Double-Taxation-Agreement Havens: Double Your Pleasure... A U.S. taxpayer who pays tax on his investment returns as part of his personal income need not worry about the U.S. withholding tax. This applies only to U.S.-originated incomes--dividends, rent, interest on bonds (but not that on bank deposits), royalties--that are paid to a foreign legal entity. However, once one alienates his investment portfolio to such a foreign entity, either a corporation or a trust, he trades off the usual income tax for the 30 percent withholding tax, paid on the income at its U.S. source before it reaches the haven entity. The withholding tax is not unqualified. A citizen of a foreign country would hardly be interested in investing in the United States if he had to pay such a tax on top of taxes imposed by his home country. Hence, the U.S. government, interested in encouraging foreigners to invest in America, has double-taxation agreements with many other nations. Such agreements usually include the following provisions: (1) Reduction of the U.S. withholding tax from 30 percent to 15 and sometimes 5 percent (if the foreign corporation involved owns 95 percent of the stock of the U.S. company from which it receives dividends). (2) Acceptance of the U.S. withholding tax as a credit against local tax liabilities. In other words, instead of taxing the 85 percent of the original dividend that remains after deducting U.S. withholding tax as if it were a gross income, the foreign investor's country treats the full amount of the original income as gross income, applies the local income tax, and reduces the tax due by the amount already paid to the United States. (3) A citizen of one of the countries party to the agreement who earns all his income in the other can pick which one he wants to pay his taxes to. (4) An agreement to exchange information to facilitate the capture of tax evaders. Most double-taxation agreements are not of interest to someone seeking a tax haven. They are with highly industrialized, highly taxed countries. Investments in such havens bear a total tax burden equal to the sum of the reduced U.S. withholding tax (usually 5 percent) and the local tax on what remains from the U.S.-source income after deduction of the withholding tax or on the full original income with the U.S. tax accepted as a credit. If this sum is less than 30 percent, a corporation or trust in such a country is preferable to a "pure" haven entity. With these thoughts firmly in mind, let us now consider the double-taxation havens. THE NETHERLANDS. Holland, originally referring only to the two western provinces of North and South Holland which lay between the Rhine and the Zuider Zee, is now in general use as the popular name for the Kingdom of the Netherlands, and the two are used interchangeably. The people are known as Dutch. This small spit of land, no more than a pinpoint on the globe, lies to the east of England across the North Sea, and is bounded by West Germany to the east and southeast and by Belgium to the south. The land is very low, and at one time in history was in fact known as The Low Countries. Half of the land itself is below sea level. It lies across the mouth of the Rhine and is crisscrossed by two large European rivers, the Meuse and Scheldt, and by its famous canals, giving it the nickname of "Venice of the North." The picture painted indelibly on most everyone's mind of Holland as the land of windmills will soon be just that--an imagined scenery--for although there are still colorful windmills whose arms flash against the sky, most water pumping work is now done by modern stations using electric power. The hazards of the sea, factualized and fictionalized, have made Holland the land of storied seafarers, barge men, and builders of dikes. Indeed, it is water that made Holland the gateway to Europe, providing the main source of the country's present wealth, and the cause, through directing the warm Gulf Stream along her coasts, of the country's mild climate. The Kingdom of the Netherlands is a constitutional monarchy with democratic parliamentary government. By this means, the monarch, government, and parliament together rule the country. The kingdom includes the Netherlands Antilles which has its own tax laws and is not included in this discussion. The Netherlands is a highly industrialized nation with little reliance on agricultural products to bolster its GNP. There is some oil production but of greater importance recently is the discovery of natural gas. The Dutch economic system might best be described as a social welfare system similar to that of Great Britain without being beset, at present at least, by the industrial problems afflicting Britain. The Netherlands, regardless of its own internal tax structure which compares to that of other heavily taxed nations, has nevertheless established itself as a tax haven through legislative action allowing substantial tax benefits to companies formed in the Netherlands for specific business purposes. The Dutch political system is a cumbersome affair and changes within the system are difficult or impossible to achieve. Executives of a tax haven company should be well advised in advance to so design the operation that it falls within the structure outlines of Holland's tax haven legislation and avoids most internal tax liability. Tax exemptions are provided within the Netherlands on specific qualifying activities, and there are treaties maintained by the government to avoid double taxation. Generally, the tax treaties will accomplish three reductions: -- Reduce the normal Netherlands withholding rate of 25 percent on dividends paid to recipients in the other country to a lesser rate, i.e., 15 percent (except in the cases of Czechoslovakia, Hungary, Ireland, Israel, Italy, Surinam, and Thailand, where the rates may be either more or less than 15 percent), with an additional provision that if the company receiving the dividend has a minimum capital participation--or in some cases, voting stock--of 25 percent in the dividend-paying company (with the exclusion of Canada and Italy and with an increase to 50 percent in the case of Spain), the withholding rate will be reduced even more. In respect to the United States and United Kingdom, if the recipient company holds 25 percent of the stock in the Netherlands company, the withholding rate is reduced to 5 percent. -- Reduce the withholding tax on interest which a Netherlands-based finance subsidiary of a foreign corporation receives. The withholding rate in the case of the United Kingdom which would normally be 35 percent of the gross, is reduced to 0 percent of the gross, with the net interest income being subject to normal Netherlands corporate tax rate. The United States company, which would normally pay a withholding tax of 30 percent of the gross has the tax reduced to 0 percent of the gross, with the net interest income being subject to the usual Netherlands corporate tax rate. -- Reduce the withholding tax rate on foreign source dividends received by the Netherlands participating company, with an added provision that if the