The Netherlands: Avoiding Potential Pitfalls When Investing

Reasons for the popularity of the Netherlands include:

• The extensive tax treaty network.
• The possibility to engage in prior consultations with the tax authorities and agree tax implications through Advance Tax Rulings (ATRs) and Advance Pricing Agreements (APAs).
• Fiscal unity regime for tax consolidation of Dutch entities from the same corporate group.
• Domestic legislation providing for an exemption from dividend tax on dividends to corporate shareholders with at least a five per cent holding.
• No withholding taxes on interest and royalties.
• With the relevant permit, no VAT needs to be paid up front on imports.
• Flexibility in the way companies are set up, including no minimum capital.
• The ability to do business (and often deal with government authorities) in English.
• The 30 per cent expat ruling which was attractive for many businesses transferring executives.

Recent changes mean that those investing through, and moving staff to, the Netherlands, need to take some care to make sure that these benefits apply.

ATRs/APAs

It is possible to engage in prior consultation with the Dutch tax authorities to agree the tax implications of certain transactions. This proves advantageous as it allows nationally and internationally operating companies to gain advance certainty regarding the application of tax laws and regulation. Currently, an international tax ruling can only be obtained by companies that have sufficient economic nexus in the Netherlands, which means the following conditions must be met:

• The entity engages in operational activities under its own account and bears associated risks.
• These activities should be in line with the function of the Dutch entity within the group.
• The operational costs should reasonably correspond with these activities.

There are two types of ruling: Advance Pricing Agreements (APAs) and Advanced Tax Rulings (ATRs). APAs concern rulings on ‘arms-length’ matters, and the allocation of profits on the basis of the OECD transfer pricing guidelines. ATRs provide certainty regarding the tax consequences of a planned transaction or series of transactions within an international context tailored for a specific situation and organisation or company.

Fiscal Unity Regime

A Dutch parent company and its Dutch (>95 per cent) subsidiaries residing in the Netherlands may, when certain conditions are met, file a consolidated tax return as if the group is one entity. This includes the full consolidation of assets, liabilities, profits and losses, which enables profits from one company to be offset against losses from another and eliminates intercompany transactions. There are some exceptions and limitations to the regime, eg on tax relief for losses made prior to the fiscal unity being formed.

A fiscal unity can also be established with a permanent establishment of a non-Dutch resident EU/EEA resident company if the PE owns >95 per cent of the shares in a Dutch subsidiary or between two (>95 per cent) Dutch resident companies if they have a non-Dutch EU/EEA parent company, or if the Dutch companies are connected through a non-Dutch resident EU/EEA intermediary holding company. However, it is important to note that a cross-border fiscal unity involving non-Dutch resident companies, excluding Dutch PEs of non-Dutch resident companies, is not permitted.

Taxes On Dividends

The Netherlands has had a withholding tax on dividends as long as most people can remember and for many years the standard rate has been 15 per cent.

For payments of dividends to corporate shareholders in countries qualifying for the EU parent subsidiary directive, or with which the Netherlands has a double tax treaty covering dividends, there is an exemption from dividend tax under domestic law where the shareholder is a corporate entity and would qualify for the participation exemption if it were Dutch resident. Broadly this means it should have a holding of five per cent or more in the Dutch company, and the assets of the Dutch company in which the shares are held should mainly be used in an active business or, if not, the Dutch company should be subject to tax at a rate of at least 10 per cent. Therefore, generally speaking, a five per cent holding was sufficient since the Dutch tax rates in most cases are above 10 per cent. Exceptions are certain types of investment company, and companies using the innovation box, although companies using the innovation box will normally be active companies.

However, there are anti-abuse provisions which can disallow this withholding tax exemption. The zero rate is denied if:

• The structure can be considered to have been set up to prevent Dutch tax being levied on another party (this generally means the direct or indirect shareholder of that company).
• The structure or series of transactions can be considered to be artificial.

