The Inward Investment and International Taxation Review
31
The Inward Investment and International Taxation Review Law Business Research Sixth Edition Editor Tim Sanders
Transcript of The Inward Investment and International Taxation Review
The Inward Investment And International Taxation Review
The InwardInvestment andInternational
Taxation Review
Law Business Research
Sixth Edition
Editor
Tim Sanders
The Inward Investment And International Taxation Review
The Inward Investment and International Taxation ReviewReproduced with permission from Law Business Research Ltd.
This article was first published in The Inward Investment and International Taxation Review - Edition 6
(published in January 2016 – editor Tim Sanders)
For further information please [email protected]
The Inward Investment and International
Taxation Review
Sixth Edition
EditorTim Sanders
Law Business Research Ltd
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The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:
ACKNOWLEDGEMENTS
A&L GOODBODY
ABOU JAOUDE & ASSOCIATES LAW FIRM
ÆLEX
AFRIDI & ANGELL
BAKER & MCKENZIE
BIRIŞ GORAN
BRATSCHI WIEDERKEHR & BUOB LTD
CHIOMENTI STUDIO LEGALE
D’EMPAIRE REYNA ABOGADOS
DUANE MORRIS
ENSAFRICA
GALAZ, YAMAZAKI, RUIZ URQUIZA, SC (DELOITTE MÉXICO)
GORRISSEN FEDERSPIEL
GRAU ABOGADOS
GREENWOODS & HERBERT SMITH FREEHILLS
GRETTE DA
HERZOG FOX & NEEMAN
KPMG LAW LLP
Acknowledgements
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LEE & KO
LINKLATERS, SLP
LOYENS & LOEFF
MOCHTAR KARUWIN KOMAR
MOTIEKA & AUDZEVIČIUS
NISHIMURA & ASAHI
NISHITH DESAI ASSOCIATES
PHILIPPE DEROUIN
POTAMITISVEKRIS
PYRGOU VAKIS LAW FIRM
QUEVEDO & PONCE
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
SKATTEANALYS ADVOKATBYRÅ
SOŁTYSIŃSKI KAWECKI & SZLĘZAK
SRS ADVOGADOS
STIBBE NV
VEIRANO ADVOGADOS
WOLF THEISS
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CONTENTS
Editor’s Preface ..................................................................................................viiTim Sanders
Chapter 1 BASE EROSION AND PROFIT SHIFTING ........................... 1Jennifer Wheater
Chapter 2 AUSTRALIA ............................................................................ 11Adrian O’Shannessy and Tony Frost
Chapter 3 AUSTRIA ................................................................................. 27Niklas JRM Schmidt and Eva Stadler
Chapter 4 BELGIUM ............................................................................... 37Christian Chéruy and Marc Dhaene
Chapter 5 BRAZIL.................................................................................... 61Silvania Tognetti
Chapter 6 CANADA ................................................................................. 75KA Siobhan Monaghan
Chapter 7 CHINA .................................................................................... 90Jon Eichelberger
Chapter 8 CYPRUS ................................................................................ 106Georgia Papa
Chapter 9 DENMARK ........................................................................... 122Jakob Skaadstrup Andersen
Chapter 10 ECUADOR ............................................................................ 137Alejandro Ponce Martínez
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Contents
Chapter 11 FRANCE ................................................................................ 150Philippe Derouin
Chapter 12 GREECE ................................................................................ 177Aspasia Malliou and Eleni Siabi
Chapter 13 INDIA .................................................................................... 192Radhika Parikh and Ashish Sodhani
Chapter 14 INDONESIA ......................................................................... 209Mulyana and Bobby Christianto Manurung
Chapter 15 IRELAND .............................................................................. 225Peter Maher
Chapter 16 ISRAEL .................................................................................. 247Meir Linzen
Chapter 17 ITALY ..................................................................................... 262Paolo Giacometti and Giuseppe Andrea Giannantonio
Chapter 18 JAPAN .................................................................................... 280Michito Kitamura, Tsuyoshi Ito and Hidenori Shibata
Chapter 19 KOREA .................................................................................. 296Young Uk Park and John Kwak
Chapter 20 LEBANON ............................................................................ 310Souraya Machnouk, Hachem El Housseini and Ziad Maatouk
Chapter 21 LITHUANIA ......................................................................... 323Mantas Juozaitis and Edvinas Lenkauskas
Chapter 22 LUXEMBOURG ................................................................... 337Pieter Stalman and Chiara Bardini
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Chapter 23 MEXICO ............................................................................... 355Eduardo Barrón and Carl E Koller Lucio
Chapter 24 NETHERLANDS .................................................................. 379Michael Molenaars and Reinout de Boer
Chapter 25 NIGERIA ............................................................................... 394Theophilus I Emuwa, Chinyerugo Ugoji and Mutiat Adeyemo
Chapter 26 NORWAY .............................................................................. 405Thomas E Alnæs and Erik Landa
Chapter 27 PERU ..................................................................................... 418César Castro Salinas and Rodrigo Flores Benavides
Chapter 28 POLAND ............................................................................... 435Jarosław Bieroński
Chapter 29 PORTUGAL .......................................................................... 466José Pedroso de Melo
Chapter 30 ROMANIA ............................................................................ 483Gabriel Biriş and Ruxandra Jianu
Chapter 31 SOUTH AFRICA .................................................................. 503Peter Dachs, Bernard du Plessis and Magda Snyckers
Chapter 32 SPAIN .................................................................................... 529José María Palicio Pire and Blanca Hernanz Fernández-Aguado
Chapter 33 SWEDEN .............................................................................. 545Lennart Larsson
Chapter 34 SWITZERLAND ................................................................... 559Michael A Barrot and Walter H Boss
Contents
Contents
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Chapter 35 TAIWAN ................................................................................ 576Michael Wong and Dennis Lee