Netherlands company participates in the paying company's capital (or in some cases, voting stock) to the extent of 25 percent (or 75 percent in the case of a company resident in Italy, and 50 percent in the case of a company resident in Spain), there will be a further withholding tax rate deduction. Dividends received from the United Kingdom are not affected by these provisions, since the United Kingdom does not have a withholding tax on dividends paid. In regards to the United States, the normal 30 percent withholding rate will be reduced to 15 percent through the treaty, with an added provision that if the Netherlands company participates in the dividend-paying company to the extent of 25 percent, the withholding rate will be reduced to 5 percent. All percentage figures apply to gross amounts. There are three types of foreign companies which can be benefited by the Netherlands tax haven legislation. These are the finance subsidiary, the holding company, and the participating company. The Finance Subsidiary. The Netherlands-based finance subsidiary has as its primary activity the financing of the operation of the foreign parent or other closely related companies through the use of Euro-currency loans. The Central Bank of the Netherlands which issues licenses for the formation of companies formed on behalf of or by non resident legal entities will under certain conditions consider the corporation to be a subsidiary if only 50 percent, or more, of its shares are owned by the foreign parent. Finance subsidiaries have the following restrictions placed on them by the Central Bank: funds may not be borrowed from residents of the Netherlands; and funds cannot be kept in a bank account in the name of the subsidiary. Such funds include interest and repayments by borrowers. The finance subsidiary will escape any restrictions on its debt-to-equity ratio as long as the finance subsidiary borrows funds from and relends funds to nonresident affiliate companies. But if funds are borrowed from nonaffiliated lenders to be re-lent to a nonresident affiliate company, a license will be required from the Central Bank, subject to the following conditions: -- Such borrowed funds, including interest and repayments received, must remain outside the Netherlands. In order to open a bank account outside the Netherlands, the finance subsidiary is required to obtain a special license. -- The finance subsidiary must hold an issued and paid up share capital of at least Dfl 1 million (the Dfl [Dutch guilder] equals approximately 1/3 1$U.S.). -- The finance subsidiary may not maintain a debt-to equity ratio which exceeds 10 to 1. -- Paid-up capital cannot be used by the finance subsidiary for any purpose, but either must be kept as liquid assets or placed in a deposit account. It should be noted that the four preceding restrictions are subject to favorable adjustment if the balance total of the parent company amounts to Dfl 1 billion, and if it guarantees unconditionally the loans taken up by the subsidiary. Interest paid on bonds, notes, and other debt obligations are not subject to any Netherlands withholding tax. When one adds this benefit to the treaty effecting avoidance of double taxation, substantial tax savings can be realized by the Netherlands finance subsidiary. Also, deductible as an expense against the profits of the company is interest paid by the finance subsidiary, otherwise liable to the normal corporate tax rate after allowable deductions. The withholding tax rate on dividends paid by the Netherlands-based finance subsidiary to a foreign entity is 25 percent, unless subject to a tax treaty. Holding Companies. To qualify as a holding company for Netherlands tax purposes, the company must be a corporation with virtually no assets other than a majority of shares in other companies. It must also fulfill an essential function within the operating structure of the organization to which it belongs. The Netherlands holding company's chief tax benefit is an exemption from corporate tax on dividends received by the company. Moreover, if the source of dividends paid to the Netherlands company is a country involved in a tax treaty with the Netherlands, there will be a decrease of the withholding tax at its source. The major consideration, as regards corporate income tax, is not the qualification as holding company, but the qualification as "minimum minority-participation" company. This is the Netherlands participating company whose tax benefits are outlined as follows: The Participating Company. To qualify for this category, the Netherlands corporation must own at least 5 percent of the outstanding shares of the capital stock of another corporation. For Netherlands tax purposes, the other corporation is called the subordinate company. To be exempt from corporate income tax on dividends and profits received, the participating company must, in addition to its minimum participation qualifications, meet the following conditions: -- The subordinated company must be taxed on its profits in the country where it was established. -- Neither the Netherlands participating company nor the subordinated company may meet the Netherlands definition of investment company. -- The participating company may not participate in the capital stock of the subordinated company for the purpose of dividend stripping. -- The participating company may be required to accept a nominal management fee from the foreign parent, which would be subject to the normal Netherlands corporate tax. -- If the participating company's scope of ordinary business is to own shares of capital stock of other companies, or if acquisition of such stock is for public interest, not all of the above requirements need be met for the Netherlands company to qualify as a "minimum minority participation" company. A participating company has two acceptable ways to finance participation in the capital stock of other companies. These are (1) through use of equity capital, and (2) through use of borrowed funds. Interest and other expenses attendant upon borrowed funds used for capital participation in other companies are not considered a deductible expense for Netherlands corporate income tax purposes. On the other hand, the interest on borrowed funds that are re-lent is a deductible expense. If, through the alienation of capital stock of a subordinated company, the participating company realizes capital gains, such gains will be exempted from taxation. However, if capital losses are incurred in such transactions, such losses are not considered deductible expenses for corporate income tax purposes unless the losses are in connection with the dissolution and liquidation of the subordinated company. There are two types of Netherlands companies under which a corporation can be organized. One is a Naamloze Vennootschap (N.V.), which is like the United States corporation or the public limited liability company in the United Kingdom. The other type is the Besloten Vennootschap Met Beperkte Aansparkelijkheid (B.V.), which can be compared to the private company in the United Kingdom. Before a Netherlands corporation