The Corporate Tax Planning Law Review: Netherlands
The Netherlands has historically been known for its attractive business climate. It has an increasingly flexible corporate law, many bilateral investment treaties and an attractive fiscal climate. Its double tax treaty network is one of the most extensive ones globally. As in many other jurisdictions, the OECD has become increasingly focused on base erosion and profit shifting (BEPS), mainly in relation to multinational enterprises. However, overall, with a decent corporate income tax rate of 25.8 per cent and a full participation exemption, the Netherlands remains an attractive jurisdiction for (international) businesses. The Dutch tax authorities remain transparent and approachable. Companies with real economic presence can still obtain tax rulings, in which a tax position is agreed up front, to provide absolute certainty on their tax position.
i Entity selection and business operations
Business in the Netherlands can be conducted through legal structures with or without legal personality. The choice of a legal structure will have liability and tax implications. Business structures without corporate legal personality are transparent, making the shareholders personally liable and taxable. The most common Dutch business structures without corporate legal personality are:
- sole proprietorships;
- general partnerships;
- professional or public partnerships;
- limited partnerships (CVs); and
- funds for joint accounts (FGRs).
Dutch legal structures with corporate legal personality are, among others:
- private limited companies (BVs);
- public limited companies (NVs); and
Setting up a Dutch corporate legal entity involves several formal requirements. A civil law notary draws up the deed of incorporation and the articles of association of the BV or NV. At the time of incorporation, the management and ultimate beneficial owners should also be registered. If a company has a legal personality, shareholders will, in principle, not be personally liable for the company's debts. There are some exceptions to this – for instance if grave mismanagement, recklessness, or fraud by the shareholders or management has led to these debts.
Furthermore, business in the Netherlands can also be conducted through branch offices or foreign legal entities.
Below we discuss the most common legal entities used by foreign investors in the Netherlands.
A BV is a legal form with legal personality. This means that, in principle, shareholders are not liable for any debts with their private assets. A BV can be set up alone or together with others. The capital of a BV is divided into shares, which are held by the shareholders. A BV can issue various types of shares, such as shares without voting rights or shares without profit rights. In the general meeting of shareholders, the joint shareholders take decisions. The BV can be used as a holding company in international structures due to its corporate flexibility.
An NV also has legal personality and is led by a board, also called 'the management'. The capital of the NV is divided into shares. These shares are owned by shareholders. The general meeting of shareholders can appoint and dismiss the board. Unlike the default situation for a BV, the shares of an NV can be resold without former approval of other shareholders. The fact that the company is a legal entity means that the directors are not liable with their private assets for any debts of the NV. An NV usually also has a supervisory board. The supervisory board oversees the management (two-tier board).
A cooperative is a special association in which at least two people conduct a business. These people benefit from the profits of the cooperative. The cooperative consists of participants. These participants can quit or join without endangering the cooperative's existence. This is different from, for example, a general partnership, where partners and associates cannot just quit without dissolution of the general partnership. The general meeting of participants holds the supreme power in the cooperative. This meeting appoints the board, which usually also consists of participants. The board enters into agreements with and for its participants. The participants have voting rights within the cooperative. The cooperative's profits are divided on the basis of the agreements made by participants. The cooperative is known to be used as a holding company in international group structures due to its corporate flexibility, as with BVs. The cooperative is incorporated by a notarial deed.
A CV is a contractual legal form of at least two people or entities. Everyone who participates is a partner. There are two types of partners in a limited partnership: the general partner, who runs the daily management of the company, and limited partners, who are involved only financially by providing funding for the company. The limited partner does not actively interfere with the company, in contrast to most shareholders in a BV. A CV does not have legal personality. The managing partners are therefore liable for debts and taxes of the CV. The limited partners are jointly and severally liable only if they are involved in the affairs of the company or if their name is used to represent the CV.
An FGR is a contractual legal form between an entity that serves as the fund manager, an entity that serves as custodian of the fund and participants in the fund. The participants bring money or capital into the fund to invest it together. With that investment they buy a part of the fund. For each part of the fund, the participant receives part of the proceeds. An FGR does not have legal personality; therefore, the FGR itself cannot hold assets. The assets and liabilities of the FGR are held by the custodian for the risk and account of the participants.
Domestic income tax
Dutch corporate income tax (CIT) distinguishes between resident and non-resident taxpayers. Resident taxpayers are taxed on their worldwide income, whereas non-resident taxpayers have a limited Dutch tax liability. Non-resident taxpayers are taxed only on their Dutch-source income – for example income derived from a branch (i.e., permanent establishment) in the Netherlands.
