In March 2017, following a request on the basis of the Act on public access to government information, the State Secretary for Finance published the memorandum ‘The APA/ATR practice, a memorandum regarding the most frequently occurring appearances’ (‘De APA/ATR-praktijk, notitie over de meest voorkomende verschijningsvormen’). The memorandum provides insight from a tax viewpoint into the interpretation of many frequently occurring international structures.
Namely, it deals with (1) activities of intermediate holding companies, (2) foreign tax liability, (3) qualification of hybrid forms of financing and hybrid entities, (4) limited partnership/private limited liability company structures, (5) informal capital/deemed dividend, (6) central entrepreneur/principal model structures (European/EMEA head office), (7) financing and royalty activities, (8) head office/permanent establishment profit allocation, and (9) re-invoicing.
The Dutch APA/ATR practice
Each taxpayer can ask the Tax and Customs Administration for a tax ruling in the Netherlands. The taxpayer (or the tax consultant on behalf of the taxpayer) requests the Tax Authorities to take a standpoint with regard to the tax interpretation of an intended (legal) action. Within the scope of the APA/ATR practice, the Tax and Customs Administration provides upfront certainty by means of APAs (Advance Pricing Agreements) and ATRs (Advance Tax Rulings). APAs and ATRs relate to the interpretation of the Dutch tax regulations with regard to a specific complex of facts. Contrary to an APA (upfront certainty about the determination of transfer pricing in an international context), an ATR concerns the tax treatment of a number of subjects in relation to an international group structure.
An ATR can involve the following:
- The application of the participation exemption for intermediate holding companies in international relationships and for top holding companies insofar none of the subsidiaries of the top holding company in question carries on any business activities in the Netherlands;
- International structures involving hybrid forms of financing or hybrid legal forms;
- The answer to the question whether a body established outside the Netherlands or on the BES islands, does or does not have a permanent establishment in the Netherlands or on the BES islands;
- The application of the substantial interest rules for foreign taxpayers;
- The answer to the question whether a body established on the islands of Aruba, Curacao or Saint Martin has a permanent establishment on the BES islands;
- The allocation of shares in a company to a permanent establishment established in the Netherlands or on the BES islands;
- The answer to the question whether there is a fictitious Dutch company; and
- The answer to the question whether there is an obligation to withhold the dividend tax for cooperations.
Intermediate holding company activities
A Dutch company carries on intermediate holding company activities if this company is part of a foreign group and holds subsidiaries in third countries (not being the Netherlands). Participation exemption and the fact that no dividend tax will be withheld, play an important role in these structures. Due to the application of the participation exemption (subject to conditions), the Dutch Tax and Customs Administration will not levy corporate income tax on the profits made in the country of the subsidiary when these profits are distributed to the Netherlands. In addition to the untaxed dividend income, capital gains and capital losses are also included in the scope of the participation exemption. Typically, dividend distributions made by a Dutch company are taxed with 15% dividend tax. A holding structure or intermediate holding structure achieves an optimum result if, by applying tax treaties, the said dividend tax will not be levied. In addition to the private limited liability company, a multinational also frequently uses cooperations for intermediate holding company activities. For the acceptance of the role of intermediate holding company, it is important that the intermediate holding company meets a number of specific substance conditions.
Financing and royalty activities
Multinationals use Dutch companies for financing and royalty activities in order to limit withholding tax on the interest and royalty payments (or the comparable rental or lease terms) from the paying countries. The Netherlands itself does not impose withholding tax on interest and royalty payments and has a large network of treaties on the basis of which the withholding tax on payments to the Netherlands can be decreased. These Dutch companies are sometimes referred to as financial service entities (within a group of companies) or conduit companies. Like the companies that carry on intermediate holding company activities, it is of vital importance that the companies with financing and royalty activities have sufficient substance to achieve the objective of the incorporation of these companies.