can be established by a nonresident individual or legal entity, a special license must be obtained from the Central Bank of the Netherlands, and until the license is issued no transactions whatsoever can take place. Regarding exchange control, the bank has a liberal policy of allowing current payments in both directions, as well as stock exchange transactions, free of any fee. There are banks and brokers officially authorized by the Central Bank through which payments or transactions must be channeled. Generally, the bank will issue a license in almost every case. However, there are instances wherein the license is issued subject to certain conditions, which are a corollary of the objects of the corporation. Corporate Tax Rate. Corporate tax is levied upon both resident and non-resident taxpayers. Companies are considered as resident if they are effectively managed and controlled in the Netherlands. Corporate taxpayers are deemed to be resident when incorporated under Dutch civil law, even if actual management is abroad. Dual residence of a company is normally avoided by tax treaty provisions in favor of the country where the company is effectively managed and controlled. Resident corporate taxpayers are subject to Dutch tax on their worldwide income. Such companies may also be subject to foreign corporate tax on their profits earned outside the Netherlands. To avoid double taxation, Dutch tax law contains various rules that exempt income which has already been taxed or is subject to taxation in another country. This avoidance of double taxation is provided for in the participation exemption, bilateral tax treaties, or the Unilateral Decree. Non-resident corporate taxpayers are those entities not established in the Netherlands, whose capital is wholly or partly derived from shares. Non-resident corporate taxpayers are only subject to tax on their Dutch-source earned income: (1) business income from a permanent establishment, and (2) income from immovable property located in the Netherlands. The profits of a Dutch permanent establishment are determined following Dutch rules, as if it were an independent enterprise. Interest or similar charges (e.g. royalties) from the head office are non-deductible, unless it can be proved that these charges are based upon transactions made by the head office specifically on behalf of the permanent establishment. A deduction from taxable profit is allowed for head office expenses which can be attributed to the activities of the permanent establishment. Dutch corporate tax law, in general, does not distinguish between capital or other gains. All gains are in principle part of the taxable income for the year during which they are generated. Annual taxable income should be calculated in accordance with sound business practice and in a consistent manner. A change in accounting method is allowed if and insofar it conforms with generally accepted accounting principles. These rather general tax law provisions allow Dutch tax authorities to apply a pragmatic attitude toward taxable profit calculations. It is common practice to negotiate advance agreements regarding elements of the method used to calculate taxable profit, such as the moment of profit recognition, intercompany transfer pricing and intercompany cost-sharing arrangements. Thus, considerable freedom exists in adopting a suitable system as long as it is in accordance with standard methods of accounting. Dutch corporations, including holding companies, enjoy participation exemption, which means they are exempt from Dutch corporate tax on "benefits" connected with certain qualifying shareholdings. "Benefits" include cash dividends, dividends in kind, bonus shares, "hidden" profit distributions and capital gains realized on disposal of the shareholding. A capital loss resulting from disposal of a shareholding is similarly non-deductible (although a loss upon liquidation of a subsidiary is deductible). The fact that capital gains are exempted by the participation exemption facilitates reorganization of a group structure and thus increases the flexibility of the group as a whole. To qualify for the participation exemption, the following conditions for a shareholding must be met: -- The participation must represent at least 5 percent of the nominal paid-up capital of the subsidiary. -- The shares must have been held since the beginning of the accounting year. -- The subsidiary company should not be a Dutch qualified investment company; this company itself is exempt from corporate tax. If the subsidiary is foreign, some additional conditions apply: -- The subsidiary must be subject to a foreign profits tax. The relative tax percentage levied is unimportant. Also, the existence of a tax holiday does not affect availability of the exemption. -- The shareholding of foreign subsidiaries cannot be a mere "portfolio investment." Advance rulings can be obtained from the Dutch tax authorities which establish this fact. Before October 1, 1988, taxable profit was subject to a flat corporate rate of 42 percent. Following recent international developments, a reduced corporate tax rate became effective on October 1, 1988. For taxable profit up to Dfl 250.000,- a 40 percent rate will be applied. Taxable profit in excess of Dfl. 250.000,- will be subject to a reduced rate of 35 percent. Dutch tax law also has provision for loss carry over, allowing an eight year carry forward and three year carry back of losses. However, losses incurred during the first six years of a company's existence can be carried forward indefinitely. Losses are offset in the sequence in which they occur, with the provision that normal (i.e. non-start up) losses are compensated first. Losses are first offset against the oldest profits. The avoidance of double taxation by treaty or Unilateral Decree normally does not take the form of a foreign tax credit against Dutch tax on worldwide income. Instead, an exemption is granted for Dutch tax on the foreign source income, even if the foreign tax is very low or nonexistent. Contrary to most treaties, however, the basic principle applied in the Unilateral Decree is that income is exempt for Dutch tax purposes only if such income is subject to a tax on income by the foreign State, regardless of the tax rate applicable in such a State, or that no foreign tax has actually been paid. Corporate Tax: Subsidiary Versus Branch. In considering the establishment of a company in the Netherlands, one is well advised to weigh the advantages and disadvantages of proceeding either with a subsidiary or a branch. While in general, the subsidiary is more expensive, complicated and time-consuming, the liability of shareholders is limited to the extent of their capital contribution, and, unless otherwise agreed to by contract, the foreign parent company is not responsible for the debts, obligations and liabilities of the Dutch subsidiary. Moreover, Dutch nationals often prefer dealing with a Dutch subsidiary instead of a foreign branch office. Major advantages of the branch are that it is relatively easy to start and its costs are usually lower