The residence of a company is determined by the facts and circumstances. Substance aspects (e.g., management, housing and staff) are important in this regard. Companies incorporated under Dutch law are considered to be residents of the Netherlands.
The statutory CIT rate has two brackets. For profits up to €395,000 the tax rate is 15 per cent. Profits exceeding this amount are subject to a tax rate of 25.8 per cent.
Dutch tax law provides for a loss relief scheme. From 1 January 2022, new rules apply in this regard. Up to and including 2021, the period for carrying forward losses was six years. This term has expired. Losses from financial years starting on 1 January 2013 or later can be carried forward indefinitely. However, a maximum threshold may apply to the amount of the set-off against profits from the years 2022 onwards. For the set-off with profits of 2021 and earlier, the maximum does not apply.
From 1 January 2022, losses of previous financial years that collectively exceed €1 million can be set off only up to an amount of €1 million plus 50 per cent of the taxable profit of that year after that profit has been reduced by the amount of €1 million. These limitations will also apply to loss carry-forward. This means that in a financial year in which a BV or other entity subject to CIT earns profits, losses from other years may be set off, up to a maximum of €1 million, without limitations. Of the available taxable profit in that year exceeding €1 million, only 50 per cent can be set off against losses from other years.
Companies subject to CIT are required to file a CIT return with the Dutch tax authorities annually. In principle, filing needs to be done within five months of the financial year (e.g., a 2021 tax return needs to be filed before 1 June 2022). However, many Dutch tax advisers have an ongoing agreement with the tax authorities that enables them to have an extended filing period on behalf of their clients. With this 11-month extension, a CIT return needs to be filed within 17 months of the financial year (in the previous example this would be 1 May 2023).
Upon request, a Dutch CIT return can be filed in US dollars or another currency instead of using euros as currency. This request must be filed with the tax authorities prior to the start of the relevant book year.
Dividend withholding tax
The statutory dividend withholding tax (DWT) rate in the Netherlands is 15 per cent, which is levied on dividends paid to resident and non-resident shareholders. However, subject to conditions, no DWT is due on dividends paid by a Dutch company to shareholders with a shareholding of 5 per cent or more. No DWT is withheld if the shares held by the recipient qualify for the participation exemption.
Other withholding taxes
On 1 January 2021, the Withholding Tax Act 2021 entered into force. As of that date, withholding tax must be withheld on an interest or royalty payment made by an entity established in the Netherlands to an affiliated entity established in a low-tax jurisdiction and in abuse situations. The low-tax jurisdictions for 2022 are American Samoa, American Virgin Islands, Anguilla, the Bahamas, Bahrain, Bermuda, British Virgin Islands, the Cayman Islands, Fiji, Guam, Guernsey, Isle of Man, Jersey, Palau, Panama, Trinidad and Tobago, Turkmenistan, Turks and Caicos Islands, United Arab Emirates and Vanuatu.
As of 1 January 2024, a conditional withholding tax on dividends will be integrated into the Withholding Tax Act 2021. From that moment on, an additional withholding tax on dividends to low-tax jurisdictions and in abusive situations will apply. This tax complements the current dividend withholding tax, as the specific aim of this conditional withholding tax on dividends is to tax two situations where currently no dividend withholding tax is levied. It concerns situations where:
- an intra-group dividend payment is made to an entity resident in a low-tax jurisdiction with which the Netherlands has concluded a double tax treaty. In such a case, the dividend withholding tax exemption may usually be invoked in participation situations because of which no dividend withholding tax would be levied; and
- a dividend payment is made by a non-resident cooperative to an entity established in a low-tax jurisdiction. In this case, no dividend withholding tax is payable because the non-resident cooperative is not subject to withholding tax.
In the Netherlands, it is possible to obtain up-front certainty on a tax position after liaising with the tax authorities, in the form of an advance pricing agreement (APA) or an advance tax ruling (ATR). An APA provides certainty on the fiscal acceptability of the transfer price that a company charges to or is charged with by a foreign group company for delivering or receiving services or goods. An ATR is an agreement on the Dutch tax characterisation of international corporate structures, such as certainty in advance on application of the participation exemption. If a company wants to conclude an ATR or an APA with the tax authorities, it must have an 'economic nexus' with the Netherlands. This means that the company submitting the ruling request must be a member of a group that carries on commercial operating activities in the Netherlands, and commercial operating activities must be performed for the account and risk of that company for which at the group level there are sufficient relevant personnel in the Netherlands. The Dutch tax authorities look more closely at the purpose of the specific structure. If the decisive motive is to save Dutch or foreign tax, no ruling will be given.
