Annual International Bar Association Conference 2013 Boston, Massachusetts Recent Developments in International Taxation The Netherlands as per May 21, 2013 Wendy Moes Hamelink & Van den Tooren N.V. wendy@hamelinktooren.com 1
1. RECENT HIGHLIGHTS 1.1 CORPORATE INCOME TAX 1.1.1 Abolition of thin capitalization rules In connection with the introduction of the new interest deduction limitation on loans relating to the financing of participations (see hereafter in paragraph 1.1.2), the Dutch thin capitalisation rules of article 10d of the Dutch corporate income tax Act ( CITA ) are abolished as per 1 January 2013. 1.1.2 New limitation on interest deduction on loans relating to the financing of participations As per 1 January 2013, new rules have been introduced which limit the deduction of excessive interest on loans relating to the acquisition of, or capital contributions to participations that qualify for the application of the Dutch participation exemption ( Participation Interest ). These new rules, that are laid down in article 13l CITA, take a mathematical approach to determine whether a qualifying participation is excessively financed with debt. Under this approach the tax balance sheet of the taxpayer forms the starting point. Loans will only be deemed to relate to the financing of qualifying participations to the extent that the aggregate acquisition price ( Aggregate Acquisition Price ) of qualifying participations exceeds the fiscal equity of the taxpayer. In other words, a participation will be deemed to be financed first with equity, which is in the benefit of the taxpayer. Furthermore, loans in connection with active group finance activities performed by the taxpayer can be disregarded, provided certain conditions are met. If the Aggregate Acquisition Price does not exceed the fiscal equity, the taxpayer is not considered to be excessively financed with debt and consequently the deductibility of Participation Interest will not be limited. If the equity is exceeded, the excess Participation Interest (and other related financing costs, such as bank costs and legal fees) remains deductible to the extent it does not exceed 750,000. An important exception to the non-deductibility of Participation Interest is provided for in case of debt financing which relates to an increase of the operational activities of the group to which the taxpayer belongs. Insofar acquisitions of, or capital contributions to qualifying participations relate to such increase of operational activities, the increase of the Aggregate Acquisition Price will not be taken into account in determining the amount of debt attributable to qualifying participations. In addition to this exception, a relaxation has been introduced with respect to acquisitions of, or capital contributions to participations (whether or not operational ) which took place on or prior to 1 January 2006 (so-called Old Participations ). The taxpayer may opt to disregard 90% of the acquisition price of, or contributed capital to Old Participations without any further substantiation. The above described exceptions however do not apply in case of abusive situations, such as double dip structures (in which the interest is deducted twice within the group), certain hybrid financing structures and other tax avoidance structures. 2
1.1.3 New Decree on article 10a Dutch CITA Under the Dutch anti-tax base erosion rules of article 10a CITA, the interest deduction on a related party loan that has been used to finance (i) a profit distribution or a repayment of capital to a related party, (ii) a capital contribution to a related party or (iii) the acquisition or extension of a share interest in an entity that is or becomes a related party, may be denied. This interest deduction limitation in principle does not apply if (i) the loan and the transaction are primarily driven by business reasons; or (ii) the interest income is subject to an effective tax rate of at least 10% calculated according to Dutch tax rules at the level of the recipient thereof whereby there is no compensation of losses or use of tax credits as a result of which the interest is effectively not subject to tax. Recently, a new Decree was published containing several new positions and approvals with respect to article 10a CITA (Decree of 25 March 2013, no. BLKB2013/110M). This Decree is an update of an earlier Decree from 2005. The main elements of the Decree are summarized below. If a share interest in an entity is acquired in parts and as a result of these acquisitions this entity becomes a related party whereas there is no relatedness yet after the first acquisition(s), article 10a CITA in principle applies to each acquisition or extension if it concerns a complex of legal transactions. The interest deduction limitation then becomes effective as from the moment the two entities are related and also applies to the first acquisition(s). If the shares in a related entity are sold and the tainted debt(s) are not repaid, the interest on this debt remains non-tax deductible. However, if the sale of the shares generates income that is subject to reasonable taxation according to Dutch standards, the interest on the tainted debt(s) will be tax deductible. The above mentioned business reason exception does not apply in case of a the funds are rerouted for non-business reasons. In the Decree the Dutch State Secretary of Finance indicates that this rerouting concept will be interpreted broadly and furthermore gives certain examples such as the use of tax havens and hybrid forms of financing. 