International Newsletter May 2011 - CROP Tax Lawyers, The Netherlands

1. May 2011
International Dutch Tax News
in the Netherlands as well as several plans that
Highlights: the Dutch government is currently developing.
- Decree on dividend WHT Decree on dividend withholding tax
A decree was published that deals with the
allocation of shares to a PE. We have
On 27 January 2011 a Decree dated 15
summarized the main conditions.
January 2011 was published. This Decree
describes various aspects of the Dividend
- Decree on attribution of profits to Withholding Tax Act regarding the allocation of
permanent establishments shares to a permanent establishment („PE‟) in
Also a decree was published with respect to the Netherlands. The Decree applies as of 28
the attribution of profits to a PE. The main January 2011. The Decree clarifies the criteria
aspects are described. used for the allocation of shares to a PE in the
- Document on Dutch tax treaty Netherlands. This allocation affects the
application of the participation exemption and
policy the group taxation regime. Starting point of the
The under-minister of Finance published a Decree is whether shares can be allocated to a
document on the Dutch tax treaty policy. We PE. We refer to the outlines of the Decree
have outlined the headlines. below.
- Tax regulation for the Country
Since the Netherlands Antilles dissolved, a Allocation of shares to a PE means that the PE
tax regulation needed to be drafted for the is authorized to carry out all activities related to
three ‘BES-islands’. the purchase, holding, management and
transfer of the shares of a company. Therefore,
- Tax regulation for the Kingdom
the Decree clarifies that an attribution of
Regulations were published for the
shares to a Dutch PE is only possible if the
application of the tax regulation for Curaçao
following cumulative criteria are met. The
and St. Maarten.
foreign company must carry out their activities
- Proposed bill on deductibility of in the Netherlands by means of a PE, the
exchange losses activities of the PE are undertaken by qualified
The Dutch Council of Ministers agreed that a
personnel and finally a direct relationship
Bill shall be proposed on currency exchange
should exist between the business activities of
results on participations.
the PE and the business activities of the
company the shares of which are allocated to
- Fiscal agenda the PE.
The under-minister of Finance published the
outlines of the desired policies on a.o. CIT. An advance tax ruling (ATR) may be obtained.
We have outlined the main aspects. However the Dutch tax authorities will not
issue an ATR with respect to the allocation of
Introduction the shares to a Dutch PE in case the structure
is set up with the aim to erode the Dutch tax
In the first four months of 2011, several quite basis and the structure merely aims to avoid
interesting developments in the field of dividend withholding tax on Dutch retained
international taxation took place. Below we earnings. This is considered to be the case if
shall briefly describe several Decrees that the shares are transferred to a PE from a
have become public during this period of time Dutch-resident company.
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2. Decree on the attribution of profits to PE allocation of all relevant costs without a profit
mark-up or an allocation based on the arm's
On the same date as the Decree on dividend length principle.
withholding tax (see above), a Decree of was
published on the attribution of profits to a PE. As regards the allocation of intangible and
The Decree, which also applies as of 28 tangible fixed assets, the Decree clarifies that
January 2011, is the Dutch elaboration of the the decisive criterion is which part of a
OECD report on the allocation of profits to a company takes the active decision concerning
PE and the draft content of the 2010 update of the acceptance and management of risks, all
the OECD Model Convention (further: the 2010 based on the "significant people functions".
MC), containing a new Art. 7. The PE is to be considered the economic
owner of tangible fixed assets, which are put at
The Decree indicates that the Netherlands will the disposal of a PE on a permanent basis. If
apply the capital allocation approach for the such assets are only put at the disposal of the
attribution of equity and debt to a PE. This PE temporarily, the PE is regarded as the
approach attributes the free capital to a PE in lessee of these assets.