As mentioned before, Dutch-resident companies are subject to tax with their worldwide income. This means that double taxation may occur when foreign-source income is taxed in the Netherlands and elsewhere. To eliminate this issue, the Netherlands has one of the most extensive treaty networks in the world, with almost 100 effective double tax treaties in place with jurisdictions from all over the globe. These double tax treaties are mostly based on the OECD model and the UN model. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the Multilateral Instrument) may impact these double tax treaties insofar as these double tax treaties are designated as a covered tax agreement by both treaty partners. In addition, there is national legislation that may provide for the avoidance of double taxation if no double tax treaty applies.
Controlled foreign company rules
The Netherlands introduced a controlled foreign company (CFC) measure on 1 January 2019 to implement the European Anti Tax Avoidance Directive (ATAD). The measure is intended to counteract the shifting of profits to a CFC. In case of a CFC, certain income categories ('tainted benefits' such as dividend and interest) of the CFC are directly included in the Dutch tax base of the holding company of the CFC. A company is considered to be a CFC if:
- the Dutch taxpayer company, together with an associated company or natural person, has a direct or indirect interest of more than 50 per cent in a foreign company, or if there is a permanent establishment; and
- the foreign company or permanent establishment is located in a country with a low statutory tax rate on profits (i.e., less than 9 per cent), or in a country that is on the EU list of non-cooperative jurisdictions for tax purposes.
Hybrid mismatch rules
The Dutch hybrid mismatch rules aim at combating the use of hybrid mismatches to avoid taxes. They lay down rules to combat tax avoidance involving hybrid mismatches both between EU Member States and between EU Member States and third countries. Hybrid mismatches are situations where a tax advantage is obtained by using the differences between tax systems in the tax treatment of entities, financial instruments or permanent establishments. The differences between corporate tax systems can lead to either (1) a payment (in one country) being deductible but the corresponding income (in another country) not being taxed or (2) one and the same payment (cost or loss) being deductible several times (i.e., double deduction).
If a payment is deductible but the corresponding income is not taxed, then the mismatch is initially removed by applying the 'primary rule'. This rule in most cases means no deduction of a payment that is not taxed at the receiving party. If the taxpayer who wants to deduct the payment is not established in an EU Member State, the primary rule cannot be applied. Then the 'secondary rule' applies whereby in most cases payment will be taxed at the recipient. This creates a situation where although the deduction is allowed, the corresponding income is also taxed.
If one and the same payment is deductible multiple times, then the tax advantage will be eliminated by disallowing deduction once. This primary rule allows deduction in the country that is considered to be the country of the payer. However, if the other country also allows the deduction, then a secondary rule regulates that the country of the payer still refuses the deduction of the payment.
The innovation box is an arrangement that effectively applies a lower tax rate to certain activities. If the innovation box is applied, benefits are taxed only at an effective CIT rate of 9 per cent, instead of the regular rate of 25.8 per cent. With this effectively low rate, the Netherlands wants to stimulate innovation. The innovation box applies to benefits from intangible assets developed by the taxpayer itself.
Interest deduction limitation
Interest on loan capital is, in principle, deductible for CIT purposes. However, there are several exceptions to this main rule. Dutch tax law has a specific rule that entails a limitation of deductible interests paid in relation to 'tainted transactions'. The rule is aimed at combating the artificial creation of interest deductions on loan capital through the conversion of equity into debt, seeing as interest – in principle – would be deductible for CIT purposes, and dividends paid on equity capital are not. This rule limits the deductibility of interest in cases where a tainted transaction takes place that is related to a debt owed to a related entity or related natural person.
Tainted transactions in this regard are (1) a profit distribution or capital refund, (2) a capital contribution or (3) the acquisition of an already related entity and the acquisition or extension of an interest that thereby becomes a related entity.
If the main rule of a limitation of the deductible interest comes into play, it can still be averted by providing rebuttal evidence.
Earnings stripping rule
The earnings stripping rule combats excessive financing with loan capital. This rule works with the following calculation. This means that in determining the profit enjoyed in a year, the balance of interest is not deductible to the extent that that balance exceeds the greater of the following amounts:
- 20 per cent of the adjusted profit (earnings before interest, taxes, depreciation and amortisation); and
- €1 million.