1.1.4 Updated list of qualified foreign entities The qualification of a foreign entity for Dutch tax purposes, and more in particular the question whether it should be treated as tax transparent or not is addressed in a Decree of 11 December 2009, no. CPP 2009/519M. For the qualification of a foreign entity as transparent or non-transparent the Decree distinguishes between corporations and partnerships. Corporations are (always) classified as non-transparent while partnerships in principle are treated as transparent, unless their shares are freely transferable. A list with entities that have been assessed based on the qualification framework of the Decree is published on the website of the Dutch tax authorities. This list of qualified foreign entities is of an indicative nature only. The list is updated on a regular basis to take new (legal and other) developments into account. On 12 April 2013 the following 15 foreign entities have been added to the list: Bahrain - Single Person Company (nontransparent), Belize - Society Anonyme/Sociedad Anonima (non-transparent), British 3
Virgin Islands - Company limited by shares (non-transparent), Hong Kong - Company limited by shares (non-transparent), Ireland - Company limited by shares (nontransparent), Japan - Godo Kaisha (non-transparent), Kenya - Company limited by shares (non-transparent), Luxembourg - Société en Commandite par Actions (non-transparent), Mongolia - Limited Liability Company (non-transparent), United Arab Emirates/Dubai - Company limited by shares (non-transparent), The US/Delaware - Corporation (nontransparent), the US/Florida - Corporation (non-transparent),the US/Kentucky - Limited Liability Company (non-transparent), the US/New York - Corporation (non-transparent), the US/Virginia - Limited Liability Company (non-transparent). 1.2 TAX TREATY DEVELOPMENTS The following developments occurred with respect to tax treaties concluded by the Netherlands: The Netherlands and India have agreed to amend the tax treaty on the subject of exchange of information. This amendment has been laid down in a protocol that entered into force on 2 November 2012; New Dutch tax treaties with Germany and Ethiopia have been signed in 2012. It is not yet known when these treaties will enter into force; It is our understanding that The Netherlands completed negotiations regarding a first time tax treaty with Colombia. The contents of this treaty is not yet publicly available. It generally is expected to be published and signed in the course of 2013; For the year 2013, the State Secretary announced to start negotiations with Costa Rica, Malawi, Poland, Spain, Tadzhikistan, Tanzania, Uruguay, South-Africa and South Korea for concluding or amending a tax treaty; Mongolia decided to unilaterally cancel its tax treaty with the Netherlands as per 1 January 2014. According to the Mongolian authorities, the tax treaty facilitated tax structures that were considered unfavourable to their country. The Dutch State Secretary of Finance announced that he is willing to negotiate a new tax treaty which should take into account the objections of the Mongolian authorities. This new tax treaty will likely contain information exchange and anti-abuse provisions. In 2012 the Netherlands concluded Tax Information Exchange Agreements with the following countries: Costa Rica, Dominica, Grenada, Liberia, Samoa and the Seychelles. 1.3 OTHER 1.3.1 Extension of payment of exit taxes As a result of the judgment of the European Court of Justice ( ECJ ) in the National Grid Indus case, the Dutch government has amended its legislation regarding the collection of taxes due in situations in which a company leaves the Dutch tax jurisdiction ( exit taxes ). The amendment provides for the possibility of an extension of payment of the exit taxes until the moment on which the exit profit is effectively realised whereby the tax collector may request a guarantee as well as interest on the outstanding amount of tax as permitted by the ECJ in National Grid Indus case. 4
