible to obtain an advance tax ruling (ATR) from the Dutch tax inspector concerning the applicability of the Dutch participation exemption. Participation exemption (as of 27) Any shareholding of % or more would be considered a qualifying participation, regardless of whether it is subject to a profit tax. A less than % participation also qualifies if it is a group company or if a related group company has a qualifying participation in that (NL/EU) subsidiary. For less than % participations on there is a three year transitional regime. However when the activities of a subsidiary are too passive (directly or indirectly assets more than % portfolio investments) and is also taxed at an effective corporate income tax rate of lower than 1%, the participation exemption does not apply (regulation for low taxed portfolio participations). The participation exemption is however applicable on low taxed real estate (assets > 9% immobile) portfolio participations. Some low taxed mobile CFC portfolio participations (2% or more shareholding and 9% or more portfolio investments) must be valued at market value on a yearly basis (each year profit/loss). The purpose of the new rules is to exclude from the participation exemption mobile portfolio investments and passive intercompany financing activities in tax havens. This means that the distributed results of the subsidiary are taxed with CIT at the NL parent company. In that situation normally a % tax credit applies, sometimes a tax credit is given for actual paid foreign CIT (when subsidiary qualifies for the EU Parent-Subsidiary Directive) and sometimes no foreign tax credit is granted what so ever (less than percent participation). Example holding-structure: Non-EU ParentCo dividend: % NA HoldCo Netherlands Antilles: dividend/capital gains: % (qualifying participation) NL HoldCo (Non-)EU OpCo dividend: 8,3% (% with Dutch co-op) capital gains: % Netherlands: dividend/capital gains: % (qualifying participation) Dividend: EU: % Dividend: non EU: -% (treaty) 9

10 2.2. FINANCE COMPANIES The main reasons for establishing an intermediary finance-company in The Netherlands are: - extensive network of 8+ tax treaties and use of EU Interest- and Royalty Directive; - abolition of capital tax as of 26; - absence of domestic withholding tax on interest payments (outbound); - relatively low withholding tax rates on interest receivables (inbound) from EU and tax treaty countries; - businesslike use of foreign (f.i. Netherlands Antilles BV) group finance company (subject to 1% CIT). The Dutch finance company should receive an appropriate remuneration for its financing activities performed. An intra-group finance company will be considered tax resident in The Netherlands and may obtain an ATR or APA on businesslike remuneration for intra-group transactions and claim a tax credit for foreign withholding tax if the company simultaneously meets substance requirements and risk requirements. The substance requirements relate to the Dutch board of directors, the books, tax resident in The Netherlands, minimum level of equity. Based on article 8c CIT Act an intra-group finance company is deemed to bear sufficient risk if the equity is equal to the lesser amount of 1% of the amount of the outstanding loans, or EUR 2 million and this equity will be held liable against any claims resulting from the risks the entity bears. The tax authorities will normally exchange information with the (tax treaty) source country when the Dutch intermediary finance company does not meet the risk requirements. The arm s length remuneration for finance transactions has to be added as a percentage to the interest charged and should consist of an annual(handling) fee and a risk premium for the equity risks incurred. The handling fee and risk premiums should be benchmarked with independent third parties. The transfer pricing information gathered should be composed into a transfer pricing report giving a business, functional and economic analysis of the intra-group finance transactions stating the required remuneration and interest rate. Somewhat more lenient rules apply when the loan volume does not exceed EUR 1 million (annual fee based on cost-plus benchmarking analysis). Example finance structure: 1

