We are delighted to make available the thirteenth edition of Tax on Inbound Investment by Getting the Deal Through. It includes international expert analysis in key areas of law, practice and regulation for corporate counsel, cross- border legal practitioners, and company directors and officers.
The Netherlands is one of Europe’s most compelling investment opportunities, despite not being the first name on every CEO’s mind when considering international expansion. Large city regions in countries, such as the UK, France or Germany, can often have more allure as gateways into Europe, but any decision maker who fails to look beyond this established order is making a mistake. A cursory look at the credentials of The Netherlands as an investment destination, immediately shows its vast potential.
Download full document here: IR Global – Meet the Members – Netherlands
Meet the IR Tax Group
Our members are leaders of the cross border tax community. They are proud to uphold the highest ethical standards and offer an unrivalled quality of service to clients all over the world.
Download full document here: IR Global – Tax Group Presentation
Tax Efficient Inbound Investment – Tax Structures for Cross-Border Acquisitions.
Anyone considering an inbound investment into another country or jurisdiction must give serious thought to taxation. Issues such as privacy, accurate asset valuation and liability protection are important, but it is the tax efficiency of a foreign investment that will most likely measure its long-term success.
There are, of course, many different types and methods of investment, whether that be via direct acquisition of a capital asset, the purchase of shares in an existing business or a real estate transaction. A smart investor will study the rules and regulations that apply to each scenario in their jurisdiction of choice, and adhere to them while minimising tax liability.
Investment by cross-border merger or acquisition is one area that has received much publicity recently, as the Organisation for Economic Co-operation and Development (OECD) works to redress certain tax-efficient structures legitimately used by smart corporates. It’s Base Erosion and Profit Shifting (BEPS) legislation is designed to address the practice of shifting profits and assets across borders to minimise overall global taxation.
This drive to halt BEPS has affected various tax reduction techniques, including patent box regimes, interest deductibility and offshore structures (via business substance tests). Buyers may also have contingent tax liabilities due to BEPS exposure under the seller’s aegis.
Where smaller investments are concerned, the rules are no less complex, as we will learn in the following discussion. For countries like the USA, which receives significant inward investment, there are withholding taxes for foreign investors on the sale of assets and the receipt of ‘soft’ income, as well as death taxes and individual state taxes to consider.
In Italy, on top of corporation tax of 24 per cent, there is a regional tax on productive activities of 4.82 per cent, which many investors will not be aware of. Employing an experienced tax advisor in the jurisdiction to be invested in, is crucial before any other decisions are made. They will help investors to decide which vehicles are best to hold assets and which jurisdictions have the most favourable tax treaties to eradicate or reduce withholding tax. The advisor will also be able to ‘read between the lines’ of complex tax legislation, structuring transactions that are tax efficient and also tax compliant.
Examples include the concept of Fiscal Unity discussed here by Friggo Kraaijeveld in The Netherlands, the use of the European Union’s Parent Subsidiary Directive (PSD) to reduce withholding tax, as explained by Tommaso Fonti in Italy, or the Portfolio Interest Exemption, employed in the USA by Jacob Stein.
They will also have details of any tax incentives offered by various governments to attract inbound investment and be able to guide investors in the customs and culture of tax authorities that may be very different from those they are used to.
The following pages contain advice and guidance from five of IR Global’s tax experts and should provide an interesting insight into the many and varied tax-orientated challenges faced in pursuit of profitable foreign investment.
Download full document here: IR Global Tax Virtual Series 2018 – Tax Efficient Inbound Investment
On 5 December 2017, European Union (EU) finance ministers adopted a list of “non-cooperative jurisdictions for tax purposes” also known as ‘The Black List’. The list is part of the EU’s work to counter worldwide tax evasion and avoidance. According to the EU, it will help the EU to deal more robustly with external threats to Member States’ tax bases and to tackle third countries that consistently refuse to play fair on tax matters. The list should create a positive incentive for international jurisdictions to improve their tax systems where there are deficiencies in their transparency and fair tax standards. No EU member states fall into the list because it should be recognized as a tool to deal with external threats to Member States’ tax bases.
The list is based on three screening criteria’s: tax transparency, fair taxation (no harmful tax regimes) and implementation of BEPS minimum standards. The Black List consists of 17 countries which failed to meet agreed tax good governance standards. The following jurisdictions appear on the EU Black List: American Samoa, Bahrain, Barbados, Grenada, Guam, Korea, Macao the Marshal Islands, Mongolia, Namibia, Palau, Panama, Santa Lucia, Samoa Trinidad Tobago, Tunisia, and United Arab Emirates.