1.3.2 Bank tax As per October 2012, a bank tax is introduced in the Netherlands. Generally, bank tax is levied on the unhedged debt position of financial institutions operating in the Netherlands under a bank license issued by the Dutch Central Bank. For efficiency reasons, the bank tax becomes due as of a base exemption of EUR 20 billion. The amount of short term debts is taxed at a rate of 0.044% and the amount of long term debts is taxed at a rate of 0.022%. These rates are multiplied with a factor of 1.1 if the taxable entity has paid an excess bonus to at least one board member. 2. FUTURE DEVELOPMENTS 2.1 TAX ARRANGEMENT BETWEEN THE NETHERLANDS AND CURACAO In December 2011 Curacao and the Netherlands reached an agreement on the main features of a new Tax Arrangement for the Kingdom of the Netherlands ( TAK ). The negotiations regarding the provisions of this new TAK are currently at a final stage and that it is expected that this new TAK will enter into force during 2013. The most relevant new provision regards the provision on the tax treatment of dividend distributions from the Netherlands to Curacao. Based on the current available information, this treatment will be as follows: The current 8.3% Dutch dividend tax rate on dividends paid by Dutch resident companies to Curacao resident companies will likely be reduced to 0% provided the Curacao resident company is an active company which qualifies under a new Limitation on Benefits clause. The contents of this clause has not yet been disclosed. However, it is our understanding that in order to be considered a qualifying active company, the Curacao company should likely meet certain minimum substance requirements (e.g. a sufficient number of qualified employees and an own office). For existing structures in which the Curacao resident company owns a share interest of at least 25% in the Dutch company and it does not qualify for the 0% rate, the current 8.3% Dutch dividend tax rate is expected to be reduced to 5% as of the date on which the new TAK will enter into force and until ultimately 31 December 2019. After this grandfathering period, the regular Dutch dividend tax rate of 15% will apply. 2.2 POLITICAL AND MEDIA ATTENTION FOR DUTCH LETTERBOX COMPANIES At present a political and media debate is pending concerning the use of what is referred to as letterbox companies, thereby aiming at the alleged inappropriate use of Dutch holding, finance and royalty companies in international tax structuring. Although a certain political pressure exists to introduce measures taking away or reducing the attractive position of the Netherlands in international holding, finance and license structures, the Dutch government has clearly taken the position that the favourable Dutch holding, finance and licensing regime is fully compatible with all international standards and that at present it has no intention of initiating any changes to this regime. At the time of writing this report it is unclear whether this intention remains unchanged once the outcome of a study by the Foundation for Economic Studies (abbreviated in Dutch SEO ) is published regarding the contribution to the Dutch economy of the financial and legal services industry involved with Dutch holding, finance and royalty companies. In any case the Dutch State Secretary of Finance has indicated that the Netherlands will follow and actively participate in the 5
pending discussions at EU, OECD and G20 level. If these discussions, or the outcome of the above report, would require the present tax regime to be amended, the Dutch government has indicated that in principle it is prepared to do so. 2.3 EUROPEAN TAX LAW RELEVANT PENDING DUTCH CASES 2.3.1 Fiscal unity For Dutch corporate income tax purposes a fiscal unity can be formed between Dutch resident companies and non-dutch resident companies having a permanent establishment in the Netherlands, if the parent company directly owns (legally and economically) at least 95% of the nominal paid-up share capital of the subsidiary and furthermore certain other conditions are met. Recently, the Amsterdam Court of Appeal referred to the ECJ for a preliminary ruling regarding the question whether the denial of a fiscal unity request between two Dutch resident sister companies with a common German resident parent company infringes EU law (Amsterdam Court of Appeal 17 January 2013, no. 11/00810). Based on the judgment of the ECJ in the Papillon case (Société Papillon v Ministère de Budget, des Comptes publics et de la Fonction publique, C-418/07), it can be argued that such a denial indeed is incompatible with EU law. 2.3.2 Dutch dividend tax Currently, a case is pending before the Dutch Supreme Court concerning the question whether a Finnish tax exempt investment fund is entitled to a full refund of Dutch dividend tax on dividends from Dutch portfolio investments. On 9 March 2012, the Den Bosch Tax Court of Appeal ruled that no Dutch dividend tax should have been levied on these dividends since this levy is not compatible with EU law (i.e. the free movement of capital). Contrary to this judgment, the Dutch Advocate-General has advised the Dutch Supreme Court that the Finnish tax exempt investment fund is not entitled to a refund (28 November 2012, CPG 12/01866). If the Dutch Supreme Court does not follow this advice, the decision will likely have significant consequences for Dutch dividend tax levied on investment portfolios in Dutch companies held by EU resident tax exempt companies, like investment funds. Potentially, the decision could even have effect in relation to dividend distributions to exempt funds in third countries. 6