11 2.3. ROYALTY COMPANIES The main reasons for establishing an intermediary royalty company in The Netherlands: - extensive network of 8+ tax treaties and use of EU Interest- and Royalty Directive; - abolition of capital tax as of 26; - absence of domestic withholding tax on royalty payments (outbound); - relatively low withholding tax rates on royalty receivables (inbound) from EU and tax treaty countries. The Dutch royalty company should receive an appropriate remuneration for its licensing activities performed. An intra-group licensing company will be considered tax resident in The Netherlands and may obtain an ATR or APA on businesslike remuneration for intra-group transactions and claim a tax credit for foreign withholding tax if the company simultaneously meets substance requirements and risk requirements. The substance requirements relate to the Dutch board of directors, the books, tax resident in The Netherlands, minimum level of equity. In 2 it became clear that an intra-group licensing company is deemed to bear sufficient risk if the equity is equal to the lesser amount of % of the average expected annual gross royalty payment, or EUR 2 million and this equity will be held liable against any claims resulting from the risks the entity bears. In order for this equity to be at risk, at least % of the minimum equity required must be paid upfront to the licensor to incur market risk. In addition a certain amount of debtor risk must be incurred. The tax authorities will normally exchange information with the (tax treaty) source country when the Dutch intermediary royalty company does not meet the risk requirements. The arm s length remuneration for intra-group licensing transactions has to be added as a percentage to the royalty charged and should consist of an annual(handling) fee and a risk premium for the equity risks incurred. The handling fee and risk premiums should be benchmarked with independent third parties. The transfer pricing information gathered should be composed into a transfer pricing report giving a business, functional and economic analysis of the intra-group royalty transactions stating the required remuneration. Somewhat more lenient rules apply when the annual royalty volume does not exceed EUR 8 million (annual fee based on cost-plus benchmarking analysis). Example Royalty structure: Non-EU ParentCo NA HoldCo royalty : % Royalty : % No Netherlands Antilles royalty withholding tax. Ruling CIT income: % cost plus or 2% spread. Licence from owner in tax haven. NL HoldCo No Netherlands royalty withhold. tax Sub licence from NA Co. Royalty: EU: % (EU Directive: transitional regime -1%) Royalty: Non EU: -% (treaty) (Non-)EU OpCo Sub licence from NL Co. 11

12 Holding-, Finance- and Royalty-companies in THE NETHERLANDS Chapter 3 Distribution/coordination centres A Dutch company can operate as a Headquarter on behalf of the foreign group companies and combine several functions or activities (for instance: administration, logistics, marketing, HRM) to be performed for the group. In August 24, the Dutch State Secretary for Finance announced in a decree that headquarters in The Netherlands are allowed to provide intra-group support services on a full-cost basis in stead of applying a (cost plus) mark up or arm s length price. Also a non-exhaustive list of activities that are regarded as (non-chargeable) shareholders costs and therefore deductible by the Dutch Headquarter, has been published. Foreign investors can contact the International Investors Desk (apbi) for information on the tax implications of a first potential investment in the Netherlands of more than 4. million. The apbi is authorised to provide advance certainty, within the context of the law, case law and policy, on, for example, corporate income tax, wage withholding tax, dividend tax, income tax, value added tax. The apbi acts as the point of contact for import duties and excise duties. The apbi works under the Rotterdam branch of the Rijnmond tax administration department. CHAPTER 4 Avoidance of double taxation methods for intermediary companies Dividends, interest and royalties are normally taxable in the resident state of the beneficial owner. However also the source state of this income has a limited taxation right (portfolio dividends normally % and participation dividends normally % dividend withholding tax; these percentages differ per tax treaty). Double taxation on dividends, interest and royalties for intermediary companies may be avoided by means of the credit method or by deducting foreign withholding taxes as costs. The credit method The Dutch corporate income tax (CIT) is reduced by the foreign tax levied or by the Dutch tax payable on the foreign dividends, interest and royalties, whichever is lower. Furthermore the foreign dividends, interest and royalties must be subject to Dutch CIT. For instance dividend withholding tax regarding dividends exempt by the participation exemption can not be credited. For the credit method regarding low taxed mobile portfolio participations see par In case of total ongoing distribution of the received dividends, 3% of that amount can be credited against the Dutch dividend withholding tax due on ongoing dividend distribution. Since the foreign withholding taxes for which credit is allowed in the Netherlands are usually levied on a gross basis, whilst Dutch CIT is levied on a net basis (after deduction of costs), it is quite possible that the Dutch CIT will not be sufficient to provide credit for the