In addition to the Black List, the EU finance ministers also adopted a “Grey List”. The “Grey List” includes entities which have committed to addressing deficiencies in their tax systems and to meet the required criteria and following contacts with the EU by the year-end 2018 (or in the case of developing countries by the year-end 2019). As those jurisdictions are not blacklisted, they would not fall within any of the sanctions discussed below. The Grey List includes 47 countries, among others, EU candidates Turkey, Serbia and Montenegro, as well as Switzerland, Bosnia and Herzegovina, Macedonia, Morocco, Thailand, Vietnam and Hong Kong.
The jurisdictions on the final Black List may face sanctions (‘defensive measures’) imposed by the Member States in the form of (administrative) tax measures and by the EU in the form of non-tax measures.
The non-tax measures are linked to EU funding in the context of the European Fund for Sustainable Development (EFSD), the European Fund for Strategic Investment (EFSI) and the External Lending Mandate (ELM). Funds from these instruments cannot be channeled through entities in listed jurisdictions.
The European Commission recommends (not mandatory!) Member States to take tax sanctions against the EU Black Listed jurisdictions. The following defensive tax measures of legislative nature could be applied by the Member States: non-deductibility of costs, CFC rules, withholding taxes, limitation on participation exemption, switch-over rules, reversal of the burden of proof, special documentation requirements and mandatory disclosure by tax intermediaries of specific tax schemes with respect to cross-border arrangements. The European Commission does not provide any guidance on when the Member States should take the recommended sanctions. If a Member State takes such measures, not only its domestic law but – depending on the measure – also bilateral tax treaties might have to be changed.
The Black List will be updated at least once a year. This update will be based on the continuous monitoring of Black Listed jurisdictions, as well as those that have made commitments to improve their tax systems (Grey Listed jurisdictions).
On October 25 2017 the Advocate General (“AG”) at the Court of Justice of the European Union (CJEU) published his opinion on the preliminary ruling request of the Dutch Supreme Court in two corporate income tax cases concerning the applicability of the so-called ‘per-element’ approach in the Dutch tax consolidation regime (“fiscal unity”). The common key issue is whether taxpayers are eligible for benefits from separate elements of the fiscal unity regime as if a fiscal unity with foreign subsidiaries can be entered into, despite the fact it’s not possible to enter into a fiscal unity with non-EU established subsidiaries. This occurs in situations concerning the Dutch interest deduction limitation rule to prevent base erosion and the non-deductibility of currency losses on a participation in a non-Dutch/EU subsidiary.
In general the AG is of the opinion that the ‘per-element approach’ adopted by the CJEU in the Groupe Steria judgment is also applicable in the Dutch tax consolidation regime (“fiscal unity”). The AG considers that the application of the interest deduction limitation is contrary to the EU freedom of establishment.
If this approach is enshrined in the Court’s decision, this could have a major impact on the Dutch tax consolidation regime. According to the Dutch Government, a negative decision from the CJEU is expected to cause artificial erosion of the tax base of Dutch corporate income tax. Hence, the Dutch Government announced emergency remedial measures in case the CJEU follows the negative conclusion of the AG in the case on interest deduction limitations to prevent base erosion. These emergency remedial measures will have retroactive effect as from 25 October 2017, 11:00 am. If the so-called per-element approach should be applied, some advantages of the fiscal unity (for example the non-application of the anti-abuse rule in art. 10a of the Dutch Corporate Income Tax Act) would no longer be available in domestic situations by treating a fiscal unity in domestic situations in the same way as in a comparable EU situation (in which the advantages are also not available). As a consequence, several laws in the CIT and the DWT will be applied as if ‘no fiscal unity exists’. The infringement with the right of establishment caused by the Dutch fiscal unity regime would in such manner be eliminated for the future. In addition, the Dutch government announced that the Dutch fiscal unity regime will, within a foreseeable period, be replaced by a company tax group regime that is future-proof.
The anti-base erosion rule (art.10a CIT) denies deduction of interest on debt, directly or indirectly, owed to related entities or related individuals, if such debt is legally or de facto, directly or indirectly, connected with a ‘tainted’ transaction (such as certain dividend distributions, capital transactions and/or (external) acquisitions).
Exceptions to the denial may apply if the taxpayer demonstrates:
- That both the intra-group debt financing and connected the underlying “tainted” transaction are predominantly motivated by sound business reasons (Business Test); or – in principle –
- That the interest on the loan received by the creditor is sufficiently taxed (i.e. effective tax rate of at least 10%) and determined under Dutch tax rules in the hands of the recipient (which does not have loss carry forwards at its disposal).
Unless the tax inspector substantiates that despite the 10% tax the debt or related transaction is not driven by business motives (“subject to tax test”).
The Dutch Supreme Court ruled on 21 April 2017 that a taxpayer meets the Sound Business Test if the taxpayer has demonstrated that the intra-group debt owed to a related party is de facto owed to a third unrelated party (i.e. the internal debt is funded by external debt under equal so-called ‘parallel’ loan conditions), irrespective of whether the taxpayer is able to demonstrate that the transaction for which the debt was incurred is driven by sound business reasons. In other words, the double test was effectively reduced to a single test.
