Dutch holding company formation
There has been a lot of recent legislation making the sale of Dutch companies difficult, but using the Dutch BV as an intermediate holding company as part of an international structure is still popular.
Whether you own a subsidiary directly or through a corporate structure, the repatriation of profits may trigger taxation in the country where the subsidiary is located. On top of that, you as a direct shareholder may be taxed in your own country for the income which you receive. Through the application of tax treaties the Dutch holding company offers a significant reduction of the tax at source.
Furthermore, the Dutch holding company creates the possibility to defer or even avoid taxation in your home country.
What does a holding Dutch holding company do?
Unlike in, for example, Spain, there is no specific “holding” company institution in the Netherlands. A holding company is simply a normal company that holds shares on behalf of subsidiaries.
The main purpose of an intermediate holding company is to collect dividends, royalties and interest payments from its subsidiaries, and channel the money to be paid out as dividends to a company in a low tax- regime jurisdiction or simply to pay the final beneficiaries.
The Dutch holding company is also often used in the way that a partnership could be used, simply as a way of sharing a tax vehicle for several partners with different activities. We could include in this category, the “conduit” company, a company purely used to channel money, or dividends or royalty payments.
Main advantages of the Dutch holding company
The tax regime is reasonably favourable, compared to that of a lot of other countries in the EU.
There is no withholding tax on dividends in most cases.
There is no capital gains on the sale of shares.
Tax is calculated after deductions for most costs and expenses.
It is easy to qualify for the holding company exemptions.
There is a large treaty network whose implications are explored below.
As with other EU countries, there is 0% withholding tax on other EU dividends, sent to the Dutch holding company and sent from the company to the beneficiaries.
Before putting a complicated international structure in place, it is possible to get a “ruling” from the Dutch tax authorities.
No foreign currency exchange restrictions.
The Dutch civil code and commercial law framework is business-friendly.
Tax work can be done from anywhere in the world, as long as the practitioner can read Dutch. Unusually, the Dutch tax authorities accept letters sent in non-official languages: most often English and German.
Excellent infra-structure and easy access to the financial markets.
There are now, very strict laws, to prevent abuse of the Netherlands. This means that anyone who incorporates there, has a lot of credibility. This contrasts with a UK company for example, where companies can be incorporated by internet.
Costs are moderate.
The participation “exemption”
The Dutch company must own 5% of the paid-up share capital of the subsidiary concerned.
The shareholding in the subsidiary must be real and permanent.
The subsidiary must be subject to “normal” tax in its country of residence.
The holding company must be a real owner, and the investment should not be like a “portfolio investment”.
A holding lower than 5% can be considered for the participation exemption if for example:
- it is in the same line of business as its other holdings
- the holding in this company is strategic: and not that of a passive investor
The EU Parent-Subsidiary Directive means that the “qualifications” cited above do not apply to most shareholdings of other EU companies. In some cases, it is advisable to get an “advanced tax ruling” to confirm in advance whether exemptions would be conceded in a given structure. People who have tried to get an “advanced tax ruling” on certain issues, state that it is not easy.
Tax reduction of expendes and losses
Losses on subsidiaries are in general not tax deductible, with the exception of “true” liquidation losses and certain depreciation losses in the first five years after acquisition.
Since 1st January 2004 limitations apply for the carry forward or carry back of tax losses by holding/financing companies. In essence, the tax losses which originate from a year in which the main activity of the company is the holding of shares or group financing activities may only be carried back or carried forward to tax years in which the company had or has similar activities. Both the nature of the activities and the volume of the activities (balance sheet ratios) are relevant.
Also as from 1st January 2004 a general thin capitalization provision has been introduced. The limitation only applies to interest (and other funding) expenses originating from qualifying intra-group loans. The maximum debt-equity ratio is 3:1, with a general franchise of € 500,000. Special rules apply for calculating the debt-equity ratio.
One of the main advantages of the Dutch holding company is that from a Dutch perspective there are virtually no substance requirements. The holding does not need to have employees. In most cases, a foreign owned holding company is serviced by a trust company, providing for management and domiciliation.
It is noted that other countries may demand a certain substance in the Netherlands before they allow tax benefits based on tax treaties or EU Directives (anti-abuse legislation).
The EU withholding tax exemption for dividends
The conditions which must be met for applying the 0% rate are:
- The subsidiary has the legal form as described by the Directive.
- The Dutch holding company owns at least 20% of the nominal paid in share capital or under certain conditions 20% of the voting rights of the subsidiary for at least one year.
- The subsidiary is subject to a normal profit tax as described by the Directive.
- The subsidiary has no dual residency status with a country outside the EU.
It is noted that the Directive offers the possibility for Member States to implement anti-abuse provisions.
Most EU member states have incorporated anti-abuse provisions in their domestic legislation to prevent abuse of the EU withholding tax exemptions for dividend. In general these provisions demand:
- true beneficial ownership of the recipient of the income; and/or
- at least 50% ultimate EU shareholder control; and/or
- local substance of the recipient of the income in its home country.
Notes about the “Advanced Tax Ruling” are stated on another page.
Currency exchange restrictions
There are no restrictions for bringing money into the country or repatriating funds from the Netherlands. There are however some reporting requirements.