withholding tax levied by the foreign source country. Full credit is thus not possible. In these cases the excess of the foreign tax not credited may be carried forward and, where possible, credited in subsequent years. The credit method for Dutch intermediary companies only applies when certain substance and risk requirements are met (see chapter 2). Under the 21 Unilateral Decree on the Avoidance of Double Taxation, which applies in non-treaty situations, the credit method only applies to foreign dividends, interest and royalties from designated (extensive list) developing countries. Deduction as costs In situations in which there are no arrangements for avoiding of double taxation, foreign withholding taxes may be deducted as costs related to the relevant income. Also, in situations in which a credit would normally be granted for dividends, interest and royalties, the taxpayer may opt for deduction of foreign withholding tax. 12

13 Holding-, Finance- and Royalty-companies in THE NETHERLANDS Chapter EC-DIRECTIVES From a corporate trust-practice point of view relevant EC Directives are: Parent-Subsidiary Directive (199) This Directive abolishes dividend withholding tax on dividends paid within the EU from subsidiaries to parent companies (or to a permanent establishment of the parent company). This Directive applies to holdings of at least 2% (27: % and as of 29: 1% participating interest). Additional criteria are applicable for parent and subsidiary such as a certain legal form and subject to corporate tax without the possibility of being exempt. Similar exemption of dividend withholding tax is available in relation to Switzerland. Merger Directive (199) Under certain conditions a business merger (business-for-share exchange) and a share merger (sharefor- share exchange) between a Dutch company and a EU corporation can take place without triggering Dutch corporate income tax. Transfer Pricing Arbitration Treaty (199) The arbitration treaty deals with arbitration regarding corresponding adjustments where the tax authorities of one EU member state adjust a transfer price and the other EU member state refuses to make a corresponding adjustment. In 26 the EU adopted a Code of Conduct on transfer pricing documentation that companies must provide to tax authorities with regard to their pricing of crossborder intra-group transactions. The Netherlands has a flexible approach regarding transfer pricing documentation requirements, which do not contain a specific and exhaustive list of information that taxpayers should maintain in their records. The Dutch tax authorities are in particular focused on the alignment between functions performed and risks assumed and resulting remuneration and follow in general the OECD Guidelines regarding transfer pricing methods. Savings Tax Directive (23) The savings tax Directive applies to interest earned on savings held by individuals in an EU member state, but does not effect interest paid to companies. Interest- and Royalty Directive (23) This Directive seeks to eliminate withholding taxes on payments of interest and royalties made between associated companies from different EU member states. Some EU countries have a transitional regime until 211. Similar exemption of interest/royalty withholding tax is available in relation to Switzerland. 13

14 Holding-, Finance- and Royalty-companies in THE NETHERLANDS Chapter 6 THE DUTCH ANTILLES NETHERLANDS RELATIONSHIP Dutch intermediary companies are often held by an Antillean holding company. The main reasons for this structure are: - special tax treaty between The Netherlands and The Netherlands Antilles (Tax regulation of the Kingdom); - absence of domestic NA withholding tax on dividend-, interest- and royalty payments (outbound); - absence of Dutch withholding tax on interest- and royalty receivables and low dividend withholding tax on dividend receivables from The Netherlands (inbound); - Antillean participation exemption exempts from CIT, dividends from and capital gains regarding shares in qualifying subsidiaries; - absence of NA capital tax; - ruling policy of NA tax authorities. The Tax Regulation of the Kingdom (TRK) or in Dutch Belasting Regeling voor het Koninkrijk (BRK) is a tax regulation between the member states of the Kingdom of the Netherlands, being the Netherlands, the Netherlands Antilles and Aruba. The TRK is like a treaty for the avoidance of double taxation. As per 1 January 22 the TRK has been amended with regard to dividend distributions from the Netherlands to the Netherlands Antilles. The TRK provides for a reduction of Netherlands dividend withholding tax to % if the dividends are received by a Netherlands Antilles resident company or individual. Moreover, the TRK provides for a further reduction of Netherlands dividend withholding tax if a few other conditions are complied with. A withholding tax of 8.3 % will