Chapter 36 THAILAND .......................................................................... 586Panya Sittisakonsin and Sirirasi Gobpradit
Chapter 37 UNITED ARAB EMIRATES................................................. 600Gregory J Mayew and Silvia A Pretorius
Chapter 38 UNITED KINGDOM .......................................................... 616Tim Sanders
Chapter 39 UNITED STATES ................................................................. 640Hal Hicks, Moshe Spinowitz and Robert C Stevenson
Chapter 40 VENEZUELA ........................................................................ 665Alberto Benshimol and Humberto Romero Muci
Chapter 41 VIETNAM ............................................................................. 680Fred Burke and Nguyen Thanh Vinh
Appendix 1 ABOUT THE AUTHORS .................................................... 695
Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS .... 721
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EDITOR’S PREFACE
The global economy has resulted in an unprecedented flow of capital, goods and services across international borders. Businesses need to be aware of the tax regimes that affect them in multiple jurisdictions and how such regimes interact. There are tax pitfalls to be avoided, but there is also scope for securing favourable tax results. Such tax benefits may sometimes arise as a result of artificial structuring and governments are actively legislating to combat abuses that erode their tax base. The current edition has a chapter dedicated to the OECD Action Plan on Base Erosion and Profit Sharing (BEPS), and individual chapters reflect areas where BEPS has already influenced or been introduced into domestic laws.
While it is easy to identify highly structured, artificial and abusive transactions at the extreme, there is a middle ground where with no complex structuring, or even with no structuring at all, benefits arise solely or primarily as a consequence of carrying on business on a normal commercial basis across borders, under different tax laws that apply different rates of taxation. How businesses operating in this middle ground will be treated as multiple jurisdictions introduce tax laws to protect their tax base is an area of concern, as widely drafted laws designed to ensure those guilty of the worst excesses will be caught can often be applied without great difficulty to those that are not the intended target.
The aim of this book is to provide a starting point for readers, and to assist businesses and advisers, each chapter providing topical and current insights from leading experts on the tax issues and opportunities in their respective jurisdictions, with a chapter on the overarching potential impact of BEPS. While specific tax advice is always essential, it is also necessary to have a broad understanding of the nature of the potential issues and advantages that lie ahead; this book provides a guide to these.
I should like to thank the contributors to this book for their time and efforts, and above all for their expertise. I would also like to thank the publisher and the team for their support and patience. I hope that you find the work useful, and any comments or suggestions for improvement that can be incorporated into any future editions will be gratefully received.
Editor’s Preface
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The views expressed in this book are those of the authors and not of their firms, the editor or the publishers. Every endeavour has been made to ensure that what you read is the latest intelligence.
Tim SandersSkadden, Arps, Slate, Meagher & Flom LLPLondonJanuary 2016
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Chapter 24
NETHERLANDS
Michael Molenaars and Reinout de Boer1
I INTRODUCTION
The Netherlands has since long been a jurisdiction of choice for the establishment of international holding companies. Generally recognised benefits of using a Dutch (holding) company include an attractive participation exemption regime, extensive investment protection and tax treaty networks, no withholding taxes on interest and royalties and the cooperative approach of the Dutch tax authorities.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
i Corporate
Dutch holding companies are generally incorporated as a limited liability company or a cooperative. A limited liability company can be incorporated in the form of a public limited liability company (NV) or a private limited liability company (BV). The vast majority of companies incorporated in the Netherlands are BVs.
The NV and BV have legal personality and a capital divided into shares. As the NV and the BV are limited liability companies, the shareholders and incorporators are in principle not liable for debts of the company. An NV can issue both registered shares and bearer shares. Bearer shares of an NV are the only kind of shares that can be traded on the stock exchange; consequently only the NV can be used for listed companies. The BV can only issue registered shares. The issue and transfer of the registered shares in a BV (and in a non-listed NV) must be effected by a deed executed by a civil law notary (this requirement does not apply to bearer shares or a listed NV). The management of
1 Michael Molenaars is a partner and Reinout de Boer is a counsel at Stibbe NV.
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an NV or BV and its business is performed by a management board. Members of the management board are in principle not required to be Dutch nationals or residents of the Netherlands and can be individuals or legal entities.
NVs and BVs are in principle subject to Dutch corporate income tax (CIT) on their worldwide profits. Distributions by a NV or BV are generally subject to Dutch dividend withholding tax (subject to reductions or exemptions pursuant to domestic law, the EU Parent-Subsidiary Directive or the application of a tax treaty).
The cooperative is an old legal form which must have the objective of meeting certain material needs of its members based upon agreements that it has concluded with its members. A cooperative has historically mainly been used in the agricultural business, but has more recently become popular as a holding company as it is in principle not subject to Dutch dividend withholding tax (DWT). The CIT treatment of the cooperative is in principle identical to that of a BV or NV. Although the cooperative is a legal person, it shares some characteristics with partnerships in the sense that its articles of association allow for a lot of flexibility (limited mandatory law), there are no minimum capital requirements and it needs to have a least two founding members. A cooperative may, in its articles of association, exclude or limit the liability of its members.
ii Non-corporate
There are in principle two forms of non-corporate entities: the limited partnership (CV) and a general partnership (VoF).