than a subsidiary. However, the foreign company is fully responsible for any debts, obligations and liabilities incurred by the branch. In determining whether to establish a subsidiary or branch, potential tax implications should also be examined. Bilateral tax treaties concluded by the Netherlands generally provide that withholding tax on dividends from a Dutch subsidiary to its foreign parent is in many cases 5 percent (see Table 1). Assuming that the 5 percent rate applies, total effective Dutch income tax on remitted earnings would approximate 38.5 percent. In the absence of a treaty the dividend withholding tax rate is 25 percent. A Dutch branch of a foreign company is also subject to tax at 35 percent. However, no withholding tax on remitted earnings is due. Therefore, the initial advantage of a branch is that the total Dutch effective income tax rate on remitted earnings can be limited to 35 percent rather than 38.5 percent. If initial losses are anticipated, the Dutch branch of a foreign company has another advantage. For Dutch tax purposes these losses can be compensated with future Dutch profits. For foreign tax purposes, the losses can often be utilized by the head office in its current year tax return. Use of a Dutch branch may not be advantageous in situations where it is anticipated that the operation will initially break even, or both the Dutch branch and the foreign head office are profitable as the branch income is subject to current taxation in the foreign country. However, in many cases, the Dutch source income will be tax exempt in the other country. Alternatively, use of a Dutch subsidiary may avoid or defer foreign taxation simply by not paying dividends to the foreign parent company and reinvesting the Dutch subsidiary's earnings. Still another advantage of a Dutch subsidiary is the amortization of intangible assets (e.g. technology) over its economic life, generally in 5-10 years. If intangible assets are transferred (and contributed as equity) by the parent company to its Dutch subsidiary, such assets can be amortized for Dutch tax purposes. Note that a 1 percent Netherlands capital tax is due on the value of the capital contribution. If intangibles are transferred in exchange for shares in the Dutch subsidiary, the parent company is often not subject to taxation in its home country upon receipt of such shares. Thus, depending on dividend policy, a tax deferral of up to 35 percent of the intangible asset value can be achieved. Issues concerning the amortization of intangible assets require justification of the amounts involved, and should be discussed with the tax inspector. The Netherlands currently enjoys more than 40 bilateral income tax treaties with the industrial and developing nations throughout the world. A list of treaties and the applicable withholding tax rates or dividends can be found in Table 1. Corporate Taxation of Regional Headquarters, Service Companies and Branches. Regional headquarters are generally established to supervise the operations of European and/or Middle East subsidiaries. Typical activities of regional headquarters include: sales coordination, administration and accounting, advertising, and public relations as well as holding shares in subsidiaries, group financing and licensing. As the activities of such entities are usually only of an administrative and supporting nature (as opposed to profit-generating activities like actual sales), the Dutch tax authorities are generally willing to issue advance rulings pursuant to which the taxable profit of such a company or branch is fixed on a cost plus basis (between 0 percent and 25 percent of the Dutch operational cost such as salaries, leasing of office space and general office expenses). These rulings may be granted for a period of three to five years, and may be extended for additional periods unless the circumstances have changed materially. Ordinarily, a subsidiary or branch established in the Netherlands, which carries on supporting, preparatory and auxiliary activities for one or more foreign affiliated enterprises, would be liable to taxation at typical rates and conditions. Examples of such auxiliary activities include: administrative functions at the executive level, the keeping of an area to store or display goods, purchasing, advertising, the collecting and supplying of information, and the carrying out of scientific research. However, the Ministry of Finance has issued a regulation concerning the tax treatment of intercompany services performed in the Netherlands by or on behalf of multinational groups. Based upon this regulation, it may sound attractive for (from a corporate tax standpoint) a nonresident company to incorporate a Dutch subsidiary or open a Dutch branch to perform such services. The regulation indicates that where a business, liable to taxation in the Netherlands, carries out transactions with affiliated businesses, the conditions agreed upon with the affiliated business should be in agreement with the arm's length principle. However, the primary yardstick for applying the arm's length principle, comparative market price, is lacking in many cases. Where it is inapplicable or where it cannot be unconditionally applied, the preferred methods for determining the profit of activities as described above is the so-called "cost-plus" method. An advance ruling can be negotiated with the Dutch tax inspector establishing the terms for application of the cost-plus method. As an example of arrangements for which a comparative market price is unavailable, the regulation specifically mentions cash management. In this case, cash management might vary from centralized bookkeeping and administrative activities to the actual management and application of all liquid resources of a group and the preparation and determination of the relevant policy management of currency exchange risks, centralization of insurance and reinsurance activities (not including underwriting activities). For the activities discussed above, the costs which form the basis for a ruling are generally all costs directly connected to the activity performed by the Dutch business, including cost of accommodation, office costs, salaries and reimbursement of employment expenses, an arm's length return on equity as well as interest expense on borrowed funds. The Ministry of Finance has stated that activities of a supporting, preparatory or auxiliary nature are to be taxed at a 5 percent cost-plus basis. Should more than insignificant business risks be attached to activities performed in the Netherlands, a profit mark-up of more than 5 percent may be required by the tax inspector. According to these rulings, any profit actually attributed to the Netherlands' activity which exceeds the cost-plus profit will normally be taxable as well. This means, for instance, that interest income received by the Dutch entity will be taxable at the normal rate, and that an actual profit markup exceeding 5 percent will not be tax exempt. It should be noted that a Dutch permanent establishment has no treaty protection with regard to income received from