The threshold of €1 million largely prevents the generic interest deduction limitation from affecting small and medium-sized businesses.
ii Common ownership: group structures and intercompany transactions
Domestic intercompany transactions
A Dutch-resident parent company and its Dutch-resident subsidiary may, under certain conditions, form a 'fiscal unity'. That fiscal unity is regarded as one taxpayer, no matter how many entities are included in that fiscal unity. Intercompany transactions are considered invisible and revive only in certain situations (e.g., in the event of a (partial) termination of that fiscal unity). The fiscal unity regime applies only to Dutch tax-resident companies and to Dutch permanent establishments. The main requirements to apply are that the parent company holds at least 95 per cent of the legal and economic ownership of that subsidiary and the entities should be subject to the same tax regime.
As a result of historical case law, it is also possible to form a fiscal unity between a Dutch parent company and its indirect Dutch subsidiary while excluding the non-Dutch (but EU or EEA) intermediate holding company. It is also possible to form a fiscal unity between Dutch sister companies while excluding the non-Dutch (but EU or EEA) parent company. Forming a fiscal unity with a permanent establishment of an EU or EEA company has also been made possible.
Although a fiscal unity is the most far-reaching tax consolidation regime in Europe, it has been subject to discussion, mostly since the 2015 Groupe Steria case.2 The future of the fiscal unity regime in the Netherlands is therefore uncertain, and we might shift to another form of consolidation, but that remains unsure to date.
The participation exemption provides for a full CIT exemption on dividends and capital gains derived from qualifying participations held by the Dutch company. In other words, the participation exemption seeks to avoid double taxation because the idea is that these dividends and capital gains have already been taxed at the level of the subsidiary. The participation exemption applies if the Dutch company holds at least 5 per cent of the shares in the subsidiary and the subsidiary is not considered a low-tax portfolio investment. The participation exemption also applies to non-EU and EEA subsidiaries.
The Dutch transfer pricing regime applies to all transactions between associated persons or companies. The rules require that transactions between associated persons should take place on the basis of the arm's-length principle (e.g., as if they were third parties). The principles of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations are adhered to.
iii Third-party transactions
Sales of shares or assets for cash
Capital gains are generally subject to CIT at the ordinary rate. Under certain conditions, capital gains from the disposition of tangible and certain intangible assets can be deferred by temporarily allocating the gain to a 'reinvestment reserve'. This reinvestment reserve therefore defers taxation and is designed to stimulate investments. There is a clawback provision that applies if the reinvestment reserve is not used for the purchase of a new asset within three years of forming the reinvestment reserve.
Capital gains earned with a capital asset that is exchanged for a similar capital asset can also be deferred – of course subject to conditions – the main condition of which is that the new capital asset has a similar economical function as the replaced capital asset.
Moreover, as mentioned under 'Participation exemption' in Section II.ii, the capital gain on the alienation of a qualifying participation is exempt from CIT. Finally, capital gains on the transfer of assets of (an independent part of) a business in exchange for shares may also be exempt. For the latter, we refer to the next paragraph.
Tax-free or tax-deferred transactions
If (an independent part of) a business is transferred and exchanged for shares, a capital gain may arise. That capital gain is, in principle, subject to CIT. The levy on this capital gain can, under certain circumstances, be exempt. These conditions are extensive, but the most important ones are (among others):
- both companies are subject to the same tax regime;
- there are no CIT losses to be carried forward;
- the future levy of CIT is secured; and
- the business merger must be instigated by business reasons.
If the shares are disposed of within three years, these business reasons are deemed not to be present.
In general, the exemption does not apply if the (business) merger is predominantly aimed at avoiding or deferring taxation.
Dutch tax law also provides for a legal merger facility, similar to the business merger. The levy on capital gains can be exempt under certain circumstances.
More or less the same applies to a demerger, where, upon demerger, a capital gain may arise. The levy on these capital gains can, under certain circumstances, be exempt, similar to the conditions of the business merger.
Dutch tax law contained a scheme that made it possible to deduct a loss in a participation or a permanent establishment (abroad) from the Dutch CIT base. Because of that, it was possible for companies to pay no or little CIT in the Netherlands using these losses abroad. This caused public dissatisfaction; therefore, this liquidation loss scheme was amended from 1 January 2021. The liquidation loss scheme is an exception to the main rule of the participation exemption that results from a subsidiary that is exempt for Dutch CIT purposes. When a qualifying participation has been dissolved and liquidated, resulting in a final loss, that liquidation loss may, under circumstances, be deducted at the level of the shareholder. As of 1 January 2021, restrictive conditions apply when making use of the liquidation loss scheme. A liquidation loss in a qualifying participation is now deductible only if the liquidation of the subsidiary takes place within a period of three calendar years of the calendar year in which the subsidiary is (almost) completely discontinued or the decision to do so has been made (temporal condition).