The formation of a CV involves less formalities than the incorporation of a Dutch NV or BV. In short, the CV is an agreement whereby two or more parties (natural persons, partnerships or legal entities) jointly contribute assets and/or labour for the purpose of sharing the benefits to be obtained. At least one of the parties will act as a general partner (GP), whereas another will be the limited partner (LP). Since the CV does not have legal personality, a CV as such cannot own its assets. The legal title to the assets of the CV will generally be held by the general partner for the benefit of the CV. The partnership liabilities are considered liabilities of the GP. If there are more general partners in a CV, they are jointly and severally liable for such obligations. The liability of the LP towards third parties is limited to the value of the assets he has contributed to the CV.
A CV is in principle only subject to CIT or required to withhold Dutch DWT if it qualifies as ‘open’; i.e., if it is non-tax transparent. A CV is open if ‘other than in the situation of a partnership interest passing by inheritance or legacy, admission or replacement of the limited partners is possible without the consent of all partners, both general and limited’. If a CV does not meet the above-mentioned definition, it is not subject to CIT as an open CV (i.e., a ‘closed’ CV is a transparent entity.
The VoF is a partnership entered into under a common name with the object to operate a business. Each of the partners is jointly and severally liable for obligations entered into on behalf of the general partnership. If the VoF is declared bankrupt, this automatically results in the bankruptcy of all of its partners. The bankruptcy of an individual partner will generally lead to the dissolution of the VoF. A VoF is transparent for CIT purposes.
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III DIRECT TAXATION OF BUSINESSES
i Tax on profits
Dutch tax residents are generally subject to Dutch CIT on their worldwide profits, while non-Dutch tax resident entities are only subject to CIT in respect of Dutch-source dincome.
CIT is levied on the taxable profits (income and capital gains) made by a corporate entity in a given year less deductible losses. Profits must be determined in a consistent manner and in accordance with the principles of ‘sound business practice’, a concept generally developed in Dutch case law taking into account the tax accounting principles of prudence, realisation and reality. For example, fixed assets used for running a company are depreciated on an annual basis. In principle, when determining profits all the business expenses may be deducted. A company may set off its losses against its taxable profits for one preceding year and against its taxable profits for nine years to come. Different rules may apply to the loss carry-over in respect of a holding and financing company. Furthermore, in respect of an entity that has ceased, or reduced, its trade or business a restriction in the availability of loss carry-over may apply if a change of control has occurred.
CIT is only levied at state level. There is no profit tax levied by lower levels of government.
RatesThe general CIT rate is 25 per cent. A step-up rate of 20 per cent per cent applies in respect of the first profit bracket of € 200,000.
AdministrationA corporate taxpayer is required to file an annual CIT return with the Tax Administration within five months of the end of its financial year, subject to possible extensions. Upon request, a Dutch taxpayer may file its annual CIT return in a functional currency. This is a welcome facility to avoid exchange rate result.
Tax groupingUnder the Dutch fiscal unity (or tax consolidation) regime for Dutch CIT purposes, a Dutch-resident parent company and its Dutch resident subsidiary can form a fiscal unity provided that the parent company holds at least 95 per cent of the legal and economic interest in the shares issued by the subsidiary (and provided certain other conditions are met as well). Upon consolidation in a Dutch fiscal unity, the parent and the subsidiaries therein are treated as one single taxpayer for Dutch CIT purposes. Their assets and liabilities are consolidated as if they have merged.
Until 16 December 2014, the Dutch fiscal unity regime did not allow for a fiscal unity between a Dutch-resident parent company and a Dutch-resident subsidiary if the parent company held its shares in such Dutch resident subsidiary indirectly through a subsidiary residing outside the Netherlands. The Dutch fiscal unity regime also did not allow for a fiscal unity between two Dutch-resident subsidiaries if the shares in each of such subsidiaries were held by a parent company that was residing outside the Netherlands. On 12 June 2014, the European Court of Justice has ruled in the SCA
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Group Holding case that not allowing such fiscal unities is in conflict with the European freedom of establishment. In response to this decision, on 16 December 2014 a new decree in relation to the Dutch fiscal unity regime was issued by the Dutch Secretary of Finance that provides for an extra statutory concession pursuant to which pending new legislation the Dutch fiscal unity regime also allows for a fiscal unity:a between a Dutch resident parent company and a Dutch resident subsidiary if
the parent company holds its shares in such Dutch resident subsidiary indirectly through a subsidiary that is resident in an EU or EEA (Iceland, Norway and Liechtenstein) Member State; and
b between two Dutch resident subsidiaries if the shares in each of such subsidiaries are held by a parent company that is resident in an EU or EEA Member State.
A legislative proposal is pending before parliament to implement these and certain other changes in the fiscal unity regime in the Corporate Income Tax Act per 1 January 2016.
ii Other relevant taxes
Value added taxValue added tax is levied on supplies of goods and services made in the Netherlands. The standard VAT rate in the Netherlands is 21 per cent. For certain designated supplies a reduced rate of 6 per cent, a zero rate or an exemption of VAT may apply. Generally, VAT is levied by having VAT taxable persons charge VAT for VAT taxable supplies. The charged VAT then has to be declared and paid by such VAT taxable person to the Tax Administration based on self-assessment through periodic VAT returns. For VAT taxable persons who have been charged VAT for supplies made to them, such input VAT may be recoverable.
