The Netherlands in International Tax Planning Second revised edition Table of contents Chapter 1: General introduction 1.1. What this book is and what it is not 1.2. Tone 1.3. EU law 1.4. Substantial amended corporate income tax in 2007 Chapter 2: How this book is organised Chapter 3: Introduction to Dutch tax 3.1. National taxation only, no state tax 3.2. Ministerial decrees and case law 3.3. National law vs. tax treaties and EU law 3.4. Classical system 3.5. What are taxpayers taxed for 3.6. Resident taxpayers 3.7. Non-resident taxpayers 3.8. Dividend withholding tax 3.9. Limitation of double taxation at corporate level 3.9.1. Participation exemption 3.9.2. Loss compensation 3.9.3. Tax consolidation 3.10. How are they taxed? 3.10.1. Tax returns 3.10.2. Tax assessments 3.10.3. Audits Chapter 4: Corporate income tax subjects 4.1. Residence 4.1.1. Case law on residence 4.2. Residents 4.2.1. Special taxable entities 4.2.1.1. Mutual investment funds 4.2.1.2. Taxable limited partnerships (also called open limited partnerships ) 4.2.1.3. Pension funds 4.2.2. Taxable object for resident taxpayers 4.2.2.1. Case law on business related costs 4.2.3. Ending resident tax status 4.2.3.1. Case law: Realisation of profits in sight of emigration 4.2.3.2. Are exit taxes EU compliant? 4.3. Non-residents
4.3.1. Special purpose funds 4.3.2. Taxable object for non-resident taxpayers 4.4. Tax transparent, taxable entities 4.4.1. Dutch hybrid entities 4.4.1.1. Case law 4.4.2. Classification of foreign entities 4.4.2.1. Decree on inbound investment 4.4.2.2. Decree on outbound investments Chapter 5: Financing a taxpayer 5.1. Equity 5.2. Debt 5.2.1. Decree on expired debts 5.3. Hybrid loans 5.3.1. Introduction 5.3.1.1. A word on hybrid loans, profit dependent loans and profit sharing loans 5.3.2. Legislation on hybrid loans 5.3.3. Extension of the hybrid loan legislation 5.3.4. Protection under tax treaties 5.3.5. Case law 5.3.6. Decrees 5.4. Leasing 5.5. (Potential) Limitations on interest deductions 5.5.1. Forms of limitations 5.5.2. General limitation on deduction of non-business costs 5.5.3. Conduit interest and royalties 5.5.3.1. Interest 5.5.3.1.1. Definition of related persons 5.5.3.2. Royalties 5.5.4. Base eroding dividends, equity contributions, equity redemptions and hybrid loans 5.5.4.1. Case law 5.5.4.2. Decree 5.5.5. Transfer of shares within a group 5.5.6. Costs related to conversion rights 5.5.6.1. Decree 5.5.6.2. Case law 5.5.7. Thin capitalisation rules 5.5.7.1. Introduction 5.5.7.2. Other points to bear in mind 5.5.7.3. The law 5.5.7.4. What is a loan 5.5.7.5. The group ratio alternative 5.5.7.6. Caveats 5.5.7.7. Planning opportunities 5.5.8. Acquisition and disposal costs of participations
5.5.9. Limitation and deferral of deductions in case of leveraged takeovers 5.5.9.1. Case law 5.5.10. Limitation on prevention of double taxation for interest payments within tax consolidated group 5.5.11. Ruling practice: Financing of (foreign) participations with at least 15 percent equity 5.5.12. Case law: Hybrid loans 5.5.13. Interest free loans Chapter 6: Loss compensation 6.1. General system 6.2. Preventing trading in passive companies with tax losses carried forward 6.2.1. Start up entities 6.2.2. Advance certainty 6.2.3. Relief 6.2.4. Decrees 6.2.5. Case law 6.3. The Bosal rules 6.3.1. Do the Bosal loss compensation rules constitute illegal State Aid? 6.4. Losses in tax consolidated groups Chapter 7: Mergers 7.1. Share merger facilities 7.1.1. Introduction 7.1.2. Corporate income tax position under the participation exemption 7.1.3. Corporate income tax position where participation exemption is not available 7.1.3.1. Case law 7.1.4. Exemption from real estate transfer tax 7.1.5. Dividend withholding tax 7.2. Asset merger facilities 7.2.1. Introduction 7.2.2. Exemption from Corporate Income Tax 7.2.2.1. Conditions 7.2.2.2. Anti-abuse measure 7.2.2.3. Decree: Issuing preference shares in asset mergers 7.2.3. Exemption from real estate transfer tax 7.2.3.1. Conditions 7.3. Legal mergers 7.3.1. Introduction 7.3.2. Legal mergers under corporate income tax law 7.3.2.1. Conditions 7.3.2.2. Anti-abuse measure against leveraged takeovers 7.3.3. Exemptions from real estate transfer tax 7.3.4. Exemption from dividend withholding tax 7.4. Legal demergers