sources in third countries (not being the country where the head office is situated). However, most tax treaties concluded by the Netherlands provide that a branch for tax purposes shall not be deemed to exist (and thus no liability for Dutch income tax even on a cost-plus basis), if: -- Facilities are used for the sole purpose of warehousing, display or delivery of goods or merchandise. -- A stock of goods or merchandise is maintained for the sole purpose of warehousing, display or shipment, processing or conversion. -- A fixed place of business is maintained for the sole purpose of purchasing goods, collecting information, advertising, providing information, or similar activities for the benefit of the foreign head office, which are of a preparatory or supporting nature. The Use of Dutch Intermediate Companies for Holding, Financing and Licensing Activities. The Netherlands is frequently used as a location for intermediate holding companies, principally because of the participation exemption (see above), but also because it can be advantageous to route finance and royalty activities through a Dutch company. These activities can also be combined in one company. The Netherlands has a more extensive tax treaty network than most Common Market countries. A regional headquarters can benefit from these treaties in collecting dividends, interest and royalties from subsidiaries. The treaties provide for an exemption from or a reduction of foreign withholding taxes on dividends, interest and royalties. Moreover, the Netherlands do not levy a withholding tax on interest and royalties. The favorable tax treatment of these activities is described below. Holding of Shares in Subsidiaries. Holding companies do not have a separate tax status under Dutch law. Tax benefits which are available can be enjoyed by any type of company which holds shares in foreign subsidiaries. Dividends received by a Dutch company from both resident and nonresident subsidiaries are fully exempt from Netherlands' income tax under the participation exemption. The exemption also includes capital gains made upon disposal of the subsidiary's shares. Capital losses, on the other hand, are not tax deductible (except for capital losses sustained upon dissolution and subsequent liquidation of the foreign subsidiary). Tax treaties concluded by the Netherlands generally provide that withholding tax on dividends distributed to a Dutch company holding at least 25 percent of the shares in the distributing company is reduced or even eliminated. The treaties also provide that Dutch dividend withholding tax on dividends distributed by the Dutch company to its foreign parent (normally 25 percent) is generally reduced to 5 percent or zero. The conditions which a company must meet to qualify for the participation exemption have been described above. A specific problem in this area is determining whether the participation constitutes a portfolio investment. To avoid disputes of a factual nature, under certain conditions a ruling can be obtained from the tax authorities establishing that the participation is not such an investment. In return, the holding company is obliged to pay corporate tax at the normal rate on an agreed minimum taxable profit normally equal to 25 percent of the costs related to the holdings activities. Group Financing. The Netherlands is particularly attractive for group financing activities because its tax treaty network typically reduces or even eliminates the foreign withholding tax on interest paid to a Dutch company. Moreover, the Netherlands do not impose any withholding tax at source on interest paid to non-Dutch creditors, nor any duty on the issuance of bonds. Tax rulings available to a Dutch finance company generally provide for income tax on a minimum nominal spread of generally 1/8 percent or 1/4 percent between incoming and outgoing interest. For very substantial loans, the spread can be reduced to 1/16 percent or even 1/32 percent. Furthermore, no debt/equity ratios need to be observed for legal, exchange control or tax purposes. Agreement may also be reached with the tax authorities on a favorable treatment of central invoicing, leasing and foreign exchange clearing within the group. Licensing. In order to benefit from the tax treaties, an intermediate royalty company is often set up between payer and recipient. The Dutch tax treaties often provide for a reduction or elimination of withholding tax on royalties received by a Dutch resident. In addition, the Netherlands does not levy a withholding tax on outgoing royalties. As a result, royalties can flow through a Dutch company at nominal cost. For tangible and intangible licensing purposes, the Dutch authorities are usually willing to issue rulings according to which Dutch subsidiaries of foreign companies engaged in licensing will be subject to tax on a spread between 2 percent and 7 percent of incoming and outgoing royalties. The percentage is determined according to a sliding scale as follows: Spread Royalty Income 7% Dfl. Dfl. 2 mln 6% Dfl. 2 mln Dfl. 4 mln 5% Dfl. 4 mln Dfl. 6 mln 4% Dfl. 6 mln Dfl. 8 mln 3% Dfl. 8 mln Dfl. 10 mln 2% Dfl. 10 mln over Dfl. 10 mln For film royalties, a flat rate of 6% can be applied. Foreign Withholding Tax. Table 1 summarizes withholding tax rates applicable to incoming dividends, interest, and royalties under tax treaties concluded by the Netherlands. Table 1 Foreign Foreign Foreign withholding withholding withholding tax on tax on tax on dividends interest royalties paid to paid to paid to a Dutch a Dutch a Dutch Company* Company Company Australia 15 10 10 Austria 10 0 0/10 Belgium 5 0/10** 0 Canada 10 0/15 0/10 China 10 0/10 10 Czechoslovakia 0 0 5 Denmark 0 0 0 Finland 0 0 0 France 5 0/10/12 0 Germany Fed. Rep. 25*** 0 0 Greece 5 8/10 5/7 Hungary 5 0 0 Indonesia 10 10/20 5/10/20 Ireland 0 0 0 Israel 15 10/15 5/10 Italy 0 0/20/30 0 Japan 10 0/10 10 Luxembourg 2+/0 0 0 Malta 5 10 0/10 Morocco 10 10/25 10 Netherlands Ant. 7+/5 0 0 Norway 0 0 0 Pakistan 10 10/15/20 15/5 Poland 0 0 10 Rumania 10 10/0 0/10 Singapore 0 10 0 South Africa 5 10 0 South Korea 10 0/10/15 10/15 Spain 10/5 10/15 6 Sri Lanka 10 10/0 10 Surinam 15/7+ 5/10 5/10 Sweden 0 0 0 Switzerland 0 0/5 0 Thailand 10/15/20 10/25 5/15 Turkey 15 0/10/15 10 United Kingdom 5 0 0 Yugoslavia 5 0 10 Foreign Foreign Foreign withholding withholding withholding tax on tax on tax on dividends interest royalties paid to paid to paid to a Dutch a Dutch a Dutch Company* Company Company U.S.A. 5 0 0 U.S.S.R. 15 0 0 Zambia 0/10 10 10 New Zealand 15 0/10 0/10 * Provided the Dutch company holds at least 25 percent of the shares of the distributing company. Sometimes additional requirements apply regarding the ownership of shares. ** Provided the Dutch company holds less than 25 percent of the Belgian company. *** 15 percent, if the Dutch company owns less than 25 percent of the shares in the German company. Property Tax (Rates). Property tax is a local tax, levied yearly by the municipality. The primary basis for taxation is the ownership and/or use of buildings and land. Property is assessed at its