Real Estate Transfer TaxReal estate transfer tax at a rate of 6 per cent is levied on the acquisition of shares or similar rights in real estate companies if the buyer obtains, directly or indirectly, an interest of at least a third in such company (including shares and rights already in possession). A real estate company is a resident or non-resident company the assets of which consist of more than 50 per cent of real estate assets and at least 30 per cent of real estate situated in the Netherlands provided such real estate, as a whole, is or was mainly used at that time for the acquisition, sale or exploitation of such real estate. There are certain exemptions available.
Wage tax and social security contributionsIndividuals (whether Dutch resident or not) who are in employment may be subject to wage tax in respect of their taxable wages. Generally, wage tax is levied through withholding by the employer. The term ‘employer’ may refer both to individuals and legal entities. The employer periodically forwards the wage tax withheld to the Tax Administration. The withholding obligation in principle also extends to social security contributions. Wage tax is calculated on all remunerations an employee receives on the
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basis of his or her current or former employment. Generally, for individuals subject to Dutch personal income tax, Dutch wage tax is creditable against Dutch personal income tax and thus the withheld wage tax functions as an advance income tax.
Excise and import dutiesExcise duties are indirect taxes on the consumption or the use of certain designated products and are levied based on the Dutch Excise Duties Act, implementing relevant EU Directives. Excise duties are generally payable upon the removal of excise good from designated excise warehouses or upon the importation of excise goods into the EU. Excise products include alcoholic beverages; manufactured tobacco products; and mineral oils.
In the Netherlands, EU import duties (customs duties) have to be paid when goods are brought into free circulation within the customs territory of the EU. The bringing of goods into free circulation is one of the customs procedures. Under this procedure, the goods are given the status of Community goods, which entitles them to be freely circulated within the internal market of the EU. The import duties usually have to be paid by the declarant when he submits the customs declaration for free circulation. Export duties do not exist in the Netherlands.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
Under Dutch tax law, the place of residence of entities is determined based on an all-facts-and-circumstances test. According to long-standing, consistent case law the place of the effective management of an entity is generally decisive in determining its place of residence under the all-facts-and-circumstances test. The term ‘effective management’ generally refers to the principal management of a company. The term principal management may, following case law, generally be deemed to refer to strategic managerial decisions in respect of the business of the entity. Factors that may serve to underpin the place of effective management for instance include: the place of residence of its (executive) directors, the place where board meetings take place and the place where that company has its (head) office. However, other connecting factors may also come into play: e.g., the place where certain accounting/consolidation, risk management, legal and tax compliance, are carried out, the location of the company’s business, etc.
An important exception to the main rule under the all-facts-and-circumstances test is the ‘incorporation fiction’. Under the incorporation fiction in Dutch tax law an entity that is incorporated under Dutch law (e.g., a BV or NV) will, for Dutch CIT purposes, be deemed to be a Dutch resident company, irrespective of its place of effective management. This implies that an entity incorporated in the Netherlands is in principle subject to Dutch CIT on its worldwide income (full liability for tax for domestic corporate taxpayers).
ii Branch or permanent establishment
The term permanent establishment (PE) is not defined in the Corporate Income Tax Act. However, from case law, Dutch legislative history and literature, it can be derived that the Dutch domestic definition of the term is to a large extent similar to the definition in the
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OECD Model Convention. A permanent establishment for Dutch CIT purposes will therefore generally be present if (1) the taxpayer has a place of business at his disposal; (2) which is fixed; and (3) through which the business of an enterprise is wholly or partly carried on. From Dutch case law one additional requirement can be inferred, namely that the place of business should be suitable for the business activities. The term ‘place of business’ seems to include all physical objects that are commercially suitable to serve as the basis of the business activity. The requirement of the place of business being ‘fixed’ relates both to the duration of use and the geographical location of the place of business.
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
i Participation exemption regime
Under the Dutch participation exemption, capital gains and dividends derived by a Dutch resident company from a subsidiary in which it holds a qualifying share interest (i.e., generally a share interest representing 5 per cent or more of the nominal paid-in capital) are exempt from CIT if certain conditions are met.
In addition, in order for the participation exemption to apply, it has to be determined whether at least one of the following three conditions is met: a the participation in the subsidiary is not held as a portfolio investment (the
motive test’); b the subsidiary in which the Dutch resident company holds a participation has
an active business enterprise (i.e., less than 50 per cent of the subsidiary’s assets consists of passive investments, the ‘asset test’); or
c the subsidiary in which the Dutch resident company holds a participation is subject to profit tax at a rate of at least 10 per cent (calculated against a tax base similar to the Dutch tax base – the ‘subject to tax test’).
Pursuant to the motive test, the participation exemption will not apply if the (domestic or foreign) participation is held as a passive investment (‘investment participation’). A participation is considered to be held as a passive investment if the taxpayer holds the participation with the intention of obtaining a return that may be expected from normal active asset management. Normal active asset management is present if the influence of the organisation on the results is limited and the size or the nature of the activities do not exceed what is typical for normal active asset management. A participation will generally not be held as passive investment if the participation is engaged in the same line of business as the taxpayer. In addition, if the taxpayer is a (top or intermediate) holding company that fulfils an essential function for the group, the participation will also not be held as passive investment.
Under the asset test it should be determined whether the assets held by the taxpayer’s direct subsidiary consist (directly or indirectly) ‘usually’ for 50 per cent or more of other assets than low-tax-free portfolio investments.