accordance with the assets and risks to be
attributed to the PE on the basis of a functional With respect to financial transactions, internal
analysis. Thin cap rules may become interest dealings may arise in the case of
applicable in case a company is not financed treasury activities, which constitute "significant
on an arm's length basis. The approach people functions". Note that the Decree does
chosen to determine which costs are to be not consider all treasury functions to result in
allocated (the fungibility approach) will result in interest dealings. This, because the
a portion of the whole enterprise's actual compensation could also consist of a deemed
interest expenses paid to third parties to be recharging of costs with a profit mark-up.
allocated to a PE. Under the Decree, interest costs or interest
income will not be recognized, if the internal
In order to avoid double taxation, if another debts or debt-claims result from an internal
country applies another method of attribution, supply of goods or services.
the Netherlands may start a mutual agreement
procedure under the relevant tax treaty. If, after If the PE exercises the "significant people
the adoption of the 2010 MC, the „old‟ (pre-) functions" with respect to the accepting and
2010 Art. 7 applies, the Netherlands will follow management of risks, financial assets may be
the approach of the country were the PE is attributable to the PE. However, if the financial
established, provided three conditions are met. assets are kept for a specific reason, e.g. a
The first condition is that the different treatment company take-over or a dividend distribution,
is a result of domestic legislation. Secondly, the financial assets are not attributable to the
the country where the PE is located applies PE if the decision to use the financial assets
another method recognized by the OECD, and, for the purposes as described before, was not
finally, that approach results in that particular taken by the PE. No profit level of a dependent
case in an arm's length attribution. agent should be attributed to a PE, because
the agent should receive an arm's length
Risk allocation to a PE compensation.
The risk allocation to a PE should be similar to The Decree provides that an ATR can be
the allocation of risks to an unrelated company. requested with respect to the profit attribution
In the Decree, various applications to various to a PE.
services are described.
Document on Dutch tax treaty policy
For group services the Netherlands shall apply
a cost-plus method once Art. 7 of the 2010 MC On 11 February 2011, the Dutch Ministry of
and the related commentary is adopted. As Finance issued a document on the Dutch tax
regards tax treaties based on the pre-2010 treaty policy (hereafter referred to as “the
MC, the Netherlands will allow both an Document”). The background of the Document
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3. shows the various significant political and finally the use of the OECD Model as a starting
economic changes, including the increased point, with tailor-made proposals if and when
international fiscal transparency and exchange necessary. Additionally, the instruments to
of information, that have been on the upscale reach these goals are described, including
since the publication of the previous - 1998 - methods to avoid double taxation, OECD
Policy Document, Also, the European and developments, the impact of EU developments
international developments as well as the and the prevention of treaty abuse.
domestic tax developments and the OECD
developments and an increasing focus on the Dutch preferences under the new Document
avoidance of abuse and the subsequent rise in
the use of anti-abuse clauses have to be Briefly summarized, the Dutch positions are
considered. the following: in the first place, the Netherlands
will continue to prefer the use of the place of
In the Document the policy framework for the effective management as tie-breaker rule.
coming years is described. Also, the Document Further, the Netherlands wants to solve cases
contains general considerations with respect to of double (non-) taxation resulting from
the choice of treaty partners, a priority list with classification differences of hybrid entities by
respect to future treaty partners, the use of mutual agreement procedures. As regards
anti-abuse provisions and entitlement to treaty funds for common account, the Netherlands
benefits. Finally, the Document states on which aims to sign competent authority agreements.
points the Dutch tax treaty policy deviates from Further, as regards the attribution of profits to a
the Model and Policy Documents of 1987, PE, a PE-definition is preferred with a limited
1996 and 1998. scope and including the new article 7 of the
OECD Model Convention. The Dutch are keen
The Document clearly states that new tax to include specific anti-abuse provisions to
treaties should contribute to the maintenance combat avoidance of dividend withholding tax
and strengthening of an attractive investment as well as avoidance of withholding taxes on
climate for international business on one hand interest and royalties levied by treaty partners.
and combating of tax fraud on the other hand.
