Introduction
When thinking of asset or profit shifting, capital protection, and tax benefits (even “tax havens”), the thoughts of many will jump to exotic destinations such as Seychelles, Marshall Islands, Mauritius, Emirates, Cyprus or even Hong Kong. However, what if such benefits could be found in the heart of EUROPE – and at that – completely legally and with a more developed infrastructure to provide support, stability, and longevity? This article will explore the legal advantages and tax benefits of The Netherlands.
In terms of holding structures, the DUTCH HOLDING (DH) regime is a very popular one. In fact, insiders regard it as the most popular one worldwide! This is caused by not one but several factors that make opening a DH company so worthwhile. At the root of factors motivating the set up of a DH is a simple reality that Dutch corporate and tax laws are historically very flexible and create fewer-than-usual complications. This is further supported by the reasonably low cost of incorporation and annual maintenance, which is bundled up with straightforward notary procedures that are easy to coordinate, generally affordable, and completed in a timely manner.
Aside from the aforementioned structural simplicities and benefits, the underlying benefit of the DH is rather simple: It provides an efficient exit route for profits of the DH’s subsidiaries and can thus create a lucrative environment in terms of corporate taxation - regardless of income bracket, despite the regular corporate income tax of 25% when exceeding profits of EUR 200,000 annually. Therefore, if executed optimally, a DH structure could boil down to an effective tax load of roughly 5%! Prominent examples of such intelligent international structures are the IP holdings of Facebook, Google, Amazon, and several other large corporations. Generally, a subsidiary’s taxation of profits is triggered in its country of origin, no matter if it is a direct subsidiary to a parent company or only formally via a corporate structure. Hence, the shareholders may still be taxed in their own country for the income they receive from it.
However, as a central European country that is part of the European Union (EU), the Netherlands has conducted several (90+) tax treaties, allowing not only the DH company but also its owners to benefit from significant taxation reductions. This, although beneficial, is not the full extent of potential in this situation, as these treaties may create legal possibilities to avoid taxation in the home country.
At the center of the DH, the regime is the ability to receive tax-free dividends and capital gains payments, while at the same time being able to deduct expenses. These aspects go to show the attractiveness of the DH company, and how it can be beneficial regardless of the regular corporate tax rate. This will be explored in further detail throughout the chapters of this article, displaying accurately the ways in which a DH can be beneficial in terms of taxation.
Substance Requirements for the DH
Important aspects to factor in when deciding where, when, and how to incorporate a company are very often the substance requirements in the concerned jurisdiction. In the case of a DH, there are almost no substance requirements: The DH does not even require employees and maybe serviced entirely by a trusted company. Such services provide minimum substance for maintaining a DH and could, for example, include management services or providing a registered address. This, simply, would already cover the requirements that exist for holding companies, as far as substance goes.
Dutch Participation Exemption (DPE)
At the core of functionality for the DH company lies the Deelnemingsvrijstelling – the so-called (Dutch) Participation Exemption (DPE). This, in essence, provides tax exemptions from all revenues and earnings such as dividends, capital gains, or royalties arising from shares in any qualified subsidiary. In order for a DH to quality for this, one of the following conditions must be true for the parent DH and subsequent subsidiaries of the DH:
If these conditions are met, the DH qualifies. In order for any DH subsidiary to also qualify for this exemption, it must meet one of the following criteria:
Under these conditions, if met, the DH enjoys full tax exemption on capital gains, dividends, and royalty payments, and the corporate taxation for ‘normal’ profits remains 25% on profits exceeding EUR 200,000.
Upon reviewing this, the reason why the DH company is such an attractive solution becomes apparent. This is not to say that there is no aspect of (calculated) risk: any business has some risk, and anyone claiming there is “zero risks” is not being honest. However, with the above structure existing, the risk is minimized. The DH subsidiary structure adds an extra layer of protection between you and your business activity. For example, if the DH holds more than 95% of shares of the operating subsidiary, it can be considered as a fiscal unit by the tax authorities. This would mean that costs between the two are easily settled, which in turn supports your tax return.
Activities & Benefits of a DH Company
The possible business activities of a DH company are, essentially, limitless. For instance, it may function as the regional HQ, creating the ability to pair activities such as collecting dividends, receiving interests, and even royalties from its subsidiaries, all in one company. Furthermore, this means that it can act as a financial service company while simultaneously still remaining a traditional holding firm.
This, naturally, brings a rich multitude of benefits. Among the most interesting aspects are surely the aforementioned capital gains or the fact that dividends on existing shares in any subsidiaries are tax exempt, provided they qualify. However, other relevant benefits include the following:
In summary, this structure presents two categories of advantages: legal and tax-related advantages.
Legal advantages of the DH company structure involve, but are not limited to:
Tax advantages begin with a significantly lower tax burden overall, enabling reinvestment of profits into the corporate structure, and into the DH and subsidiaries as well. However, the true potential is dependent upon the following:
With its combination of a strong legal base, which provides attractive taxation benefits, the DH company is, therefore, an attractive choice especially for overseas investors, and particularly when it comes to additional asset protection and capital shifting aspects. The aforementioned network of tax treaties can be seen as playing a major role in this.
Tax Treaty Benefits & EU Withholding Tax Exemption
The Netherlands has, over the years, concluded tax treaties with more than 90 countries worldwide, extending far beyond purely the region of Europe. This in turn strengthens the tax situation for the DH in numerous ways. As an example, a DH may avoid capital gains tax in the country of a subsidiary if the (Dutch) shareholder sells his shares. Common tax issues, like dual-residency issues, do not typically arise due to these treaties either. Other aspects of potential conflict such as questions related to the permanent establishment are also avoided. As mentioned previously, there is also a reduction in withholding tax with dividend payments by the DH to the country of the investor, as well as a reduction of withholding tax rates for other sources of income such as interest or royalty payments.