The first of the two tests requires the tax to be determined in the situation that the direct shareholder does not exist. This is compared with the tax payable under the actual structure. If the interposition of the direct shareholder does not result in a tax saving, and the indirect shareholder has an active business or as an individual, then the dividend will not fall foul of this provision. One continues up the structure until one arrives at a company with an active business or at an individual.

For the second test, generally, if the shareholder has an active business and the shareholding can be allocated to this business, the structure will not be considered artificial. Pure holding and financing companies will generally not be considered to have an active business, but if they have sufficient “relevant substance” based on a list of substance requirements published by the tax authorities, they will usually be considered to meet the non-artificial test, although the tax authorities can still deny the zero rate if they can show that most likely the structure is abusive.

If a structure is considered abusive, then withholding tax at 15 per cent may be levied, unless the relevant double tax treaty prevents or reduces it. In some cases, especially where it has been adjusted on the basis of the Multilateral Instrument, the double tax treaty will not apply. This means that in addition to withholding tax of 15 per cent there could be a “top-up corporate income tax” to take the total rate to a maximum of (currently) 25.8 per cent, which can be an unpleasant surprise.

For dividend payments to companies and countries on the Dutch blacklist (basically countries with a corporate income tax rate below nine per cent), or the EU list of noncooperative jurisdictions, a withholding tax of 25.8 per cent can be levied on dividends unless it can be shown that there are good business reasons for the structure.

The rules for gains on disposal of shareholdings can also provide that the gain is subject to corporate income tax at a rate of up to 25.8 per cent, but the rules differ from those for dividends, so a careful review is required.

Interest And Royalties

In the past, interest and royalties were always payable from the Netherlands without any withholding tax. However, there is now legislation which provides that where such interest or royalties is/are paid to a recipient in a listed low tax country (including a permanent establishment in a low tax country even if the recipient itself is established in a non-low tax jurisdiction), and is considered to be in a structure with a main objective to avoid (Dutch) tax in the hands of another party as a result of an artificial construction or series of constructions, and also in certain other cases where the recipient is effectively not taxed because it is not considered the beneficial owner. Basically, this means that such payments can be subject to a withholding tax equal to the highest rate of corporate income tax applicable in the Netherlands, which is currently 25.8 per cent.

The Dutch 30% Ruling

Seconding staff is also less beneficial than it used to be, since the benefits under the 30 per cent ruling have been scaled back.

Subject to certain conditions, the 30 per cent expat ruling is available for highly qualified employees seconded from group companies outside the Netherlands, or taken on from abroad. In practice, highly qualified means that they earn (currently) more than €46,107 per annum.

The ruling provided for a tax-free allowance of 30 per cent of the total remuneration for a period of five years. Taxpayers also had the ability to be treated as partially non-resident for that period, meaning that most unearned income was not taxable in the Netherlands (exceptions being income from Dutch real estate or a Dutch business or company). Particularly for Americans, this made life administratively much simpler since they only had to deal with (most) unearned income in their US tax return, and did not have to deal with two different systems for taxing unearned income with the consequential problems of ensuring that relief for double tax will apply when one system may arrive at a different income figure from the other. However, the partial non-residence status was a significant benefit from any qualifying individuals.

Tax-free reimbursement of school fees for an international school is also possible. An unusual quirk is that somebody with a 30 per cent ruling can also exchange their driving licence for a Dutch one. Normally this only applies for those coming to the Netherlands from an EU or EFTA country.

A maximum had already been introduced, so that the tax-free remuneration cannot exceed (in 2024) €69,900 on remuneration of €233,000. The allowance is now reduced after 20 months from 30 per cent to 20 per cent, and after 40 months to 10 per cent.

Finally, the ability to be treated as a partial non-resident will no longer apply from 1 January 2025.

Where Does This Leave The Netherlands?

It is still an attractive location for setting up a group holding company, or for financing and licencing activities, but care is needed where payments are made to low tax jurisdictions. For a regional hub it is still an excellent location and withholding taxes will not be an issue, nevertheless, businesses setting up in the Netherlands will need to make sure that they are well advised in order to avoid unexpected tax liabilities.