As regards negotiations for new tax treaties, Also, it is preferred to include a clause stating
the focus will be on emerging economies and that buying back shares and winding-up
developing countries. The Netherlands intends proceeds would qualify as dividend income. As
to contribute to the enhancement of the tax regards capital gains, resident-state taxation is
systems and the improvement of the preferred; however, focus is also on keeping
functioning of the tax administrations for taxation rights as regards gains from a
developing countries. substantial shareholding. As regards taxation
of pension rights and annuities, the
The Document also contains a schedule to be Netherlands prefers a source-state taxation if
used when deciding whether the Netherlands the build-up of the pension/annuity was fiscally
would like to negotiate a full tax treaty, a tax facilitated by granting a deduction for the
treaty with a limited scope, or a tax information payment of the premiums. If a treaty contains a
exchange agreement. It appears from the clause that refers to a domestic anti-abuse
accompanying letter to the Document that provision, a mutual agreement procedure is
because the Netherlands in the near future will preferable for the Netherlands. In order to
mainly negotiate with non-OECD countries realize capital import neutrality, the
having tax systems that deviate significantly Netherlands aims to terminate present tax
from the Dutch system, the Dutch standard sparing credits and is not willing to include new
model shall become less relevant. ones in tax treaties. Automatic and
spontaneous exchange of information is
In the Document once again aspects of the desirable. A “most favored nation”-clause is not
treaty policy that are vital to the Netherlands to be inserted in tax treaties.
are explained, such as the inclusion of an
extensive exchange of information provision,
the inclusion of anti-abuse provisions, and
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4. Tax regulation for the Country A claim for a refund must be made within 3
years after the end of the calendar year in
As of October 10, 2010, the Netherlands which the withholding tax is withheld. An
Antilles have been dissolved. Instead, currently exemption or refund from withholding tax in
3 countries within the Kingdom - besides the respect of participation dividends must be
European part - exist: Curaçao, Aruba and Sint claimed by submittance of forms.
Maarten. The other 3 islands (Bonaire, Sint
Eustatius and Saba) have opted to become a Council of ministers agrees on Bill on the
part of the Netherlands. As such, they have deductibility of currency loss exchanges on
been transformed into communities within the participations
Netherlands.
On April 8, last, a press release was issued, in
Although they have become part of the which it was stated that the Dutch council of
“country” the Netherlands, they still have their ministers agreed that a Bill shall be proposed
own tax system. As a result of two tax to Parliament on currency exchange results on
systems, there is a risk of double or non- participations.
taxation. Therefore additional legislation was
required to address this issue and to avoid Under current Dutch law, currency exchange
such situations to the largest extent possible. results on participations fall within the scope of
the participation exemption and thus cannot be
The Tax regulation for the Country, which is taken into account. At present, there are
comparable with the tax regulation for the several tax payers that – on the basis of the
Kingdom (that is and remains in place as verdict of the European Court of Justice in the
regards the other 3 “countries”), is taking up case C-293/06 (Deutsche Shell) – take the
that challenge. It contains attribution opinion that currency exchange losses can be
regulations for real estate, business income, deducted from the fiscal result.
dividends and capital gains. Due to the specific
situation (1 country with 2 tax regimes) the The Bill to be proposed shall aim at realizing
outcomes sometimes differ from the outcome deductibility from the fiscal result for currency
that would result under the application of Dutch exchange losses on participations and taxation
tax treaties. of currency exchange profits on participations.
Thus, the participation exemption shall not be
In this regulation, no rules have been applicable to these results Also, the Bill aims
incorporated for gift- and inheritance tax. Thus, to avoid that currency exchange losses shall
Dutch regulations - including a 10-years fiction under certain circumstances be deductible
after emigration from the Netherlands – remain twice (once as currency exchange result and
effective. once as part of a possible winding-up loss).
Finally, the Bill shall propose to not apply the
Tax Regulation for the Kingdom – participation exemption on currency exchange
implementing regulations in respect of results made on a participation that has been
Curaçao and St. Maarten published. transferred within the group.
