CROP International Tax Newsletter May 2011


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CROP International Tax Newsletter May 2011

  1. 1. May 2011 International Dutch Tax News in the Netherlands as well as several plans that Highlights: the Dutch government is currently developing. - Decree on dividend WHT Decree on dividend withholding tax A decree was published that deals with the allocation of shares to a PE. We have On 27 January 2011 a Decree dated 15 summarized the main conditions. January 2011 was published. This Decree describes various aspects of the Dividend - Decree on attribution of profits to Withholding Tax Act regarding the allocation of permanent establishments shares to a PE in Also a decree was published with respect to the Netherlands. The Decree applies as of 28 the attribution of profits to a PE. The main January 2011. The Decree clarifies the criteria aspects are described. used for the allocation of shares to a PE in the - Document on Dutch tax treaty Netherlands. This allocation affects the application of the participation exemption and policy the group taxation regime. Starting point of the The under-minister of Finance published a Decree is whether shares can be allocated to a document on the Dutch tax treaty policy. We PE. We refer to the outlines of the Decree have outlined the headlines. below. - Tax regulation for the Country Since the Netherlands Antilles dissolved, a Allocation of shares to a PE means that the PE tax regulation needed to be drafted for the is authorized to carry out all activities related to thr - the purchase, holding, management and transfer of the shares of a company. Therefore, - Tax regulation for the Kingdom the Decree clarifies that an attribution of Regulations were published for the shares to a Dutch PE is only possible if the application of the tax regulation for Curaçao following cumulative criteria are met. The and St. Maarten. foreign company must carry out their activities - Proposed bill on deductibility of in the Netherlands by means of a PE, the exchange losses activities of the PE are undertaken by qualified The Dutch Council of Ministers agreed that a personnel and finally a direct relationship Bill shall be proposed on currency exchange should exist between the business activities of results on participations. the PE and the business activities of the company the shares of which are allocated to - Fiscal agenda the PE. The under-minister of Finance published the outlines of the desired policies on a.o. CIT. An advance tax ruling (ATR) may be obtained. We have outlined the main aspects. However the Dutch tax authorities will not issue an ATR with respect to the allocation ofIntroduction the shares to a Dutch PE in case the structure is set up with the aim to erode the Dutch taxIn the first four months of 2011, several quite basis and the structure merely aims to avoidinteresting developments in the field of dividend withholding tax on Dutch retainedinternational taxation took place. Below we earnings. This is considered to be the case ifshall briefly describe several Decrees that the shares are transferred to a PE from ahave become public during this period of time Dutch-resident company. -1-
  2. 2. Decree on the attribution of profits to PE allocation of all relevant costs without a profit mark-up or an allocation based on the armsOn the same date as the Decree on dividend length principle.withholding tax (see above), a Decree of waspublished on the attribution of profits to a PE. As regards the allocation of intangible andThe Decree, which also applies as of 28 tangible fixed assets, the Decree clarifies thatJanuary 2011, is the Dutch elaboration of the the decisive criterion is which part of aOECD report on the allocation of profits to a company takes the active decision concerningPE and the draft content of the 2010 update of the acceptance and management of risks, allthe OECD Model Convention (further: the 2010 based on the "significant people functions".MC), containing a new Art. 7. The PE is to be considered the economic owner of tangible fixed assets, which are put atThe Decree indicates that the Netherlands will the disposal of a PE on a permanent basis. Ifapply the capital allocation approach for the such assets are only put at the disposal of theattribution of equity and debt to a PE. This PE temporarily, the PE is regarded as theapproach attributes the free capital to a PE in lessee of these assets.accordance with the assets and risks to beattributed to the PE on the basis of a functional With respect to financial transactions, internalanalysis. Thin cap rules may become interest dealings may arise in the case ofapplicable in case a company is not financed treasury activities, which constitute "significanton an arms length basis. The approach people functions". Note that the Decree doeschosen to determine which costs are to be not consider all treasury functions to result inallocated (the fungibility approach) will result in interest dealings. This, because thea portion of the whole enterprises actual compensation could also consist of a deemedinterest expenses paid to third parties to be recharging of costs with a profit mark-up.allocated to a PE. Under the Decree, interest costs or interest income will not be recognized, if the internalIn order to avoid double taxation, if another debts or debt-claims result from an internalcountry applies another method of attribution, supply of goods or services.the Netherlands may start a mutual agreementprocedure under the relevant tax treaty. If, after If the PE exercises the "significant people -) functions" with respect to the accepting and2010 Art. 7 applies, the Netherlands will follow management of risks, financial assets may bethe approach of the country were the PE is attributable to the PE. However, if the financialestablished, provided three conditions are met. assets are kept for a specific reason, e.g. aThe first condition is that the different treatment company take-over or a dividend distribution,is a result of domestic legislation. Secondly, the financial assets are not attributable to thethe country where the PE is located applies PE if the decision to use the financial assetsanother method recognized by the OECD, and, for the purposes as described before, was notfinally, that approach results in that particular taken by the PE. No profit level of a dependentcase in an arms length attribution. agent should be attributed to a PE, because the agent should receive an arms lengthRisk allocation to a PE compensation.The risk allocation to a PE should be similar to The Decree provides that an ATR can bethe allocation of risks to an unrelated company. requested with respect to the profit attributionIn the Decree, various applications to various to a are described. Document on Dutch tax treaty policyFor group services the Netherlands shall applya cost-plus method once Art. 7 of the 2010 MC On 11 February 2011, the Dutch Ministry ofand the related commentary is adopted. As Finance issued a document on the Dutch taxregards tax treaties based on the pre-2010MC, the Netherlands will allow both an e Document -2-