Under the subject-to-tax test it should be determined whether or not an investment participation is subject to a reasonable profit-based tax by Dutch tax standards. The
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foreign tax should result in an effective tax rate of 10 per cent according to Dutch standards; thus the Dutch and foreign tax systems are compared as to rate, tax basis and other aspects that influence the effective tax rate.
As a result of the implementation of the amendments to the EU Parent-Subsidiary Directive in the Netherlands, an anti-hybrid measure will be introduced in the participation exemption as per 1 January 2016. Pursuant to a new linking rule, income – that otherwise qualifies for the application of the participation exemption – is not exempt under the Dutch participation exemption if and to the extent it legally or in fact is deductible for profit tax purposes in the hands of the subsidiary or payor. In determining whether a payment is deductible, it appears not to be relevant whether the deduction effectively leads to a reduction of tax payable. The scope of the anti-hybrid measure also applies with respect to distributions/payments by non-EU tax resident subsidiaries.
On 1 May 2015, new legislation to codify the so-called compartmentalisation doctrine entered into force with retroactive effect to 14 June 2013. Under the general compartmentalisation doctrine developed in Dutch case law, profits from participations in subsidiaries accrued during a period in which the participation exemption applied should continue to be exempt thereunder even if at the time of receipt of the dividends the participation exemption no longer applies based on the facts and circumstances at that time. On 14 June 2013, the Dutch Supreme Court ruled that the compartmentalisation regime does not apply in case of a change in law (more specifically, a change in the conditions underlying the Dutch participation exemption regime by the Dutch legislator). In order to, inter alia, provide that the compartmentalisation doctrine also applies in case of a change in law, the Dutch legislator has now codified this doctrine. The recently codified compartmentalisation doctrine does not apply with respect to the anti-hybrid measure.
ii Innovation box
The ‘innovation box’ regime provides for a reduction of CIT rates on profits derived from intellectual property, including royalty income. Under the innovation box, profits derived from intellectual property developed by a company, and for which a patent is granted are taxed at an effective rate of 5 per cent to the extent they exceed a threshold equal to the sum of the costs incurred to develop the intellectual property; profits up to this threshold are taxed at the regular CIT rate. Losses incurred on the utilisation of the intellectual property are treated the same way as development costs.
On 9 December 2014, the EU Code of Conduct Group for Business Taxation reported to the Ecofin on the future of patent box regimes. According to the Ecofin, the scope of the current Dutch regime is too wide. Due to this pressure from the EU, it can be expected that the innovation box will be amended and that the innovation box would – for instance – only apply to profits derived from patents.
iii State aid
On 21 October 2015, the European Commission (EC) decided that a tax ruling between Starbucks and the Netherlands should be considered illegal state aid. As a consequence, the European Commission ordered the Dutch State to recover the aid granted to a Dutch
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Starbucks group company (Starbucks Manufacturing EMEA BV), which is estimated between €20 million and 30 million. When publishing its decision the EC noted that its preliminary inquiries had shown that the quality and the consistency of the scrutiny by the tax authorities differed substantially across Member States, specifically with regard to tax rulings. In particular, the EC noted that in general the Netherlands seemed to proceed with a thorough assessment based on comprehensive information required from the taxpayers. In a press release the European Commission stated that, even though tax rulings as such are legal, the Starbucks tax ruling endorsed transfer pricing methods that did not reflect the economic reality and unduly lowered Starbucks’ tax burden in the Netherlands. In particular, the European Commission found that the ruling artificially lowered taxes paid by Starbucks Manufacturing EMEA BV in two ways:a Starbucks Manufacturing pays a royalty to Alki (a UK-based company in the
Starbucks group) for coffee-roasting know-how, which the European Commission considers to be very substantial; or
b Starbucks also pays a price for green coffee beans to Switzerland-based Starbucks Coffee Trading SARL, which the European Commission deems to be inflated.
On 27 November 2015 the Dutch government announced that it will appeal against the EU Commission’s decision. The main reason given for the appeal is that the Dutch tax authorities consistently apply internationally accepted methods and that the Commission’ uses its own interpretation and application of the OECD guidelines about the transfer pricing methods, with the result that, according to the Commission, the so-called Comparable Uncontrolled Price (CUP) method should have been applied. The Dutch government does not believe that the CUP method should have been applied in the Starbucks case because of the absence of suitable data. Moreover, in its decision, the Commission applies its own new criterion for profit calculation, which is incompatible with domestic regulations and the OECD framework.
VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding outward-bound payments (domestic law)
Dividend distributions by a Dutch-resident company (with a capital divided into shares) are in principle subject to Dutch DWT at a rate of 15 per cent. Based on the incorporation fiction, companies incorporated under Dutch law are deemed to be resident in the Netherlands for purposes of DWT. The Netherlands does not levy any withholding tax on interest and royalty payments.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
Statutory exemptions generally apply in respect of distributions to certain qualifying corporate shareholders resident in the Netherlands and in the EU/EEA, provided, generally, the shareholders have an interest of at least 5 per cent in the Dutch company. Also, a full refund may be available to certain legal entities resident in the Netherlands
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or the EU/EEA who are not subject to Dutch CIT, or would not have been subject to Dutch CIT had they been resident in the Netherlands. The latter refund may for instance apply to pension funds.