be imposed on dividend distributions by a Netherlands company to a Netherlands Antilles company if the Netherlands Antilles company holds at least 2% of the share capital of the Netherlands company and provided that, due to some tax regulation in the Netherlands Antilles, the overall tax burden on the received dividend distribution will not be effectively less than 8.3%. To use a Dutch co-op (co-operative investment fund) in active investment structures can be a solution to avoid Dutch dividend withholding tax. DUTCH (NA/NL) SANDWICH: Non-EU ParentCo NA HoldCo NL HoldCo (Non-)EU OpCo dividend: % interest : % royalty : % Netherlands Antilles: Dividend/capital gains: % (qualifying participation) No NA interest/royalty with. tax dividend: 8,3% / Dutch co-op: % / capital gains: % interest : % Netherlands: Royalty : % Dividend/capital gains: % (qualifying participation) No NL interest/royalty withhold. Tax Dividend/interest/royalty: EU: % / -1% (EU Directive until 211) Dividend/interest/royalty: Non EU: -% (treaty) Receiving Dutch Interest/royalties Dutch dividend Country withholding tax withholding tax % % Netherlands-Antilles (*) Aruba -7,-(**) 14

15 (*)In 2 it was agreed upon to have a % and even % Dutch dividend withholding tax available to Netherlands Antilles companies holding at least 1% of the shares of a Netherlands subsidiary, provided they are: - a bank or insurance company subject to supervision by the monetary authorities; - a publicly listed company or qualifying pension fund; - not used as a conduit company. The Netherlands Antilles Company will be deemed not to be a conduit company if it invests the gross dividend for months with a development/recovery bank or make long term entrepreneurial investments in the Netherlands Antilles economy. It is still not clear if and when the %-% regime will be implemented in the TRK. Only after implementation of the % regime in the TRK, new super holdings will be established in the Netherlands Antilles. (**) % if the dividend received is subject to a profit tax of at least,% (a % reduced rate is also under negotiation) Netherlands Antilles Corporate income tax (CIT) All companies resident in the Netherlands Antilles are subject to profit tax on their worldwide income. The effective tax rate is 34,% as of 21 according to the New Fiscal Framework (NFF) legislation. An offshore company is a company established in the Netherlands Antilles which derives its income from sources outside the Netherlands Antilles. As of January 1, 22 the special offshore tax regime has ceased to exist. However there is a transitional offshore regulation until January 1, 22. In this connection dividends, interest and royalties derived by a Netherlands Antilles company incorporated before 1 January 22 will be subject to a tax rate of 2.4% to 3% up to 1 January 22, if a ruling has been applied for. Special incentives are available for captive insurance companies, manufacturing companies, hotels, shipping and air transport companies, land development companies and (trading)companies engaged in activities in the so-called Free Zone. Insurance premiums at arm s length paid to NA group captive insurance company are normally deductible in The Netherlands. Furthermore the Dutch model ruling practice from before 21 has been introduced as of 23. As of 26 a new ruling practice has been introduced to avoid harmful tax competition as stated by the Code of Conduct- or Primarolo-group. Each ruling request must be substantiated and relevant information for determination of the arm s length prices has to be provided. Rulings issued under the previous 22/23 decrees will remain valid until their expiration date, but expire at the latest at the end of 28. Also an extension of the participation exemption was introduced as of 22. The Netherlands Antilles exempts from CIT, dividends from and capital gains regarding shares in qualifying (NL) subsidiaries. This is still the main reason to maintain superholdings on Curacao. A 9% participation exemption also applies if the subsidiary is a CIT exempt Netherlands Antilles private limited liability company (N.A.B.V.). The N.A. B.V. is often used in so called cash box investment structures. According to new legislation /rulings the NA B.V. can also be used for IP activities and a 1% CIT NA B.V. regime is introduced for intercompany financing and for low taxed mobile investment participations. In 21 the Netherlands Antilles also introduced special regulations for companies engaged in e-commerce activities established in the so-called E-zone. The main benefits are: - A 2% profit tax rate; - An exemption from turnover tax and import duties Finally Private Foundation (SPF) legislation was introduced. This foundation has quite similar characteristics as the Anglo Saxon private trust. To register and finance aircraft a (transparent) Aruba Exempt Company (AEC) can be useful.