To the extent that the liquidation loss exceeds €5 million (franchise), the following conditions apply:
- the shareholder has a controlling interest in the dissolved subsidiary (quantitative condition); and
- the dissolved subsidiary is established in the Netherlands, in another EU or EEA Member State or in a state with which the EU has an association agreement (territorial condition).
iv Indirect taxes
Value added tax
In the Netherlands, value added tax (VAT) is levied on the supply of goods and services. The general rate applicable is 21 per cent, but a reduced rate of 9 per cent applies to certain goods and services. Furthermore, there is a zero per cent rate for certain goods and services, and some are exempt. This distinction is important because at the zero per cent rate, taxpayers can reclaim the VAT paid. This is not possible with VAT exemptions.
Member States of the EU implement the directives issued by the EU regarding VAT, so there are no major differences between the VAT systems of EU Member States. The standard rates do, however, vary between 27 per cent (Hungary) and 17 per cent (Luxembourg).
Customs and excise
As in all EU Member States, the EU customs legislation applies in the Netherlands. The Dutch customs administration is very cooperative and understands the needs of businesses, including customs brokers and customs warehouse facilities. They are available to make arrangements to ensure efficient compliance with the applicable rules.
International developments and local responses
i OECD-G20 BEPS initiative
BEPS mainly concerns cases where the interaction of different tax rules (of different states) leads to double non-taxation or to less than full single taxation. It also covers arrangements that achieve no or low taxation by moving profits to jurisdictions other than those in which the activities that generate those profits take place. According to the OECD, no or low taxation is not in itself a cause for concern, but it becomes so when it is accompanied by practices that artificially separate taxable income from the activities that generate that taxable income. The above outcomes can also occur as a result of the application of bilateral tax treaties through an artificial arrangement.
The envisaged solutions to the BEPS issues were published by the OECD in the form of the Action Plan on Base Erosion and Profit Shifting (the Action Plan), which included 15 action points to this end. This Action Plan aimed to address BEPS issues in a coordinated and comprehensive manner by providing OECD member countries with domestic and international tools to better align the possibility to tax with economic activity.
Following these reports, the BEPS issue – and a solution to it – has been elaborated on at OECD level, which has since put BEPS issues very high on the agenda of OECD member countries.
The Netherlands implements the results of BEPS in its tax treaties and in domestic laws. In that context, implementation has led to country-by-country reporting obligations, updated transfer pricing rules and the application of the Multilateral Instrument to Dutch tax treaties.
ii EU proposals on taxation of the digital economy
The Dutch government is of the opinion that only a solution on a global level will provide a long-term solution for taxing the digital economy. That is why the Netherlands has not yet introduced a unilateral digital services tax.
On 21 March 2018, the European Commission published the Digital Tax Package, which includes a proposal for a digital services tax. However, work on the digital economy also takes place at a global level where the OECD-G20 Inclusive Framework on BEPS has agreed to a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. This major reform of the international tax system should ensure that multinational enterprises will become subject to a global minimum tax rate of 15 per cent as from 2023. In light of these developments at OECD level, European work on a digital services tax is on hold for the time being.
Furthermore, the implementation of the two-pillar solution will require the removal of unilateral digital services taxes and other relevant similar measures for all companies.
For this purpose, it is a condition that no newly enacted digital services taxes or other relevant similar measures are to be imposed from 8 October 2021 until the earlier of 31 December 2023 or the coming into force of the Multilateral Instrument to give effect to Pillar One of the two-pillar solution.
With regard to the treatment of existing digital services taxes, a number of countries have reached an agreement with the US as to the treatment of their existing digital services taxes pending the implementation of Pillar One.
iii Tax treaties
The Netherlands has one of the most extensive tax treaty networks and continues to expand it. Recently, much-awaited tax treaties were concluded with Chile, Colombia and Cyprus. Dutch tax treaties are largely based on the OECD model treaty.
Outlook and conclusions
The Netherlands has a favourable and stable tax environment with one of the most extensive tax treaty networks in the world. One of its unique features remains that a tax position can be discussed and agreed up front with the Dutch tax authorities. However, as with many other European countries, the tax system is rapidly changing due to international developments. Now that all OECD countries have supported the two-pillar approach, even more changes are expected to be forthcoming with regard to tax systems worldwide.
1 Paul Schouten is a senior associate and Jairo Keeldar is a junior associate at Greenberg Traurig LLP.
2 This was a case at the Court of Justice of the European Union about (a breach of) the freedom of establishment in relation to the French tax consolidation regime l'intégration fiscale. In this case, the per element approach was introduced.