real value on the market in an unoccupied condition or at an approximate cost of rebuilding if market value is not obtainable due to the special character of specific real estate. A levy of Dfl. 15,- for each Dfl. 3.00,- of this calculated value is payable for combined ownership and use. This latter amount varies per municipality but does not usually exceed Dfl. 20,-. If the premises are leased, this levy is partly paid by the owner and partly by the user. Property tax in the Netherlands is therefore of minor importance and very low in comparison with surrounding countries. Depreciation. Generally, all assets owned or used by a corporation for purposes of its trade are depreciable if the values of these assets necessarily diminish with time. Depreciation is calculated on cost less residual value. The basis for depreciable costs is the purchase price or production cost. This basis may not be regularly adjusted for depreciation of the currency. Depreciable basis must be decreased, however, by amounts received as capital grants (cash grants) from the government as an encouragement for capital investment (e.g. the Investment Premium Regulation). Depreciation allowances may be taken during years in which an asset is used in the business. The time at which the asset is ordered or the purchase price is paid is not, therefore, decisive. However, any reduction in commercial value between the time at which an asset is ordered and the time it is put into use may be deducted immediately. Permissible depreciation methods include the straight line and declining balance methods and methods based on the intensity of use. Depreciation is compulsory; no deferral is permitted. Depreciation rates are usually based on the expected economical life of an asset. Rates can be negotiated with the local tax authorities. Typical rates allowable for the more common business assets are detailed below: Office buildings 2 - 3% Industrial buildings 2 - 5% Office furniture 10 - 20% Office machines up to 100% small machines, others, 20 - 50% Motor vehicles 25 - 33-1/3% Machinery 10 - 20 - 33-1/3% Small tools 100% Intangibles 100%, 20 - 10% Taxation of Foreign Employees. Employees transferred to the Netherlands (who are not Dutch nationals) can apply for a special tax concession known as the 35 percent ruling. When granted, the foreign employees are treated by the Netherlands' tax authorities as nonresident taxpayers, both as regards to wealth tax and income tax (including wage tax, which is an advance levy on income tax). As of September 1, 1988, a revised 35 percent ruling has become effective for expatriates. Moreover, expatriates can now request a personal income tax assessment regardless of their taxable income, whereas under the prior ruling no assessment was available below a specified taxable income. The new 35 percent ruling contains several requirements: -- The contemplated stay must be of a temporary nature with a maximum duration of 60 months. The Secretary of State of Finance will, upon request, extend the 60-month period for the senior management of a company setting up a new establishment in the Netherlands. As under the 1986 version of the ruling, employees can reapply for the 35 percent concession for the full months as long as their previous stay in the Netherlands ended more than 5 years before their present engagement. Whether they have made use of the 35 percent ruling in the former period is irrelevant. -- In principle, the employee may not have Dutch nationality. Dutch nationals can qualify for the concession if their roots are outside the Netherlands. -- The employee must be transferred temporarily to a Dutch affiliate or permanent establishment, as part of his employment with an international concern; or be recruited abroad with the preconceived intention to be transferred to the Netherlands within the framework of a career with such a group. In contrast to the 1986 ruling the revised version allows application for the 35 percent ruling by persons employed by a business which does not have a share capital (like an NV or BV) if: - this business is part of a group of cooperating businesses and, - it is based in the Netherlands, and - it has decisive power with respect to the activities of the group of cooperating businesses. -- Within 4 months after the employee's arrival, a foreign employer must request the Tax Inspector at Brunssum to designate him as a Dutch taxpayer for wage and social security tax purposes. As a result, the 35 percent ruling will become effective from the date of arrival if the condition mentioned below is met. If the filing date is overdue, the 35 percent ruling can only be implemented after the wage and social security taxes have actually been withheld and paid to the Tax Collector. -- The employee must apply for the 35 percent ruling with the tax inspector at Brunssum within 4 months of arrival in the Netherlands. If the request is not filed in time, the 60-month period will be reduced by the period of time between arrival and filing. The consequences of the new 35 percent ruling include: -- Under the 35 percent ruling, employees who are resident for Dutch tax purposes in the Netherlands will be treated differently from those whose stay is of a temporary nature. The latter are considered to be fictitious foreign taxpayers and are therefore only taxable on their salary income from work performed in the Netherlands. Employees who are actually resident in the Netherlands are treated as (national) nonresident taxpayers. As a result they are taxable on their worldwide salary income. In addition only Dutch source investment income will be taxable, including: - income from Dutch real property; - income from mortgage loans on Dutch real property; - income from shares of a Dutch company in which the nonresident has held a substantial interest over the past five years. Other capital income will not be taxable for income tax and wealth tax purposes. -- The 35 percent ruling allows employees to make a national cost deduction of 35 percent of their gross salary for both income tax and security tax purposes. In addition they can deduct costs of a purely businesslike character. Mortgage interest paid in connection with Dutch real property is also deductible. Reimbursements of school fees are excluded from the calculation of the wage or salary. Allowances paid by the employer for expenditures which are partly related to the employee's private life are fully included. -- Employees residing in the Netherlands are entitled to additional allowances in computing their taxable income, while employees who are here temporarily are entitled to the work allowance ("arbeidstoeslag") only. -- As regards income from employment which is attributable to another country or countries, an employee can generally claim tax relief in the Netherlands to avoid double taxation. Such relief is available under either domestic law or by bilateral treaty. -- The new 35 percent ruling is applicable to expatriates arriving in the Netherlands after August 31, 1988. Persons who received a concession under the prior rules are not affected by