One aspect to note is that these treaties can be overruled by the EU directives. Especially in the case of dividends, the Parent-Subsidiary Directive provides a 0% withholding tax rate for any qualifying corporate dividends paid within the EU. This, naturally, will deviate per country depending on the implementation laws, but nonetheless provides an attractive outlook on the subject of dividends.
For this to be applicable, however, several conditions must, yet again, be met, including:
This ruling retains its attractiveness even to non-EU resident investors. The double-layer holding structures with the utilization of the tax advantages in relation to DH and its subsidiaries offer a much wider variety when it comes than at the end to the dividend taxation towards the beneficial owner. Here it makes sense to pinpoint the example of Google’s “Double Irish with a Dutch Sandwich” structures, but also some updated strategies.
Table: NL Tax Treaties – Country Overview
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Source: Belastingdienst NL (Tax & Customs Administration), Oct 2019
Separate Types of Holding Structures: Dutch Finance Company
A frequently used and reliable tax planning structure is the so-called DUTCH FINANCE COMPANY (DFC). It is enabled through the excellent legal and financial infrastructure which the Netherlands provides. A specific attribute towards further amplifying the capacity for a DFC can be made to the 2010 ruling for “flow-through financing”, which made the DFC an attractive solution. For this to apply, the DFC must possess its own office and own bank account. Further, the equity at risk must be at least 1% of any outstanding loans or exceed EUR 2 Million if it is less than 1%. The DFC is very compatible with foreign tax regimes and resistant to anti-abuse provisions of foreign countries under this ruling. In terms of group financing activities, this particular ruling places the Netherlands at the frontline of the EU. While there is no true “special tax rate”, and the normal income tax for corporations applies, this new ruling provides an effective tax rate of just 5%!
The main type of DFC since the 2010 ruling is the Dutch Group Finance Company (DGFC). A primary activity of the DGFC is to provide loans to subsidiaries, shareholders, and group companies. However, it may also function as a holding or even operating firm. In this structure, effectively 75-80% of the net interest income is excluded from the taxation base. This, as mentioned above, helps reduce the tax rate to 5% de facto! The benefits are therefore apparent. Nonetheless, here is a list of highlights, to name a few:
Naturally, a DFC / DGFC must comply with Dutch tax filing and registration requirements – there is, therefore, increased scrutiny from authorities towards DFCs or other “tax vehicles”. A DFC must register for tax purposes, compose an annual corporate income tax return, obtain tax residency status (if required), manage VAT returns (if required), and manage dividend withholding tax returns (if required). Nonetheless, in combination, these aspects make the DFC a lucrative and viable option for foreign investors.
Separate Types of Holding Structures: Dutch Cooperative
A further relevant and lucrative type of DH structure is the DUTCH COOPERATIVE (DC), or DUTCH COOP. It is an acknowledged form of parent-subsidiary structure which can receive dividends from EU subsidiaries without incurring dividend withholding tax in the origin country of the subsidiary. This makes it a popular international structure choice for no-tax holding companies. The DC, while being subject to Dutch corporate income tax, may be eligible for DPE. DC uses ‘members’ instead of ‘shareholders’. A DC must have at least two members at the time of incorporation and is designed to benefit its members via its activities, such as holding or other holding structure related activities. For example, similarly to the two main company types in the Netherlands, the BV and NV type companies, liability is limited. In this, members can be compared to shareholders, in that they can be entitled to profits of the DC, but do not have capital dividends in shares, so there is no minimum capital – or even equity – requirement. The incorporation is performed via notary deed, however, there is no minimum capital requirement for the incorporation and a bank statement is not required. It must, however, be differentiated between the UA (excluded liability) or the BA (limited liability) – even by name.
Taxation of the DC happens the same way as with all Dutch corporations at the surface level: It is subject to corporate income tax. However, as long as the interest can be allocated to an active business of any member in the DC, there is no dividend withholding tax (otherwise it is 15%). It is worth noting that this 15% applies if the DC (in)directly holds shares in a company where the main purpose is to avoid Dutch dividend withholding tax or foreign tax only. Any dividends received or capital gains on shares in qualifying subsidiaries are effectively tax-exempt.
On the layer of members of a DC, it is worth noting that foreign-based members may be subjected to Dutch corporate or even individual income tax if there is income derived from the membership in the DC, as long as this cannot be allocated to the equity of a business enterprise according to the Dutch Corporate Income Tax Act. This is the case when a non-resident taxpayer owns (in)directly at least 5% of the interest or voting power of the Dutch entity.
The DC may qualify as a company eligible for tax treaty benefits. However, it is not a standard legal form and may thus be scrutinized by tax authorities in the source state and therefore denied treaty benefits. To avoid this, a BV company may be involved as an intermediary between the DC and the foreign company making payments. This behaves similarly to EU withholding tax exemptions for dividends, interest, and royalties.
The DC is, although not a standard and go-to legal form of holding, still an extravagant possibility for a foreign investor.
Concluding Remarks
The Dutch Holding allows foreign investors a flexible and reliable way to optimize their operating structures. Enabled and enhanced by the excellent infrastructure and legal framework the Netherlands has to offer, it provides a solution to an issue that can typically only be taken care of in exotic (and, at times, questionable) “tax havens”.
Situated at the heart of Europe, it combines the use of several (90+) tax treaties with the further attribute of not being classified as a traditional “tax haven”, allowing for prime features such as tax-free dividends and capital gains. Remaining at all times in the legal “green zone”, the Dutch Holding presents itself in our view as not one, but the choice for foreign offshore investors.