In the Official Gazette of 8 March 2001, the The Bill shall be applicable to currency
implementing regulations concerning the exchange results that are realized after the
application of the Tax Regulation for the date of the press release. The proposal of the
Kingdom (TRK) in respect of Curaçao and St. Bill shall be presented to the Council of State
Maarten were published. The regulations deal (Raad van State, an advisory council to the
with the formalities that Curaçao and St. government) for advice, after which – and after
Maarten companies must observe to obtain an possible adjustments – the Bill shall be
exemption or refund of Netherlands presented to Parliament. If Parliamental
withholding tax on "participation dividends" approval is granted, this Bill is enacted as of
(note that in that case a participation of at least April 8, 2011 17:00 pm.
25% is required).
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5. Fiscal agenda of April 14, 2011 EUR 500,000 of interest paid would still be
deductible. The amount of non-deductible
It must have been busy times for the Dutch interest is to be determined on the basis of a
under-Minister of Finance, as he also certain debt-to-equity ratio that is still to be
published on April 14, last, his “Fiscal Agenda”. determined. Under this measure, this would
This Fiscal Agenda shows the outlines of the mean that also interest payable to third parties
desired policies on, a.o. corporate income tax would not be deductible by the fiscal unity.
issues.
It is indicated that the Bill containing these
Aim of the Agenda is to provide certainty which proposals shall be presented in due course. In
is vital for the tax climate on businesses. In the mean time, the Dutch tax authorities are to
that respect he aims at ending the discussion investigate the issue of financing that is used
between the different fiscal treatment between to acquire participations that remain outside
loans and equity: the remunerations on loans the fiscal unity of which the acquiring company
(interest) are in principle tax-deductible, forms part. At present it remains vague
whereas the remuneration on capital whether such loans may be targeted for
(dividends) in principle are tax-exempt. The limitation of interest deductibility.
Agenda describes in this respect three
corporate income tax measures. It is planned What forms no part of the Agenda, but is under
that they enter into force – after parliamentary investigation by the tax authorities at present,
approval – in 2012. The first measure is a is a possible amendment to the corporate
reduction in the corporate income tax rate from income tax regime for foreign investment
25% to 24%. companies that hold a substantial interest in a
Dutch company, but the Agenda does not
Secondly, the under-Minister aims to change further provide any suggestions on the way to
the tax regime for permanent establishments deal with this matter.
(PE‟s). He is considering to change the regime
into a tax-exempt regime. Losses may not be Summarizing
offset against profits realized by the company
of which the PE forms part. Possibly an All in all quite some developments are taking
exception shall be made for “final” losses, in place or shall in the near future take place in
case the PE is wound up or sold to a third the Netherlands. CROP tax advisors shall
party. On the other side, profits of a foreign PE update you in the coming newsletters on these
would be tax-exempt, except for profits that are topics might developments occur.
generated by a passive PE that is lowly taxed.
In that case, a credit system should apply. We
assume that most readers that are a bit familiar
with Dutch tax law recognize the features of For information please contact:
the Dutch participation exemption in the
proposed regulation. Marco Visser or Frans Tempel
T: +31 33 495 25 00 T: +31 33 463 57 27
E: visser@crop.nl E: ftempel@crop.nl
Finally - and somewhat astonishing when one
considers that there have been many calls for
a reduction of the overkill of rules on the Disclaimer: CROP registeraccountants and CROP belastingadviseurs
deductibility of interest - a further limitation on makes no representation nor gives any warranty (either express or
implied) as to the completeness or accuracy of this publication. CROP
interest-deductibility is planned on interest registeraccountants and CROP belastingadviseurs is not liable for the
information in this publication or consequences of the use of this
payable by an acquiring holding companies publication. CROP registeraccountants and CROP belastingadviseurs will
that forms subsequently a fiscal unity with the not be liable for any direct or consequential damages arising from the use
of the information contained in this publication.
company that has been newly acquired. This
measure aims to ensure that the interest on
the acquisition loan is not to be offset against
the profits of the newly acquired company.
Under this measure, a maximum amount of
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