In addition, Dutch DWT may be mitigated under bilateral tax treaties concluded by the Netherlands.
iii Double tax treaties
The Netherlands has a broad tax treaty network, with most treaties following the OECD model treaty. Treaties generally provide for relief from double taxation on all types of income; limit the taxation by one country of companies resident in the other; and protect companies resident in one country from discriminatory taxation in the other.
iv Taxation on receipt
Income from dividends, interest and royalties received by Dutch tax residents are included in their worldwide profits, thus generally subject to CIT, unless the participation exemption is applicable.
VII TAXATION OF FUNDING STRUCTURES
i Debt
GeneralIt follows from case law that an instrument that is a loan for Dutch civil law purposes, will also be treated as such for Dutch tax purposes taking the following three exceptions into account, in which cases a debt instrument for civil law purposes should be treated as equity for Dutch tax purposes:a only the appearance of the instrument is a loan, while in reality the parties
purported to create an equity instrument (‘sham transaction’);b the loan has been made under such conditions that the creditor participates, with
the monies lent, to a certain degree in the enterprise of the debtor (‘participating loan’); or
c if the creditor owns a shareholding in the debtor and extends a loan under such circumstances that the debt claim, at the time of extending the money, is wholly or partly without value because of the creditworthiness of the debtor (‘loss financing’).
Based on case law the participating loan exception is only present if the following (cumulative) conditions have been met:a the remuneration is (entirely or nearly entirely) contingent of profit; andb the debt obligation is subordinated to all pari passu ranking creditors; andc the debt obligation has no fixed term, but is only payable in case of bankruptcy,
suspension of payments or liquidation of the debtor.
If one of the above described exceptions applies, the ‘debt’ instrument should be treaty as equity for Dutch tax purposes. This means that (interest) payments made on such
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instruments are not tax deductible. In addition to the non-deductibility of payments made under ‘hybrid loan’ by Dutch debtors, interest payments on a hybrid loan may also attract Dutch DWT.
Arm’s length principleUnder Dutch tax law, arm’s-length interest expenses should generally be deductible for CIT purposes. In line with the arm’s-length principle, the Dutch Supreme Court developed the non-business loan concept. The decisions regarding the non-business loans were primarily focused on the question whether a depreciation of bad debt was tax deductible for the lender. However, although not yet clearly decided by the Dutch tax courts, for the borrower the qualification as non-business loan could, in the view of the Dutch tax authorities, lead to a (partial) limitation of interest deduction. A loan between two group companies is considered to be a non-business loan if the loan is granted under terms and conditions that would not have been agreed upon if the lender and the borrower would not have been affiliated. There are multiple relevant factors to take into account (e.g., the borrower should be able to (re)pay the loan and interest, the risk incurred with the loan, the debt/equity ratio and the security offered by the borrower). If a third party would be willing to provide the loan with a higher interest rate (without it becoming profit contingent) under the same conditions, the loan would not be qualified as a non-business loan (but the interest may still be adjusted).
When structuring the acquisition several (general and specific) interest deduction limitations should be taken into account. Especially in situations where losses are being incurred (also) as a result of aggressive debt financing, the Dutch tax authorities more often challenge the deduction of interest.
Limitation of interest deduction for acquisition holdingsThis entails an interest deduction limitation that is aimed at structures whereby the taxpayer (a Dutch acquisition vehicle) borrows funds to make the acquisition, acquires the shares in the target and subsequently forms a CIT fiscal unity with the target to offset the interest expenses on the acquisition loan against the taxable profits of the target. The deduction of interest paid by an acquisition holding in respect of loans that are legally or de facto, directly or indirectly entered into in connection with the acquisition of (or the increase of an interest in) one or more entities that have subsequently been consolidated in a CIT fiscal unity with the acquisition holding (‘acquisition loans’) may be limited to the extent that such interest is considered to be related to excessive acquisition loans. Interest paid by the acquisition holding on acquisition loans can in principle only be deducted from the acquisition holding’s stand-alone profits. However, interest on acquisition loans may also be deducted from operating income of the target to the extent the total amount of the acquisition loans does not exceed 60 per cent of the acquisition price of the target at the end of the tax book year in which the target was acquired and consolidated. At the end of each subsequent tax book year, the initial threshold of 60 per cent is lowered by 5 per cent per year to a maximum of 25 per cent. The first €1 million of interest on acquisition loans will be fully deductible.
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Anti-base erosion rulesThis anti-abuse provision is specifically targeted at situations that may be typified as ‘base erosion’. The common feature of such structures is that (group) equity is converted into debt in one or more transactions that have a somewhat artificial character (and without a valid business reason). Interest and fluctuations in value in respect of loans which are legally or de facto, directly or indirectly, owed to related entities or related individuals are not deductible, to the extent these loans relate legally or de facto effectively, directly or indirectly, to one of the following transactions (‘tainted transactions’):a a distribution of profits or repayments of capital by the taxpayers (or a related
entity/individual) to a related entity;b a capital contribution by the taxpayer (or a related entity/individual) in a related
entity; orc the acquisition or increase by the taxpayer (or a related entity/ individual) of an
interest in an entity that is a related entity after such acquisition or increase.
This anti-abuse provision does, however, not apply if the taxpayer establishes that the debt and the related transactions are predominantly motivated by business reasons or the interest on the loan is taxed in the hands of the recipient at a level that is – to put it briefly – sufficient determined under Dutch tax rules (i.e., at least 10 per cent).