  3. 3. shows the various significant political and finally the use of the OECD Model as a startingeconomic changes, including the increased point, with tailor-made proposals if and wheninternational fiscal transparency and exchange necessary. Additionally, the instruments toof information, that have been on the upscale reach these goals are described, includingsince the publication of the previous - 1998 - methods to avoid double taxation, OECDPolicy Document, Also, the European and developments, the impact of EU developmentsinternational developments as well as the and the prevention of treaty abuse.domestic tax developments and the OECDdevelopments and an increasing focus on the Dutch preferences under the new Documentavoidance of abuse and the subsequent rise inthe use of anti-abuse clauses have to be Briefly summarized, the Dutch positions areconsidered. the following: in the first place, the Netherlands will continue to prefer the use of the place ofIn the Document the policy framework for the effective management as tie-breaker rule.coming years is described. Also, the Document Further, the Netherlands wants to solve casescontains general considerations with respect to of double (non-) taxation resulting fromthe choice of treaty partners, a priority list with classification differences of hybrid entities byrespect to future treaty partners, the use of mutual agreement procedures. As regardsanti-abuse provisions and entitlement to treaty funds for common account, the Netherlandsbenefits. Finally, the Document states on which aims to sign competent authority agreements.points the Dutch tax treaty policy deviates from Further, as regards the attribution of profits to athe Model and Policy Documents of 1987, PE, a PE-definition is preferred with a limited1996 and 1998. scope and including the new article 7 of the OECD Model Convention. The Dutch are keenThe Document clearly states that new tax to include specific anti-abuse provisions totreaties should contribute to the maintenance combat avoidance of dividend withholding taxand strengthening of an attractive investment as well as avoidance of withholding taxes onclimate for international business on one hand interest and royalties levied by treaty partners.and combating of tax fraud on the other hand.As regards negotiations for new tax treaties, Also, it is preferred to include a clause statingthe focus will be on emerging economies and that buying back shares and winding-updeveloping countries. The Netherlands intends proceeds would qualify as dividend income. Asto contribute to the enhancement of the tax regards capital gains, resident-state taxation issystems and the improvement of the preferred; however, focus is also on keepingfunctioning of the tax administrations for taxation rights as regards gains from adeveloping countries. substantial shareholding. As regards taxation of pension rights and annuities, theThe Document also contains a schedule to be Netherlands prefers a source-state taxation ifused when deciding whether the Netherlands the build-up of the pension/annuity was fiscallywould like to negotiate a full tax treaty, a tax facilitated by granting a deduction for thetreaty with a limited scope, or a tax information payment of the premiums. If a treaty contains aexchange agreement. It appears from the clause that refers to a domestic anti-abuseaccompanying letter to the Document that provision, a mutual agreement procedure isbecause the Netherlands in the near future will preferable for the Netherlands. In order tomainly negotiate with non-OECD countries realize capital import neutrality, thehaving tax systems that deviate significantly Netherlands aims to terminate present taxfrom the Dutch system, the Dutch standard sparing credits and is not willing to include newmodel shall become less relevant. ones in tax treaties. Automatic and spontaneous exchange of information isIn the Document once again aspects of the desirable. A -clause is nottreaty policy that are vital to the Netherlands to be inserted in tax treaties.are explained, such as the inclusion of anextensive exchange of information provision,the inclusion of anti-abuse provisions, and -3-
  4. 4. Tax regulation for the Country A claim for a refund must be made within 3 years after the end of the calendar year inAs of October 10, 2010, the Netherlands which the withholding tax is withheld. AnAntilles have been dissolved. Instead, currently exemption or refund from withholding tax in3 countries within the Kingdom - besides the respect of participation dividends must beEuropean part - exist: Curaçao, Aruba and Sint claimed by submittance of forms.Maarten. The other 3 islands (Bonaire, SintEustatius and Saba) have opted to become a Council of ministers agrees on Bill on thepart of the Netherlands. As such, they have deductibility of currency loss exchanges onbeen transformed into communities within the participationsNetherlands. On April 8, last, a press release was issued, inAlthough they have become part of the which it was stated that the Dutch council of ministers agreed that a Bill shall be proposedown tax system. As a result of two tax to Parliament on currency exchange results onsystems, there is a risk of double or non- participations.taxation. Therefore additional legislation wasrequired to address this issue and to avoid Under current Dutch law, currency exchangesuch situations to the largest extent possible. results on participations fall within the scope