16 Holding-, Finance- and Royalty-companies in THE NETHERLANDS Chapter 7 LEGAL AND MANAGEMENT ASPECTS The legal form of most businesses in The Netherlands are private limited liability companies ( Besloten Vennootschap ) or public limited liability companies ( Naamloze Vennootschap ). A non-quoted Dutch company is normally incorporated as a B.V.. A BV or NV must be incorporated by one or more incorporators by means of a notarial deed of incorporation containing the company s articles of incorporation. A BV or NV may have a single shareholder. The shareholders may be either individuals or legal entities; their nationality is irrelevant. A declaration of no objection of the Dutch Ministry of Justice is required before the BV/NV can be incorporated. A BV or NV must have an authorized capital, divided into a number of shares, each of which has a par value expressed in euros. Dutch law also requires a minimum issued and paid in capital of 18. (2% of the authorized share capital) for BV companies and 4. (2% of the issued share capital) for NV companies. Limited liability companies are independent legal entities. The liability of shareholders is limited to their capital subscriptions. Directors of the company can however be liable to all debts of the company in case of malpractice. The incorporation process will take a minimum of two weeks. As an alternative it is possible to purchase a company from the shelf. It is expected that as of 28/29 a so called BV-light -regime will be introduced. The main features are lowering or abolishing the minimum share capital requirements, introduction of a distribution test and publishing requirements will be simplified. In the case of a distribution of assets, or the repurchase or redemption of shares of a BV, the directors have to assess whether the BV is able to fulfil all its obligations due and payable after these transactions. If the directors do not fulfil the distribution test, they would become personally liable for resulting damages. Large BV s must have a supervisory board (Raad van Commissarissen) which carries out a supervisory function over the managing board on behalf of the shareholders. A supervisory board is required only in so called "structure" companies (structuur vennootschappen) which are N.V.'s or B.V.'s with an equity exceeding EUR 17 million and at least one hundred employees in the Netherlands and a works council. Exchange control No license is required for payments in euros between residents and non-residents. However some information must be reported to the Dutch Central Bank (De Nederlandsche Bank) for statistical purposes based on the 23 Reporting Provisions. Furthermore based on the Dutch Banking Act, finance companies are, in general, required to report their Dutch business activities to the Central Bank. Audit requirements Requirements for the annual reporting and the period of time for preparation and adoption thereof are displayed in the following table: Private (limited liability) company Public limited (liability) Company Cooperative, Guarantee company Commercial corp. Commercial foundation Preparation by Management Management Management Management Period Within months after balance sheet date, extended by a period of max. 6 months Within 6 months after balance sheet date, extended by a period of max. months Adoption by General meeting Board of General meeting Statutory organ of shareholders Directors Approval by - General meeting Of shareholders - - Period Within 2 months after preparation Within 1 month after preparation Publication Requirement Within 8 days after preparation / approval. At least within 13 months after balance sheet date. 16

17 The extent to which the information required by the law has to be included in the annual financial statements depends on the size and type of the company concerned. A distinction is made between: - small, medium-sized and large companies; - group companies; - insurance companies; - credit institutions. Companies are categorized as small or medium-sized if during two consecutive financial years they have not exceeded at least two of the following three figures: Total assets Net turnover Average number of employees Small < 4,4, < 8,8, < Medium-sized < 17,, < 3,, < 2 These figures include the figures for subsidiaries on a consolidated basis. They do not apply to insurance companies and credit institutions. Documents to be filed at the Dutch chamber of commerce are: a. large companies: full