Participation debt rulesThe Dutch thin capitalisation rules have been abolished as per 1 January 2013. New participation debt rules were then introduced which aim to curb structures that make use of an imbalance that grants an exemption for profits derived from qualifying participations (i.e., shareholdings of 5 per cent or more of a subsidiary’s nominal paid-in capital) while allowing a tax deduction for related expenses, including interest. As a consequence of this provision, the deduction of interest due and expenses made by a taxpayer in respect of loans that are (deemed to be) related to the financing of qualifying participations (participation-related loans) is disallowed for Dutch CIT purposes to the extent such interest and/or expenses exceed a threshold of €750,000. The part of a taxpayer’s loans that is earmarked as participation-related loans equals the amount of the aggregated acquisition price of a taxpayer’s participations exceeding its equity.
Return of capital Under Dutch tax law, through the overall-profit principle, a repayment of capital that is recognised for Dutch tax purposes does not affect the profit determination for CIT purposes of the distributing company. Although such repayment of capital does not qualify as a dividend for CIT purposes, a partial repayment of paid-in capital, if and to the extent that there are net profits, does qualify as a taxable dividend, unless the general meeting of shareholders has resolved in advance to make such a repayment and provided that the nominal value of the shares concerned has been reduced by a corresponding amount by way of an amendment of the articles of association of the company.
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VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
i Acquisition
Share dealAn acquisition of the shares in a Dutch corporate entity is generally done by a foreign entity directly, or indirectly through a wholly owned Dutch acquisition corporate entity. If the shares are acquired through a Dutch acquisition corporate entity, a fiscal unity is often formed by the acquiring entity together with the Dutch target entities, provided that certain criteria are met. If a fiscal unity is formed, the interest expenses on acquisition debt at the level of the acquisition entity can in principle be offset against the profits of the Dutch target entities (subject to the interest deduction limitations as described in VII.i).
A cooperative is often used as shareholder of the acquisition corporate entity. Dutch cooperatives are in principle not subject to Dutch DWT as they are not a company with a capital divided into shares. However, pursuant to anti-abuse rules (recently amended in view of the EU Parent-Subsidiary Directive general anti-abuse rule) a cooperative is nevertheless subject to Dutch DWT if (1) the cooperative is used in a structure as a holding company with the main purpose or one of the main purposes of avoiding Dutch DWT or a foreign withholding tax (anti-abuse or subjective test) and (2) there is an arrangement or a series of arrangements that are not genuine. For purposes of condition (2) an arrangement may comprise more than one step or part and an arrangement or a series of arrangements is considered not genuine if and to the extent that they are not put into place for valid commercial reasons which reflect economic reality (objective test).
A point of attention is always the CIT anti-abuse rules for foreign shareholders (or members in a cooperative). Under the CIT anti-abuse rules (also recently amended in view of the EU Parent-Subsidiary Directive general anti-abuse rule), a foreign shareholder with a substantial interest (i.e., generally a shareholding of 5 per cent or more) in a Dutch resident company, is subject to Dutch CIT as a non-resident taxpayer if (1) its shareholding is held with the main purpose or one of the main purposes of avoiding Dutch personal income tax or DWT in the hands of another person (anti-abuse or subjective test) and (2) there is an arrangement or a series of arrangements that are not genuine. For the purposes of condition (2) an arrangement may comprise more than one step or part and an arrangement or a series of arrangements is considered not genuine if and to the extent that they are not put into place for valid commercial reasons which reflect economic reality (objective test).
Asset dealAn asset deal can generally be done directly by a foreign entity or through a Dutch corporate entity. Income (gains upon the sale of assets) realised from the assets are in principle taxable at the level of a Dutch recipient (corporate entity or permanent establishment). Provided that certain criteria are met, the Dutch tax due could be deferred by using a ‘reinvestment reserve’.
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ii Reorganisation
Subject to certain conditions, there are rollover provisions available pursuant to which a transfer of assets or shares take place on a non-recognition basis if the transferee records these items for the same value in its tax books. Such rollover provisions include a business enterprise merger, legal merger, legal demerger or legal spin-off.
iii Exit
A corporate entity that relocates outside the Netherlands is in principle subject to CIT in respect of any deferred tax liabilities. As a result of EU case law the Netherlands provides for a system to opt for deferral of taxation until the date of realisation.
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
There is no statutory anti-avoidance rule. However, if specific statutory provisions are abused, the tax authorities have certain methods to counter the abuse. The authorities can try to broaden or narrow the interpretation of the text of a provision in light of the purpose and intent of the law, to exclude abuse or approach the facts differently by presuming a sham transaction. The key point in applying the tax law, according to case law of the Dutch Supreme Court, is the true intention of the parties and not simply the representation provided in derogation of the facts. Another doctrine that can be invoked is ‘tax qualification’, under which the designation given to certain legal forms under civil law are ignored for the application of the tax law. If these options are unsuccessful, the authorities can invoke the fraus legis doctrine, under which a transaction may be deemed not to exist, ignored or replaced by a similar action. Two conditions must be satisfied for fraus legis to apply: (1) the decisive motive for entering into the legal act is tax evasion; and (2) the method of tax evasion chosen is contrary to the purpose and intent of the law.
ii Controlled foreign corporations
There are no general CFC rules in the Netherlands. However, certain subsidiaries must be valued at fair market value if the following conditions are satisfied:a the shareholder (together with related companies) holds an interest of at least
25 per cent in the subsidiary;b the subsidiary is held as a portfolio investment (typically only the case if the
investment is (predominantly) held to provide a return that is comparable to that provided by genuine portfolio investment activities);
c the subsidiary is low-taxed (indicative threshold rate of 10 per cent); andd 90 per cent or more of the assets of the subsidiary, as well as those of the (in)direct
subsidiaries it owns (if any), in the aggregate consist of low-taxed passive assets.