these changes. The inspector of Direct Taxation handles applications for the 35 percent concession. The address is: Inspectie der Directe Belastingen (Buitenlanders), Akerstratt Noord 69, Postbus 300, 6440 LA BRUNSSUM, tel.: 045-217333. Legal Forms of Business Enterprises. There are three principal forms of business enterprise in the Netherlands: (1) public limited liability company (N.V.); (2) private limited liability company (B.V.); (3) the partnership. The public limited liability company (N.V.) is a legal entity with its capital divided into shares. Shareholders are not personally liable for corporate debts or obligations which exceed the amount of their shareholding. A N.V. is established by legal deed containing the articles of association ("Statuten"), which must be in the Dutch language. These Statuten are subject to the approval of the Minister of Justice, and an announcement of the formation must be made in the Official Gazette (Nederlandse Staatscourant). A public limited liability company can be established by one or more individuals or corporate entities. After establishment, one person or corporate entity may own all of the issued shares. There are no discriminatory rules about the nationality of shareholders or officers of the N.V. The financial statements of all N.V.'s are subject to an annual audit requirement, and the annual publication of balance sheet, profit and loss account, explanatory notes and the auditor's certificate is obligatory. Minimum capital to be issued and paid up initially is Dfl. 100.000,-. The same rules generally apply to a private limited liability company (B.V.). The minimum paid-up capital for a B.V., however, is Dfl. 40.000,-. In addition, there are two other important differences: -- The transferability of shares of a B.V. is restricted by law, and can be further restricted in the articles of association. The B.V. is not allowed to issue bearer shares; rather all shares must be registered. -- Only medium and large B.V.'s are subject to an obligatory audit and must publish their financial statements in full. In order to set up a private limited liability company in the Netherlands ("Besloten Vennootschap"), the following information is required: -- Name of company to be formed. -- Statement of the amount of capital to be issued and paid up initially. The company may have an authorized capital of five times this amount, which means that the capital may be increased to the amount of the authorized capital without amendment of the articles of association. -- The company's founder may choose between using managing directors only or have both managing directors and supervisory directors. -- Full names, private addresses, date and place of birth and nationality of the future directors. -- Recent financial statements of the shareholders and preferably a corroborating statement of their bankers. -- A short description of the object of the company, which can be rather broad (e.g. engineering of and trading in waste-heat recovery devices for industrial applications and all activities related to such object). -- The financial year to be observed by the new company (e.g. July 1st to June 30th). Apart from legal fees, which are dependent on the amount of work involved, the incorporation costs for a B.V. company with a minimum capital of Dfl. 40.000,- are as follows: -- capital duty (1% of paid-up capital) Dfl. 400,- -- name clearance by Trade Register Dfl. 250,- -- statement of no-objection from Ministry of Justice Dfl. 150,- -- notary fee (minimum) Dfl.2.500,- -- Trade Register fee for first year Dfl. 175,- The third type of business enterprise in the Netherlands is the partnership, of which there are two kinds: general and limited. A general partnership, "Vennotschap Onder Firma" (usually called V.O.F. or Firma), may be formed by individuals or corporate entities. The necessary regulations--comparable to the articles of association of a N.V. or B.V.--are summed up in an (informal) agreement concluded by the partners ("vennoten"). Each general partner is personally liable for the obligations of the partnership. Like corporations, partnerships must reveal a certain amount of information for the Trade Register. The same rules apply to a limited partnership or "Commanditaire Vennootschap" (C.V.). A C.V. is a partnership of one or more general and one or more limited partners. Limited partners are only liable for the amount of their respective capital contributions, provided they do not take part in the management of the partnership. Value Added Tax. Value added tax (V.A.T.) is levied in the Netherlands on entrepreneurs on the delivery of all goods (both movable and immovable) and services rendered in the Netherlands and, generally, on the importation of goods. The term "delivery" includes the transfer of title goods, lease/purchase agreements and the disposal of goods for nonbusiness purposes. V.A.T. is levied at each stage of production and distribution on the basis of amounts invoiced to the purchaser, including shipping, handling and insurance charges but excluding the V.A.T. tax itself and cash discounts for prompt payment or deposits on returnable containers. For imported goods, the taxable basis is the import value as determined for customs duty purposes, together with all import duties and inland freight. The delivery of goods is deemed to be a taxable event if the place where transportation begins or where the goods are located at the time of delivery is within the Netherlands. Services are normally considered to be supplied where the supplier of the services is established or has a fixed establishment. However, numerous exceptions exist for specific services. The following tax rates are currently in force: -- A standard rate of 18+ percent applicable to all goods and services not exempt or subject to the reduced rate or zero rate. -- A reduced rate of 6 percent for those goods and services considered essential (i.e. necessaries of life). -- A zero rate for goods and services related to export and import (e.g. any activities within bonded warehouses or their equivalent). V.A.T. is charged to the customer and must be stated on the invoice for all goods and services supplied. V.A.T. is paid to the tax authorities through a tax return that must be filed on a monthly or quarterly basis as decided by the local tax inspector. The return and related payment are sent to the tax collector within one month after the end of the applicable period. V.A.T. is paid to suppliers on purchased goods and services (input tax), and is deductible from the V.A.T. charged to customers (output tax). Both amounts must be stated on the tax return. If the V.A.T. paid exceeds the V.A.T. charge, the excess is refunded by the tax authorities. The right to deduct V.A.T. paid from V.A.T. charged arises when the invoice is received and not when it is paid. Conversely, V.A.T. charged is payable to the tax collector at the time the invoice is rendered to the customer and not at the time when payment is received. Although the Netherlands should not be considered as a tax haven country in any general sense, it