of the participation exemption and thus cannot beThe Tax regulation for the Country, which is taken into account. At present, there arecomparable with the tax regulation for the several tax payers that on the basis of theKingdom (that is and remains in place as verdict of the European Court of Justice in the case C-293/06 (Deutsche Shell) take thethat challenge. It contains attribution opinion that currency exchange losses can beregulations for real estate, business income, deducted from the fiscal result.dividends and capital gains. Due to the specificsituation (1 country with 2 tax regimes) the The Bill to be proposed shall aim at realizingoutcomes sometimes differ from the outcome deductibility from the fiscal result for currencythat would result under the application of Dutch exchange losses on participations and taxationtax treaties. of currency exchange profits on participations. Thus, the participation exemption shall not beIn this regulation, no rules have been applicable to these results Also, the Bill aimsincorporated for gift- and inheritance tax. Thus, to avoid that currency exchange losses shallDutch regulations - including a 10-years fiction under certain circumstances be deductibleafter emigration from the Netherlands remain twice (once as currency exchange result andeffective. once as part of a possible winding-up loss). Finally, the Bill shall propose to not apply theTax Regulation for the Kingdom participation exemption on currency exchangeimplementing regulations in respect of results made on a participation that has beenCuraçao and St. Maarten published. transferred within the group.In the Official Gazette of 8 March 2001, the The Bill shall be applicable to currencyimplementing regulations concerning the exchange results that are realized after theapplication of the Tax Regulation for the date of the press release. The proposal of theKingdom (TRK) in respect of Curaçao and St. Bill shall be presented to the Council of StateMaarten were published. The regulations deal (Raad van State, an advisory council to thewith the formalities that Curaçao and St. government) for advice, after which and afterMaarten companies must observe to obtain an possible adjustments the Bill shall beexemption or refund of Netherlands presented to Parliament. If Parliamentalwithholding tax on "participation dividends" approval is granted, this Bill is enacted as of(note that in that case a participation of at least April 8, 2011 17:00 pm.25% is required). -4-
  5. 5. Fiscal agenda of April 14, 2011 EUR 500,000 of interest paid would still be deductible. The amount of non-deductibleIt must have been busy times for the Dutch interest is to be determined on the basis of aunder-Minister of Finance, as he also certain debt-to-equity ratio that is still to be determined. Under this measure, this wouldThis Fiscal Agenda shows the outlines of the mean that also interest payable to third partiesdesired policies on, a.o. corporate income tax would not be deductible by the fiscal unity.issues. It is indicated that the Bill containing theseAim of the Agenda is to provide certainty which proposals shall be presented in due course. Inis vital for the tax climate on businesses. In the mean time, the Dutch tax authorities are tothat respect he aims at ending the discussion investigate the issue of financing that is usedbetween the different fiscal treatment between to acquire participations that remain outsideloans and equity: the remunerations on loans the fiscal unity of which the acquiring company(interest) are in principle tax-deductible, forms part. At present it remains vaguewhereas the remuneration on capital whether such loans may be targeted for(dividends) in principle are tax-exempt. The limitation of interest deductibility.Agenda describes in this respect threecorporate income tax measures. It is planned What forms no part of the Agenda, but is underthat they enter into force after parliamentary investigation by the tax authorities at present,approval in 2012. The first measure is a is a possible amendment to the corporatereduction in the corporate income tax rate from income tax regime for foreign investment25% to 24%. companies that hold a substantial interest in a Dutch company, but the Agenda does notSecondly, the under-Minister aims to change further provide any suggestions on the way tothe tax regime for permanent establishments deal with this matter.into a tax-exempt regime. Losses may not be Summarizingoffset against profits realized by the companyof which the PE forms part. Possibly an All in all quite some developments are taking place or shall in the near future take place incase the PE is wound up or sold to a third the Netherlands. CROP tax advisors shallparty. On the other side, profits of a foreign PE update you in the coming newsletters on thesewould be tax-exempt, except for profits that are topics might developments occur.generated by a passive PE that is lowly taxed.In that case, a credit system should apply. Weassume that most readers that are a bit familiarwith Dutch tax law recognize the features of For information please contact:the Dutch participation exemption in theproposed regulation. Marco Visser or Frans Tempel T: +31 33 495 25 00 T: +31 33 463 57 27 E: E: ftempel@crop.nlFinally - and somewhat astonishing when oneconsiders that there have been many calls fora reduction of the overkill of rules on the Disclaimer: CROP registeraccountants and CROP belastingadviseursdeductibility of interest - a further limitation on makes no representation nor gives any warranty (either express or implied) as to the completeness or accuracy of this publication. CROPinterest-deductibility is planned on interest registeraccountants and CROP belastingadviseurs is not liable for the information in this publication or consequences of the use of thispayable by an acquiring holding companies publication. CROP registeraccountants and CROP belastingadviseurs willthat forms subsequently a fiscal unity with the not be liable for any direct or consequential damages arising from the use of the information contained in this that has been newly acquired. Thismeasure aims to ensure that the interest onthe acquisition loan is not to be offset againstthe profits of the newly acquired company.Under this measure, a maximum amount of -5-