As a result, profits made by such subsidiaries are taxed in the hands of the Dutch parent company. A credit system applies to avoid double taxation on such profits.
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iii Transfer pricing
In case parties to business transactions should be considered affiliated, the Dutch transfer pricing rules are applicable. Pursuant to the Dutch transfer pricing rules, the profits derived by a company from business transactions between such company and affiliated parties shall be determined as if the terms and conditions underlying these arrangements would have been agreed between independent parties – in other words, would have been entered into under arm’s-length terms and conditions (the arm’s-length principle).
iv Tax clearances and rulings
The Dutch tax authorities are well known for their cooperativeness and the possibility to get certainty in advance. In 2014 the Dutch Secretary of Finance has issued new decrees with respect to the advance tax ruling (ATR) and advance pricing agreement (APA) practice in the Netherlands. Under the 2014 decrees, in order for a Dutch top or intermediate holding company within an international structure to be eligible for an ATR, such holding company will either have to satisfy the Dutch minimum substance requirements or have to be part of a group which has operational activities in the Netherlands or is contemplating to engage in such activities. Under the 2014 decrees, generally an ATR will be valid for a period of four to five years, subject to certain exceptions for longer-term transactions.
In relation to APAs, companies engaged predominantly in intragroup leasing and/or renting transactions also fall within the scope of the definition of financial services company (which definition was previously limited to intragroup financing and licensing companies). Furthermore, the Dutch tax authorities will spontaneously exchange information with the relevant foreign tax authorities if a financial services company that has sought an APA after 13 June 2014 does not meet the Dutch minimum substance requirements and the group of which such company forms part does not have any (plans to engage in) other activities in the Netherlands. Finally, it is explicitly mentioned that an APA will generally be valid for a period of four to five years.
X YEAR IN REVIEW
On 15 September 2015, the Dutch government presented the 2016 Budget. As part thereof a bill was submitted to the Dutch parliament on the implementation of the amendments to the EU Parent-Subsidiary Directive in the Netherlands. It contains two measures: an anti-hybrid measure and the introduction of a general anti-abuse rule. The Dutch implementation of the anti-hybrid measure aims to ensure that the application of the Dutch participation exemption will no longer lead to situations of double non-taxation. This aim is in line with OECD BEPS Action 2. The EU Parent-Subsidiary Directive general anti-abuse rule is designed as a common (EU) minimum anti-abuse rule aimed at preventing misuses of such Directive through arrangements or series of arrangements that are not genuine and do not reflect economic reality. The general anti-abuse rule does not prevent the application of domestic anti-abuse rules or doctrines. As explained in Section VIII.i, supra, in the Netherlands the implementation of the general anti-abuse rule is limited to modifications of two already existing anti-abuse rules: (1) the CIT
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anti-abuse rules for foreign shareholders with a shareholding of 5 per cent or more (i.e., a substantial interest) in a Dutch resident company and (2) the DWT anti-abuse rules for cooperatives.
XI OUTLOOK AND CONCLUSIONS
The OECD presented on 5 October 2015 the final package of ‘measures for a comprehensive, coherent and co-ordinated reform of the international tax rules’ in view of the BEPS-project. In this respect, it is expected that a proposal for an ‘anti-BEPS directive’ is presented at the start of 2016 whereby different action points will be elaborated in a single directive. As president of the Ecofin Council, the Dutch government announced that it will prioritise the anti-BEPS directive. During its EU presidency, the Netherlands also aims to take further steps in increasing transparency as a vital weapon against tax avoidance.
In the coming year the Dutch government will also look into the difference in tax treatment between the NVs and BVs and cooperatives, in Dutch DWT, in view of the increased use of cooperatives in an international context.
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Appendix 1
ABOUT THE AUTHORS
MICHAEL MOLENAARS Stibbe NVAs the head of our tax practice group, and previously a resident partner at our London and New York offices, Michael’s expertise is global. From 1996 through 2002 he worked in Stibbe’s New York office and from 2002 through 2007 in Stibbe’s London office. His specialisms include domestic and international taxation with particular emphasis on M&A and private equity transactions, corporate reorganisations and investment fund structures. Michael guides large multinational companies, financial institutions and private equity firms through every stage of technically complex issues, including contentious issues, ensuring all their needs are met. He is also a frequent speaker on international tax issues and has co-authored several books and articles on international taxation. Michael has a law degree from Amsterdam University and an LLM from New York University. He was admitted to the Amsterdam Bar in 1992 and is partner since 2000.
REINOUT DE BOERStibbe NV Reinout specialises in domestic and international taxation with particular emphasis on mergers and acquisitions, private equity transactions and corporate reorganisations.
Furthermore, he has experience with tax controversy work, including litigation and second opinions, and is a member of Stibbe’s tax controversy practice.
Prior to joining Stibbe in 2006, Reinout worked for over six years as tax policy adviser at the Dutch Ministry of Finance and as tax attaché at the Dutch Permanent Representation to the European Union in Brussels. He holds degrees in tax law and civil law from Leiden University.
About the Authors
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STIBBE NVStrawinskylaan 20011077 ZZ AmsterdamThe NetherlandsTel: +31 20 5460638Fax: +31 20 546 [email protected] [email protected] www.stibbe.com
