tax Archieven — KC Legal

Understanding the taxation of IP

By Tax

The Virtual Series publications from IR Global bring together a number of the network’s members to discuss a different practice area-related topic. The participants share their expertise and offer a unique perspective from the jurisdiction they operate in.

In the following document, you will hear from seven experts in IP taxation. They will offer insight specific to their own jurisdiction, on the most efficient methods of tax structuring with regard to IP, highlighting any potential challenges and opportunities IP owners might want to be aware of when operating in their country.

Dutch Fiscal Unity Emergency Remedial Measures

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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.

Amendment Of Rebuttal Scheme Included In Anti Base-Erosion Rules

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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:

  1. 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 –
  2. 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. Despite the test, if people can’t repay bbl, then it is best to get help from experts.

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.

Changes To Dutch Dividend Withholding Tax in 2018

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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:

  1. 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
  2. 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”)

Subjective 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).

Objective Test

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:

  1. At least half of the company’s board members should reside in the jurisdiction of the intermediary holding company;
  2. 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;

  1. Decisions by the board should be made in the jurisdiction of the intermediary holding company;
  2. The most important bank accounts should be held/managed in the jurisdiction of the intermediary holding company;
  3. 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;

  1. 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
  2. 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.

EU And Switzerland Initiate Tax Transparency

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The European Union and Switzerland have initiated an agreement that will require both Switzerland and the EU member states to automatically exchange information as of 2018 in relation with the financial accounts of their citizens. The financial account data includes, amongst others, names, addresses, tax ID numbers and dates of birth of accountholders.

The driving force behind the agreement is to prevent EU residents to hide undeclared income in Swiss accounts, as to evade paying taxes.

Underminister Of Finance Informs Parliament On Ruling Practice

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In an effort to provide as much transparency on the Dutch Ruling practice as possible without violating confidentiality, the Dutch Under Minister of Finance provided insight information on the Dutch ruling practice in a letter to Parliament. He provided information in relation to the ruling practice itself, in relation with the type of rulings concluded, as well as information on the number of rulings concluded.

The Under Minister of Finance also stated that he sees no reason to systematically inform Parliament, thus without cause, of concluded rulings. He declared that systematically informing through  trading robots Parliament of concluded rulings, even if informed on a confidential basis, violates the trust of the tax payer in the Dutch tax authorities, and with that, the trust in the Netherlands as a state of residence.

EU Court of Justice Ruled Dutch Fiscal Unity Regime In Contravention

By Legal, Tax

On the 12 June 2014, the European Court of Justice ruled that the Dutch fiscal unity regime (treating multiple group companies as one single taxpayer), contravenes to the EU principle of Freedom of Establishment. In essence the infringement was caused as the Dutch fiscal unity regime does not allow:

– A fiscal unity between Dutch sister companies, while being held (in)directly by a EU resident parent company;
– A fiscal unity between a Dutch parent company and a Dutch second-tier subsidiary, while the second-tier subsidiary is held through a EU resident (first-tier) subsidiary.

The European Court of Justice reached this decision while answering prejudicial questions raised by the Amsterdam High Court in three separate cases.

New Tax Arrangement For The Netherlands And Curacao

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On 10 June 2014, the proposed new bilateral arrangement for the avoidance of double taxation for the Netherlands and Curacao (the “TNC”) was presented to Dutch Parliament. The TNC shall replace the current Tax Arrangement of the Kingdom and is expected to enter into force as per 1 January 2015.

Amongst other things, the TNC introduces a 0% dividend withholding tax rate, albeit under strict conditions. The TNC further includes a beneficial transitional rule under which shareholdings of at least 25% may apply a reduced 5% dividend withholding tax rate (currently 8.3%) until 31 December 2019.

Netherlands And Curaçao Reach Agreement On New Bilateral Tax Arrangement

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On December 12, the Dutch Ministry of Finance announced that Curaçao and The Netherlands have reached agreement on the text of a new bilateral arrangement for the avoidance of double taxation (the “Arrangement”). The Arrangement shall replace the current Tax Arrangement of the Kingdom (“TAK”) and, subject to parliamentary procedures in both countries, should become effective per 1 January 2015.

The announcement reconfirms the introduction of a zero percent (0%) dividend withholding tax rate on distributions of profits albeit under strict conditions (the current dividend withholding tax rate under the TAK is 8.3%). The zero percent rate will apply on dividends paid to certain active parent companies qualifying under a “limitation of benefits” provision, which will be introduced. This “limitation of benefits” provision has however not yet been clarified.