7.4.1. Introduction 7.4.2. Exemptions from Corporate Income Tax 7.4.2.1. Conditions 7.4.2.2. Anti-abuse measure against leveraged takeovers 7.4.3. Exemption from real estate transfer tax 7.4.3.1. Conditions 7.4.4. Exemption from dividend withholding tax Chapter 8: Outbound investment 8.1. Unilateral decree for the prevention of double taxation 8.1.1. Subject to tax criterion 8.1.2. Definition of a permanent establishment 8.1.3. Exemption method 8.1.3.1. Calculating the exemption 8.1.3.1.1. Example 8.1.3.2. Decree on inspector s confirmation of foreign profit carried forward 8.1.3.3. Passive foreign enterprise 8.1.3.4. Case law 8.1.4. Tax credit method 8.1.4.1. Calculating the foreign tax credit 8.1.4.2. Decree on developing country transitions 8.1.4.3. Foreign tax credit for passive foreign enterprise 8.1.4.4. Definition of dividends, interest and royalties 8.1.5. Preventing trading in companies with foreign profits carried forward 8.2. Tax treaties 8.2.1. Decrees 8.2.2. Case law 8.2.3. Tax sparing credits 8.2.3.1. Case law: Material test of investment stimulus for tax sparing credit 8.2.3.2. Decree: Tax sparing credit: policy 8.3. EC Parent Subsidiary Directive 8.4. Foreign withholding tax at the source Chapter 9: Participation exemption 9.1. Conditions 9.1.1. Minimum participation of 5 percent 9.1.1.1. Less than 5 percent participations 9.1.1.2. Case law 9.1.1.3. Decrees 9.1.1.4. EU participations 9.1.1.5. Five percent interest in taxable limited partnerships 9.1.1.6. Extended participations (meetrekregeling) 9.1.2. Low taxed portfolio participations 9.1.2.1. Free investments 9.1.2.1.1. Investments vs Free investments 9.1.2.1.2. Determination made on allocation basis
9.1.2.2. Real estate participations 9.1.2.3. Subject to at least ten percent income tax 9.1.2.4. Country 9.1.2.5. Income tax 9.1.2.6. Case law 9.1.2.7. Decrees 9.1.2.8. Shares in passive group finance companies 9.1.2.8.1. Gibraltar companies 9.1.2.8.2. Application extended list of entities under Parent/Subsidiary Directive 9.2. Tax credit for low taxed portfolio participations 9.2.1. Introduction 9.2.2. The gross up 9.2.3. Excluded items of income 9.2.4. Credit for positive grossed up income 9.2.4.1. EC Participations 9.2.4.1.1. Excess EC participation credits 9.2.4.2. Other excess participation credits 9.2.4.3. Extensive example 9.3. Exempt items 9.3.1. Income and gains 9.3.1.1. Case law 9.3.1.2. Decrees 9.3.2. Stock options 9.3.2.1. Case Law 9.3.2.1.1. The Falcon-Case 9.3.2.1.2. Subsequent case law: Call and put options cannot transfer beneficial ownership 9.3.3. Earn-out arrangements 9.3.3.1. Decree 9.3.4. Hybrid loans 9.3.4.1. High Court rules on prêt participatif and Titre Subordinée à Duree Indeterminée 9.3.4.2. Decrees 9.3.5. Currency exchange results 9.3.6. Splitting profits in time 9.3.6.1. Case law: Compartimenteringsarrest 9.3.7. Gains on shares acquired through a merger 9.4. Cost deductions 9.4.1. Ordinary costs 9.4.2. The Bosal decision 9.4.2.1. Decree on reach of the Bosal decision 9.4.2.2. Case law on reach of the Bosal decision 9.4.2.3. Limitations on loss compensation 9.4.3. Acquisition and disposal costs 9.4.4. Interest and currency exchange results on loans 9.4.4.1. Hedging
9.4.4.1.1. The situation until 1997 9.4.4.1.2. The situation between 1997 and 2003 9.4.4.1.3. The situation as of 1 January 2004 9.4.4.1.4. The situation as of 1 January 2007 9.4.4.2. Decrees on general deduction of costs 9.5. Loss from liquidation 9.5.1. General system 9.5.2. Conditions 9.5.3. Determination loss from liquidation 9.5.3.1. Historic cost price 9.5.3.2. Liquidation proceeds 9.5.4. Decrees 9.6. Anti-abuse measures 9.6.1. Conversion of loans into shares 9.6.1.1. Introduction 9.6.1.2. Anti-abuse measure 9.6.1.2.1. The receivable is disposed of 9.6.1.2.2. Converting a receivable to shares or waiving it 9.6.2. Converting branches into participations 9.6.2.1. Introduction 9.6.2.2. Anti-abuse measure 9.6.2.3. Decrees 9.6.2.4. Amendments enacted in 2007 9.6.3. Making participations subject to tax 9.6.3.1. Introduction 9.6.3.2. Anti-abuse measure 9.6.3.3. Abolishment per 1 January 2007 9.6.3.4. Decrees Chapter 10: Tax consolidated groups 10.1. What it is 10.2. Conditions for forming a consolidated group 10.2.1. Additional conditions under which a permanent establishment may form part of a consolidated group 10.3. Consequences of having a consolidated group 10.4. Start of the consolidation 10.5. During the consolidation 10.5.1. Foreign profits and losses 10.5.1.1. Decree on foreign tax relief 10.5.2. Measures preventing double dipping of results 10.5.3. Measures limiting leveraged takeovers 10.5.3.1. Calculation example 10.5.3.2. Case law 10.5.4. Loss compensation 10.5.4.1. Allocating profit to consolidated members 10.5.4.2. Pre and post consolidation results