balance sheet, full profit and loss account and notes thereon, annual report and other information; b. medium-sized companies: limited balance sheet, limited profit and loss account and notes thereon, annual report and other information; c. small companies: summary of balance sheet and notes thereon. If the company has subsidiaries, consolidated group accounts should be included. The consolidated accounts of the Dutch intermediary company does not have to be published at the Dutch trade register (only a summary for small companies with the note that the exemption for consolidation is used), in case the consolidated accounts of the foreign (ultimate) parent company are published in the Netherlands. In principle all companies other than those classified as small are required to be audited. Client Identification (WID) and Reporting of Unusual Transactions (MOT) In the context of the fight against money laundering, the obligations as imposed by the WID require the service providers to identify the client before service may be provided. Under the MOT, unusual transactions considered to be money laundering, for which objective and subjective indicators are defined in law, must be reported to a special reporting office falling under the competence of the Ministry of Justice. Both WID and MOT acts were already applicable for Dutch banks and also apply to services by notaries, lawyers, tax advisors, auditors and trust companies as of June 1, 23. Act on the supervision of trust companies As of March 1, 24 the Dutch Central Bank (DNB) is responsible for the supervision of all trust companies in The Netherlands. Every single service provider must obtain a license from DNB for their trust activities. It is forbidden to provide any fiduciary service as long as the administrative and integrity rules on the Know Your Client principle and the Source of Funds rule are not fulfilled. 17

18 Holding-, Finance- and Royalty-companies in THE NETHERLANDS Appendix This appendix contains an overview of withholding taxes on dividends, interest and royalties according to the tax treaties concluded by The Netherlands. The normal dividend withholding tax in The Netherlands is % (as of 27). The Netherlands do not levy interest- and royalty withholding tax. In non-treaties situations the Dutch dividend withholding tax rate on outbound dividends normally amounts % (as of 27). In treaty situations it has always been NL tax treaty policy to reduce the dividend withholding tax rate to % on portfolio dividends and to % for participation dividends (OECD Model tax treaty: %). INBOUND relates to the foreign withholding tax withheld on the dividends, interest and royalties paid to a Dutch parent company. OUTBOUND relates to the Dutch withholding tax withheld on dividends, interest and royalties paid by a Dutch subsidiary. The lower rate for participation dividends applies, in the below mentioned overview, if the recipient is a company that owns at least 2% of the capital of the dividend distributing company. Tax Treaty Dividends Interest Royalties Interest/Royalties Overview of withholding tax rates under Dutch tax treaties: OUTBOUND Portfoliodividends: companies/ individuals INBOUND Participation dividends: OUTBOUND Participation dividends: INBOUND (foreign interest withholding tax %)* Albania / / //1 1 Argentina Armenia 1 1 / 12 INBOUND OUTBOUND (foreign (Dutch / NL withroyalty holding tax %) withholding tax %)* 3///2 Aruba /7. *-7. Australia 1 1 Austria Azerbaijan Bangladesh Barbados* () 1 () 1 /7./1 /1 1 / Belarus / / 3//1 Belgium Bosnia-Herz. () () /1 Brazil 1/ /2 Bulgaria Canada /1 /1 /1 China*(P.R.C.) Croatia Czech Rep. 1 () Denmark () () Egypt Estonia () () /1 /1 Finland () () France () () /1 Georgia* / / Germany 1() 1() 18

19 Greece 3()* () 8/1 /7 Hungary () () Iceland / India 1/ 1/ 1/ 2 Indonesia Ireland () () Israel /1 /1 / /1 Italy* /1() /1() 1 Japan Jordan* / / Kazakhstan / / 1 Korea (Rep.) 1 1 1/ 2 Kuwait Kyrgyzstan 1 Latvia () () /1 /1 Lithuania () () 1 /8 Luxembourg* 2.() 2.() Macedonia Malawi 1 Malaysia /1 8 Malta () () 1 /1 Mexico / / /1/ 1 Moldova / / 1 2 Mongolia /1 / Marocco /2 1 Neth. Antilles* 8.3//* 8.3//* New Zealand 1 1 Nigeria Norway Pakistan //2 /1 Philippines 1 1 /1/ 1/ Poland () () / Portugal 1 1() () 1 1 Romania / / Russia Serbia&Monte. Singapore 1 / Slovak Rep. 1 () () Slovenia () () / South Africa * * 1* Soviet Un.* Spain 1() () /1 /6 Sri Lanka 1 1 /1 1 Surinam 2 7./ 7./ /1 /1 Sweden () () Switzerland / ()