It is now proposed that a taxpayer should demonstrate that both the debt and the tainted transaction are predominantly entered into for business reasons (“Double Sound Business Test”). The amendment will have effect per January 1, 2018, if adopted by the Dutch Parliament.
The interpretation by the Supreme Court of the double business motive test of article 10a CITA differs from the application by the Dutch tax authorities of the test in practice. The Dutch Tax Authorities examine the sound business motive of the underlying transaction separately from the sound business motive of the intra-group debt financing.
On 19 September 2017, the Dutch government announced several bills containing tax law proposals. Under the legislative proposal (the “Proposal”) changes to the Dutch dividend tax act and the substantial interest taxation rules have been announced. This Tax Update will discuss the main aspects of the Proposal which should become effective as from 1 January 2018.
The following proposals will be addressed:
- Dutch corporate income tax anti-abuse rules;
- Dividend withholding tax obligation for qualifying membership rights in (passive) holding cooperatives;
- Expanding the current dividend withholding tax exemption;
- New anti-abuse rules.
What will change?
Dutch corporate income tax anti-abuse rules
Under the current Dutch corporate income tax (“CIT”) anti-abuse rules, income derived by a foreign shareholder from a substantial interest in a Dutch tax resident company may be subject to Dutch CIT in case the structure is considered abusive following the application of the Subjective Test and the Objective Test. Under the Proposal the Subjective Test has been amended such that it will only apply if Dutch individual tax is avoided. The rationale for this being that the avoidance of Dutch dividend withholding tax (“DWT”) is addressed in the new DWT anti-abuse rules.
The above implies that income derived from a substantial interest is subject to Dutch CIT in case both of the below conditions apply:
- The substantial interest is held with the main purpose (or one of the main purposes) to avoid Dutch individual tax of another person (“Subjective Test”); and
- The structure can be considered an artificial arrangement or a series of artificial arrangements (“Objective Test”).
Dividend withholding tax obligation for qualifying shareholder/membership rights in holding cooperatives
Presently, distributions of profit (in any form) made by Dutch NVs and BVs are generally subject to 15% Dutch dividend withholding tax, while distributions of profit made by cooperatives are generally exempt from this withholding obligation (except in abusive situations). The Proposal aims to eliminate the difference in tax treatment between Dutch cooperatives (coöperaties) and Dutch public limited liability companies (Naamloze Vennootschappen or “NVs”) and Dutch private limited liability companies (Besloten Vennootschappen or “BVs”).
Distributions by holding cooperatives to shareholders or members that hold a qualifying participation in the “Holding Cooperative” will become subject to DWT at the standard 15% rate in the same way as distributions by limited liability companies such as the Dutch NV and BV, unless the proposed (broadened) exemption from DWT applies.
A cooperative qualifies as a Holding Cooperative if the actual activities of the cooperative mainly consist of more than 70% of holding participations and/or the direct or indirect financing of affiliated persons or entities. The activities conducted by the cooperative in the 12 months preceding the profit distribution will be decisive. Besides the cooperative’s balance sheet total, other factors such as types of assets and liabilities, turnover, activities and time spent by employees should also be taken into account.
A qualifying participation in a Holding Cooperative concerns an entitlement to at least 5% of the annual profit or the liquidation proceeds of the cooperative. Participations in the Holding Cooperative directly or indirectly held by related parties (to such member or by other entities that are part of the same cooperative group of such member) are also taken into account.
Please note that distributions made by Holding Cooperatives may still be exempt from Dutch dividend tax if the members meet the requirements of the newly introduced exemption (discussed below).
Expanding the current dividend withholding tax exemption
Under the Proposal, the scope of the current DWT exemption for EU and EEA shareholders will be extended to shareholders that are located in a tax treaty jurisdiction, provided that the tax treaty contains a dividend provision.
The extended DWT exemption may also apply to distributions to a hybrid entity, provided certain conditions are met. A hybrid entity can be explained as an entity that is transparent in one country and opaque in the other country. A distinction must be drawn between two different situations:
- A hybrid entity (e.g. an US LLC or a fund) that is non-transparent for Dutch tax purposes but is transparent under its local tax legislation. If the participants in the hybrid entity are qualifying residents of a tax treaty country the exemption may continue.
- A hybrid entity resident in a qualifying jurisdiction that is tax transparent for Dutch tax purposes, but is non-transparent under its local tax legislation. If the hybrid entity is treated as the beneficial owner of the dividend under its local tax legislation, the exemption may continue.