10.5.4.3. Decrees 10.5.4.4. Example of loss compensation calculation 10.6. End of the consolidation 10.6.1. How does a consolidation end 10.6.2. Upon deconsolidation 10.6.3. Losses after deconsolidation 10.6.3.1. Decree 10.6.4. Reinvestment and cost equalisation reserve 10.6.5. Intercompany debt 10.6.6. Deconsolidation prior to liquidation 10.6.7. Valuation of a deconsolidated subsidiary 10.6.8. Foreign results 10.7. Anti-abuse measures 10.7.1. Transfer of hidden reserves within the group 10.7.1.1. Introduction 10.7.1.2. What the law says 10.7.1.3. Case law Chapter 11: Inbound investment 11.1. Income from a Dutch enterprise 11.1.1. Permanent establishments 11.1.1.1. Definition 11.1.1.2. Partnerships 11.1.1.3. Q&A Decree on international taxation 11.1.2. Real estate 11.2. Substantial interests 11.2.1. Definition of substantial interest 11.2.1.1. Residents of non-treaty countries 11.2.1.2. Residents of treaty countries 11.2.2. Taxable objects of substantial interest holders 11.3. Q&A decree on international taxation Chapter 12: Dividend tax 12.1. Mutual investment funds 12.2. Taxable profit distributions 12.2.1. The recognised contributions made on shares 12.2.1.1. Dutch dividend tax on acquired foreign profit reserves 12.2.2. Redemption of shares 12.2.2.1. Qualification of redemption of shares under tax treaties 12.3. Exemptions 12.3.1. Participation exemption 12.3.2. Exemptions under EC Parent/Subsidiary Directive 12.3.3. Redemption of shares 12.3.3.1. Case law 12.3.4. Dividend distributions within a tax consolidated group 12.3.5. Dividend tax credit
12.3.5.1. Defining tax with respect to specific countries 12.3.5.2. Hungary 12.3.5.3. Turkey 12.3.6. Permanent establishments 12.4. Tax rate and tax collection 12.4.1. Gross up for net dividend distributions 12.4.2. Dividend tax rates under tax treaties 12.5. Dividend stripping 12.6. Dividend tax in case of emigration 12.7. Formal law 12.7.1. Decrees Chapter 13: Other anti-abuse legislation 13.1. Fraus legis (abuse of law doctrine) 13.2. Surtax abolished per 1 January 2005 13.2.1. The Surtax regime 13.3. Dividend stripping 13.3.1. Background Preceding case law 13.3.1.1. English market maker 13.3.1.2. Dutch market maker 13.3.2. Dividend stripping measures 13.3.2.1. Legislation 13.3.2.2. Some relief 13.4. Conduit structures 13.4.1. Introduction 13.4.2. Real economic risk 13.4.3. Real substance 13.5. Transfer pricing 13.6. CFC legislation 13.6.1.1. Credit for underlying taxes 13.6.2. Decrees 13.7. Exchange of information 13.7.1. Tax treaties 13.8. Statute of limitations 13.8.1. Case law Chapter 14: Ruling practice 14.1. Jurisdiction 14.2. Information required and other conditions under APAs and ATRs 14.3. Decree on rulings for taxpayers providing intercompany services 14.3.1. Definition of intercompany services 14.3.2. Conditions 14.3.3. Conduit finance structures 14.3.3.1. Case law 14.3.4. Substance requirements 14.3.5. Q&A decree
14.4. Decree on good faith towards treaty partners 14.5. APAs 14.6. Decree on hybrid loans 14.7. Statistics on ruling practice 14.8. Special knowledge groups Chapter 15: Employee stock option plans 15.1. Introduction 15.2. Legislation 15.2.1. Determining the deductible amount for corporate income tax purposes 15.2.2. Dealing with shares acquired to cover the option liabilities 15.2.2.1. Corporate income tax 15.2.2.2. Dividend tax 15.3. Case law on treatment of stock options for employer 15.4. Decrees Chapter 16: Functional currency regime 16.1. Beginning of functional currency reporting 16.2. End of functional currency reporting 16.3. Conversion rates used 16.4. Foreign permanent establishments Chapter 17: Real estate transfer tax 17.1. Introduction 17.2. Taxable actions 17.3. Exemptions 17.3.1. Internal reorganisations 17.4. Basis and tax rate Chapter 18: Special facilities for expatriate workers 18.1. Tax-free expense allowance for extraterritorial expenses 18.2. Conditions for the payment of a tax-free expense allowance 18.3. Term of the tax-free expense allowance 18.4. Extraterritorial expenses 18.5. Level of the tax-free expense allowance