does offer considerable advantages to holding and finance companies. In appropriate circumstances, formation of a Dutch company might be the correct choice as a vehicle to finance other companies in a group, while it may at the same time function as a holding company. AUSTRIA. Austria has holding company legislation that is in many ways similar to that of the Netherlands for receipt of dividends from subsidiaries. Austria is a neutral country with strong trade ties to Eastern Europe, which may be useful for a holding company making investments in that area. It is not a member of the European Community, and thus is outside of the common tax policy, but that could change in the future as Austria is considering membership. Austria has an extensive system of double taxation agreements, covering nearly 40 countries. In the 1989 tax reform in Austria normal corporate taxation was reduced to 30 percent. A corporation is subject to Austrian tax on its earnings worldwide if the head office or registered office of the company is in Austria. The head office is assumed to be where the center of senior management is situated. The registered office is the place defined by law where an Austrian corporation is headquartered. Corporations that have neither their head office nor their registered office in Austria are subject to tax in Austria on their domestic earnings. If a corporation (parent company) has a holding in another Austrian company (affiliated company) all of the parent company's profit-sharing is tax exempt. This tax exemption applies both to disclosed dividend payouts and to disguised profit distribution. Apart from the general exemption for holding earnings in Austria, there is also what is known as the "international intercompany tax concession." An Austrian corporation is exempted from paying Austrian corporation tax on any form of profit-sharing from a holding in a foreign corporation provided the following conditions are met: the foreign corporation must be a corporation (not a partnership or other form of enterprise); and the Austrian corporation can show evidence to have directly possessed a holding interest of at least 25 percent in the shares of the foreign corporation continuously for at least one year before the balance sheet date applicable to the income assessment. An Austrian holding company may thus collect dividends from its foreign subsidiaries tax free. The "international intercompany tax concession" covers both disclosed dividend payouts and disguised profit distribution. The "international intercompany tax concession" does not contain an "activity clause." It is thus of no consequence whether or not the Austrian holding company or its subsidiary have active earnings--in other words, whether or not they are actively engaged in business transactions. Once the requirements for the "international intercompany tax concession" have been met, not only the regular dividends but the capital gains generated in Austria which arise from the sale of such qualified affiliated holdings are tax exempt. Tax exemption for capital gains applies only to holdings in foreign companies, however. The capital gains arising from holdings in Austrian corporations are entirely subject to taxation. There are no provisions stipulating that mere holding companies are excluded from the privileges provided for in Austria's double taxation agreements. On the other hand, Luxembourg's double taxation agreements contain such provisions. If an Austrian corporation pays dividends to a foreign corporation, a withholding tax of 25 percent is withheld (some double taxation agreements provide for lower rates of withholding tax). This raises obvious problems in paying the money from Austria to a pure tax haven. Of course the problem only arises if and when there is a need to pay out a dividend, rather than reinvest the money. The conversion of interest into dividends and vice versa often makes sense for taxation purposes. For example, if a Swiss company purchases bonds, any interest therefrom is fully liable to taxation in Switzerland. If the Swiss company instead establishes a subsidiary in the Netherlands Antilles and the subsidiary purchases the bonds, the subsidiary earns interest thereon which is taxable in the Netherlands Antilles at a maximum level of 3 percent. The subsidiary subsequently pays the Swiss parent company dividends, which are not subject to withholding tax in the Netherlands Antilles. In Switzerland the dividends received are tax exempt. In this case the interest was converted into dividends in the Netherlands Antilles. Converting interest into dividends and vice versa is generally possible in Austria (provided no fake transaction or breach of the law is involved) and may well pay off. For example, a Saudi Arabian company wishes to invest in a Dutch company. As Saudi Arabia has not concluded any double taxation agreements, dividend payments from the Netherlands to Saudi Arabia are subject to a withholding tax of 25 percent. On the other hand, the Saudi Arabian company may establish an intermediate holding company in Austria which in its turn acquires a holding in the Dutch company. By the terms of the Austrian-Dutch double taxation agreement, dividends can be transferred tax-exempt from the Netherlands to Austria. In Austria neither these dividends nor any capital gains arising out of the sale of the holding are subject to tax. However, the tax-exempt transfer of the dividends to Saudi Arabia is not possible, since Austria has not concluded a double taxation agreement with that country. But it is possible to convert dividends into interest. The Saudi Arabian company first establishes a second subsidiary (sister company of the Austrian holding company) in a country which levies either no tax or only low levels of tax on interest and no withholding tax on dividends (e.g. an offshore company in the Channel Islands or the Netherlands Antilles). The Saudi Arabian company provides this offshore company with the appropriate equity capital. The offshore company passes on this equity capital as a loan to the Austrian holding company. The latter acquires the Dutch company with the loan from the offshore company. Dividends and capital gains from the holding in the Netherlands are temporarily invested in Austria tax-exempt. The profits temporarily invested in Austria are transferred out of Austria in the form of interest payments on the loan from the offshore company. This flow of profits is exempt from tax, because such interest payments are not subject to tax in Austria. The offshore company, too, receives the interest tax-exempt. The interest is again converted into dividends and is transferred exempt of withholding tax to Saudi Arabia. In the above example the withholding tax is lowered from 25 percent to 0 percent. It should be noted, however, that arrangements like this need to be examined very closely to ensure that they are not classified unilaterally as fake transactions or abusive practices. By contrast with most countries' tax law systems, Austria's commercial and tax law do not prescribe minimum debt equity ratios.