New anti-abuse rules
Under the new anti-abuse rules the DWT exemption is denied if:
- The shareholder holds the shareholding with the main purpose or one of the main purposes to avoid taxation due by another individual or entity (“Subjective Test”); and
- The holding of the shares or membership rights is part of an artificial structure or transaction or a series of artificial arrangements or composite of transactions, which will be the case if there are no valid business reasons reflecting economic reality (“Objective Test”)
Regarding application of the Subjective Test it must be assessed whether the direct shareholder of the Dutch company/Holding Cooperative has been interposed with the main purpose or one of the main purposes to avoid DWT. This would be the case if distributions by the Dutch company/Holding Cooperative would have been subject to DWT had the direct shareholder/member not been interposed. If so, the DWT exemption does not apply, unless the shareholder qualifies under the Objective Test (see below).
Under the Objective test, it must be determined whether there is an artificial structure, transaction or a series of artificial arrangements that have not been put in place for valid commercial reasons reflecting economic reality. Whether an arrangement has been put into place for valid commercial reasons may depend on the substance at the level of the shareholder. Valid commercial reasons may, inter alia, be present if the shareholder:
(a) conducts an active business (with an own office and own employees) and the shareholding is part of that business’ assets;
(b) is a top holding company that carries out material management, policy and financial functions for the active business group it heads; or
(c) functions as an intermediary holding company of a top holding in the meaning of (b) above (in relation to the relevant subsidiary) and performs a linking function between its shareholder that conducts the active business enterprise and the Dutch company.
If the business enterprise is carried out by the indirect shareholder, and the direct shareholder is a foreign intermediate holding company that does not carry out a business enterprise, valid business reasons will only be considered present if the foreign intermediate holding company has ‘relevant substance’.
An intermediary holding company is considered to have relevant substance in case all the below conditions are fulfilled:
- At least half of the company’s board members should reside in the jurisdiction of the intermediary holding company;
- The board members resident in the jurisdiction of the intermediary holding company should possess the required professional knowledge to properly perform their tasks (including at least decision-making decisions);
iii. The company should have qualified staff to execute and register the intermediary holding company’s transactions adequately;
- Decisions by the board should be made in the jurisdiction of the intermediary holding company;
- The most important bank accounts should be held/managed in the jurisdiction of the intermediary holding company;
- The bookkeeping should be done in the jurisdiction of the intermediary holding company;
vii. The business address should be in the jurisdiction of the intermediary holding company;
viii. The intermediary holding company should not, to the best of its knowledge, be considered a tax resident of another country;
- The intermediary holding company should incur wage costs in relation to performing the linking function of at least the local equivalent of EUR 100,000 under Dutch wage standards; and
- The intermediary holding company will need to have its own office space at its disposal in the jurisdiction where it is established during a period of at least 24 months whereby this office space needs to be equipped and used for the linking function.
The last two requirements are new under the Proposal and will only apply as of 1 April 2018.
Why is this relevant?
Within one month after each dividend distribution, the dividend distributing Dutch company/Holding Cooperative has to provide the Dutch tax authorities with information to enable them to ascertain whether the DWT exemption has been applied correctly. If the DWT exemption is not applicable, then the DWT may still be mitigated under a tax treaty (as long as it doesn’t contain an anti-abuse provision).
We recommend reviewing the consequences of the proposals for DWT and non-resident corporate income tax rules, as they may benefit or suffer from the changes. We are more than willing to assist you in reviewing your structures to ensure their future effectiveness.
On 20 June 2016 the EU’s Economic and Financial Affairs Council (“ECOFIN”) agreed on a draft Anti-Tax Avoidance Directive (“ATAD”). Rules in five different fields have been laid down: a) interest limitation rules; b) exit taxation rules; c) general anti-abuse rule (GAAR); d) controlled foreign company (CFC) rules and e) rules on hybrid mismatches. Substantial changes were made to the first proposal of the European Commission in January 2016. The draft will be formally adopted in a forthcoming ECOFIN meeting.
The member states will have to transpose the directive into their national laws and regulations before 1 January 2019, except for the exit taxation rules, which they will have to implement before 1 January 2020. Member States can postpone the implementation of the interest deduction limitation provision until 1 January 2024, subject to certain conditions.
The Dutch Supreme Court overturned a verdict by the Dutch High Court in which it limits the accountability of the limited partner (“Commanditaire Vennoot”) of a partnership (“Commanditaire Vennootschap”) in case the limited partner violates the management restrictions, as the management activities are solely reserved for the general partner (“Beherend Vennoot”).
When the management restrictions are violated (i.e. the limited partner acts as if it was the general partner), the Dutch Commercial Code dictates that the limited partner should be held accountable to all creditors of the partnership, even if the liabilities cannot be linked to the breach (for example, even if the liabilities already existed before the breach). The Supreme Court ruled that the sanction imposed should be in proportion with the breach. The accountability should therefore be limited to the liabilities of the partnership that are linked to the breach.