Dutch corporate law
- Dividends can be paid at the end of the year or, if the proper provisions are included in the articles of incorporation of the BV, during the year as an interim dividend. The general limitation for paying a dividend is that the company has sufficient “free reserves”.
- Equity can be contributed to the company as a payment on shares or as a share premium without the issuance of shares or as a combination of these two. The contribution of share premium and the repayment of share premium can be achieved trough a shareholders decision which allows an easy and quick transit of funds.
- There are no special limitations for foreign shareholders or directors.
A Dutch company is under certain circumstances allowed to keep its books and to calculate its taxable profits in an other currency than the EURO. An election should be made before the foreign currency can be applied as functional currency for corporate tax purposes.
Dutch accounting rules for holding companies
A Dutch holding company is subject to the normal accounting, reporting and registration requirements which apply to BV’s.
Dutch capital tax
The capital tax is due over the amount of cash contributed, or if it concerns a contribution in kind, the fair market value of the assets/liabilities contributed at the date of contribution. The capital tax should ultimately be paid one month after the capital contribution.
Exemptions from the capital registration tax are available if the capital contribution is structured as a qualifying asset merger (assets for shares), share merger (shares for shares) or legal merger. Also capital contributions, which are directly linked to capital contributions, by the Dutch company into subsidiaries (capital in – capital out), may, under certain conditions, qualify for an exemption at the Dutch intermediary level.
It is noted that an exemption should be applied for when filing the capital registration tax return. It is possible – and in certain cases recommended – to obtain an advance tax ruling on the application of an exemption.
Dutch dividend withholding tax
The withholding tax rate can, however, in most cases be reduced by virtue of tax treaties or the EU Parent-Subsidiary Directive. The remaining Dutch withholding tax which is due upon distribution may further be reduced by an indirect tax credit on the basis of Dutch domestic law.
The credit amounts to 3% (three percent) of the gross amount of the dividend paid by the Dutch holding company. This is in fact a refund of the withholding tax due in view of redistribution of qualifying dividend income. Formally the full amount of dividend withholding tax is to be withheld by the Dutch company, but the amount of the credit does not need to be paid to the Dutch tax authorities and thus constitutes a net benefit for the distributing company.
Dutch law does not provide for special rules in case of liquidation. If a Dutch BV is liquidated, the fair market value of its remaining assets and liabilities in excess of the amount of paid in capital, will upon distribution constitute a taxable dividend.
In essence, a Dutch holding company is subject to the normal Dutch VAT regime. The Dutch VAT rules do however in practice only apply to holding companies which are either actively involved with the management of the subsidiary(ies), or which conduct other activities as well.
In general, a passive holding company will not qualify for VAT registration which implies that the holding company:
- cannot obtain a Dutch VAT registration number
- does not need to file VAT returns
- is not eligible for VAT relief
If the holding company does qualify for VAT registration, it will have to file VAT returns. In these returns the VAT charged to the holding company can be claimed back, and the VAT which it becomes due in view of services rendered becomes payable.
A limitation for the VAT refund can apply to the extent the Dutch holding provides VAT exempt services (like providing loans to EU parties).
Dutch withholding tax rates on dividends
The Dutch domestic withholding tax rate for dividend distributions, including interest on certain categories of profit participating loans, is 25%. The rate for inter-company dividends is often reduced, in many cases to 0 percent due to application of tax treaties. Dividends paid to qualifying shareholders in the EU are – by virtue of the EU Parent Subsidiary Directive – exempt from the Dutch dividend withholding tax.
Dutch withholding tax on interest
The Netherlands do not have a withholding tax on genuine interest payments. However, interest payments to a foreign corporations may become subject to Dutch income tax, and sometimes Dutch dividend withholding tax. However, in many cases Dutch tax treaties prevent the Netherlands to exercise this right on taxation. New EU rulings make it very difficult to tax interest payments.
Dutch withholding tax on royalties
There are no withholding tax on royalties – this makes the Netherlands an excellent place to have an intermediate royalties company.
New dividend withholding tax treaties
Tax treaty benefits
The Netherlands have concluded tax treaties with more than 70 countries worldwide. Specifically for holding activities tax treaties may provide the following benefits:
- A reduction of the withholding tax rate on dividends in the country where the subsidiary is established.
- The avoidance of a capital gain tax in the country where the subsidiary is located when the Dutch shareholder sells its shares.
- The avoidance of dual residency issues.
- The avoidance of permanent establishment issues.
- The reduction of withholding taxes in connection with dividend payments to the country where the investor resides.
- A reduction of withholding tax rates for other sources of income, like for instance interest income or royalty income.
Rules from 2005
The normal domestic rate is 25%. Most treaties reduce the withholding tax to 5%. A Portfolio dividend does not qualify as a participation dividend. Withholding tax on portfolio dividends is usually reduced to 15%.
A shareholder qualifying for a reduced rate can request the distribution company to apply for relief at source. A company paying a dividend to a shareholder can submit a request to a competent tax inspector to be released from the obligation to withhold at the full tax rate. In claiming the reduction at source, a shareholder will have to certify that under Netherlands law it is to be considered as the beneficial owner of the dividend.
Complete list of treaties
Please check complete list at the Dutch official website – click HERE.
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