ÖZET

The Netherlands, which is one of the most popular countries when it comes to international holding structures, introduced a conditional withholding tax on interest and royalty payments to be made to related entities located in low-tax jurisdictions and abusive situations.

This article aims to elaborate the amendments that made within the mentioned Act and its effect on international holding structures.

Keywords: The Netherlands, Withholding, Dutch Withholding Tax, Low-Tax Jurisdictions, Tax Heavens, Related Entity, Interest, Royalty.

INTRODUCTION

Dutch Withholding Tax Act ("DWTA") which entered into force in January, 1st, 2021, incurs a conditional withholding tax ("CWHT") on interest and royalty payments made by multinational companies resident in the Netherlands to their related entities located in low-tax jurisdictions and in other situations specified in the DWTA.

Until December 31st, 2020, interest and royalty payments made by companies registered in the Netherlands to their related companies were not subject to withholding tax in the Netherlands. However, it was decided that some intra-group interest and royalty payments will be subject to withholding tax of 25% as of January 1st, 2021, the highest corporate income tax rate applied in the country.

The purpose of introduction of this tax by the Dutch government is explained as the prevention of abuse (treaty shopping) caused by the use of the Netherlands as a gateway country in interest and royalty payments to be made to related entities in jurisdictions has low tax rates. Under the DWTA, companies with tax obligations in the Netherlands will not be granted a privilege. The tax shall be paid by the company that makes the payment and is registered in the Netherlands.

In addition to the conditional withholding tax to be applied to interest and royalty payments, the Dutch government has released a legislative proposal that introduces additional withholding tax on dividends paid to low-tax jurisdictions, which is scheduled to enter into force as of January, 1st, 2024.1

I. TAX BASE, TAXPAYER, AND THE RATE

The base of CWHT is defined as the gross amount of interest and royalty payments made by Dutch resident companies.

CWHT is derived from intra-group interest and royalty payments paid or accrued by a permanent entity that is a corporate taxpayer in the Netherlands in the following cases:

  • The recipient of the payment is a resident of a country with a statutory tax rate of 9% or lower,
  • The recipient of the payment is established in one of the countries declared as tax haven by the European Union ("EU"),
  • Allocation of interest or royalties to a permanent establishment in a country with a statutory tax rate of less than 9% or in the EU's list of tax havens,
  • A case of abuse involving payments or accruals deemed to have been made to hybrid entities.

If one of the above-mentioned situations occurs, the rate of withholding to be made in accordance with the CWHT is set to be 25%, which is the highest corporate tax rate applied in the Netherlands.

II. DEFINITION OF RELATED ENTITY

CWHT shall apply to interest and royalty payments made to related companies.

In order to deem two entities as related, at least one of the below conditions must be met:

  • The receiving entity has direct or indirect qualifying interest in the paying entity (holding more than 50% of its shares or voting rights),
  • The paying entity has direct or indirect qualifying interest in the receiving entity (holds more than 50% of its shares or voting rights),
  • A third entity directly or indirectly holds the qualifying interest of both the paying entity and the receiving entity (holding more than 50% of their shares or voting rights),
  • The receiving entity holds a direct or indirect interest in the paying entity and together with other entities of a cooperating group that entity owns a direct or indirect qualifying interest in the paying entity (holding more than 50% of the shares or voting rights),
  • The paying entity holds a direct or indirect interest in the receiving entity and together with other entities of a cooperating group that entity owns a direct or indirect qualifying interest in the receiving entity (holds more than 50% of the shares or voting rights) or
  • Entities that are part of a cooperating group together hold a direct or indirect qualifying interest in the paying entity and those entities together hold a direct or indirect qualifying interest in the receiving entity.

The definition of a cooperating group is based on the Article 10/a-6 of the Dutch Corporate Income Tax Act, and the definition has been deliberately broadened. This is means that especially the joint venture or companies held by private equity firms/venture capitals where one of the shareholders of a company in a jurisdiction with a low tax rate to provide debt financing through a partnership or entity that can be affected by CWHT. Therefore, it would be accurate to conduct a structure-based analysis in order to make a more accurate assessment.

III. DEFINITION OF LOW-TAX JURISDICTION

Low-tax jurisdiction, in parallel with the controlled foreign company legislation of the Netherlands which is effective as of January 1st, 2019, means countries has statutory corporate income tax rate of lower than 9% such as Bahrain, Bahamas, Bermuda, Turkmenistan, and United Arab Emirates; and the countries in the list of tax havens which is published by the EU such as American Samoa, Barbados, Fiji, Panama, U.S. Virgin Islands.

If one of the countries which the Netherlands has signed a Double Taxation Treaty ("DTT") with is identified as a low-tax jurisdiction, the CWHT application will be implemented 3 years after the country in question has been identified as a low-tax jurisdiction. During this 3-year period, the Netherlands plans to renegotiate existing DTTs in order to effectively collect CWHT.

IV. ABUSIVE SITUATIONS

CWHT can occur if an abusive situation is detected, as well as interest and royalty payments are made to a related entity located in a low-tax jurisdiction. In order to detect abuse, it is necessary to examine whether there is a purpose of avoiding withholding tax payment in the Netherlands while the structure is established in this way. If a structure cannot be based on economic grounds, it can be considered artificial and concluded that it was designed for the purpose of abuse.

In accordance with the rules for the prevention of abuse contained in the DWTA, CWHT shall be levied if the following situations are provided:

  • The main purpose or one of the main purposes of the existence of the company receiving the payment is to avoid CWHT (subjective test),
  • The structure is deemed as artificial (objective test). (Objective testing is evaluated based on the commercial reasoning behind the structure.).

To ensure the flow of interest or royalty payment through a company located in a low-tax jurisdiction without a valid commercial reason can be an example of existence of an artificial structure.

In terms of objective test, as of January 1st, 2020, fulfillment of substance requirements does not mean that the company is considered as 'safe-harbor'. This suggests that it could be argued by the Dutch tax authority that the structure was built for the purpose of abuse, even if the minimum substance requirements were met. On the other hand, if an entity does not meet the minimum substance requirements, it can be proven that the structure was not created for the purpose of abuse. Therefore, minimum substance requirements only play a role in the allocation of burden of proof between the taxpayer and the Dutch Tax Administration.

V. ACCRUAL OF TAX, DECLARATION, AND DATE OF PAYMENT

Interest or royalty payments are considered as have been received by the recipient in the following cases:

  • Payment of interest / royalty by the Dutch taxpayer,
  • Payment of interest / royalty in exchange for the recipient's receivables,
  • Making interest / royalty payment available to the recipient or
  • Existence of an interest-generating element.

Interest and royalty accrued after December 31st, 2020 and not paid to the recipient in the relevant year / have not been made available to the recipient shall be deemed to have been received by the recipient on December 31st of the relevant year.

CWHT must be withheld by the Dutch resident entity. CWHT must be paid to the Dutch tax authorities by preparing a tax return within 1 month after the end of the calendar year. Managers of entities that made and receive payments are responsible for CWHT.

CONCLUSION

It is important to review the structures where the existence of an abuse can be alleged as well as whether all intra-group interest and royalty payments made by a Dutch resident company to any entity in a low-tax jurisdiction are subject to CWHT.

Footnotes

1. https://www.government.nl/latest/news/2021/03/25/dividend-withholding-tax-bill-submitted, Accesed: April, 29th, 2021

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.