The favorable tax regime for holding companies in the Netherlands is well known. An important tax advantage in the Netherlands is that qualifying dividends and capital gains are exempt from corporate income tax under the Dutch participation exemption. By using the extensive tax treaty network, the typical Dutch holding structure allows for a reduction of foreign withholding taxes on outbound dividends and capital gains by channeling these flows through a Dutch holding company (“Dutch HoldCo”).
The subsequent repatriation of the retained earnings by the Dutch HoldCo to its foreign corporate shareholder may trigger Dutch dividend withholding tax at a rate of 15%. However, this rate is often reduced on the basis of a double tax treaty or the EC Parent Subsidiary Directive
Based on Dutch corporate law, several types of legal entities can serve as a Dutch HoldCo. The most commonly used type is the Dutch BV. A Dutch BV is a limited liability company of which the capital is divided into shares. As of October 1, 2012, there is no minimum capital requirement for Dutch BVs. Furthermore, a Dutch BV has legal personality under Dutch corporate law. Its counterpart, the public limited liability company, is the so-called NV.
For more detailed information about Dutch BVs and NVs, we refer to our memorandum titled ‘Legal aspects of Dutch BVs and NVs’.
In general, the income of a Dutch HoldCo is subject to corporate income tax at a rate of 20%. Profits exceeding € 200,000 are taxed at a rate of 25%. However, income derived from qualifying participations, such as dividend income and capital gains, are fully tax exempt under the Dutch participation exemption. The main criteria to qualify for the participation exemption are listed in Annex I.
If set up as a BV, NV or other legal entity, the Dutch HoldCo will have access to the extensive tax treaty network of the Netherlands as well as the EC Parent Subsidiary Directive, resulting in tax treaty protection and reduced withholding tax rates on dividends received and paid by the Dutch HoldCo. Consequently, structuring international holding activities via a Dutch HoldCo can result in substantial tax savings.
In a situation where the shares in a Russian company would be held directly by one or more shareholders residing in the EU, dividends will in many cases be subject to 15% Russian dividend withholding tax (unless reduced under a double tax treaty). This Russian dividend withholding tax can be reduced substantially by interposing a Dutch HoldCo.
In the event a Dutch HoldCo is interposed between the Russian company and its EU shareholders, the Russian company will distribute dividends to the Dutch HoldCo instead of to its foreign shareholders. Subsequently, the Dutch HoldCo will distribute dividends to the foreign shareholders. Dividend distributions from the Russian company to a Dutch HoldCo are subject to 5% Russian dividend withholding tax, whereas dividend distributions from a Dutch HoldCo to the EU shareholders are not subject to Dutch dividend withholding tax. Consequently, interposing a Dutch HoldCo would result in a saving of 10% Russian dividend withholding tax.
Suppose the dividend payment to the EU shareholder(s) amounts to 100,000 Rubbles. In that case, an amount of 15,000 Rubbles1 of Russian dividend withholding tax would be due if the dividends would be paid directly to the EU shareholder(s). However, if the holding activities are structured via a Dutch HoldCo, only 5% Russian dividend withholding tax will be due.
Consequently, by interposing a Dutch HoldCo, the Russian company will save 10,000 Rubbles of Russian dividend withholding tax for each dividend payment in the amount of 100,000 Rubbles. Please note that a saving between 5% and 10% may possibly also be achieved if the shareholder(s) would be resident of a country with which the Netherlands has concluded a tax treaty.
The Dutch HoldCo must file an annual corporate income tax return. This tax return is normally prepared in euros. The taxpayer however has the possibility to file its return in another currency. This could be attractive if the Dutch HoldCo is part of an international group which reports in a foreign currency or prepares its administration in a foreign currency. By applying this currency as well, foreign exchange results will be eliminated at the level of HoldCo.
Registration in the trade register of the Dutch Chamber of Commerce is mandatory and the Dutch HoldCo is required to prepare annual accounts in conformity with Dutch civil law. A summarized version of its annual accounts needs to be filed with the Dutch Chamber of Commerce on an annual basis.
Annex I – Dutch participation exemption
If a subsidiary qualifies for the Dutch participation exemption, any income derived from the participation (dividend income and capital gains) is tax exempt in the Netherlands. Hereinafter we will describe the conditions in order to qualify for the Dutch participation exemption.
In general, the Dutch participation exemption applies if the following conditions are met:
If both the ownership test and the intention test are positive, it can usually be concluded that the participation exemption is applicable.
Notwithstanding the outcome of the intention test, however, a participation is deemed to be held as a portfolio investment if the function of the subsidiary – together with its lower tier partici-pations – consist for more than 50% of passive intra-group financing/licensing/leasing activities.
Escape – subject to tax test
If the intention test is not met or if the above exception applies, the participation exemption will still be applicable if the subsidiary is subject to a taxation that is in accordance with Dutch tax standards. If the subsidiary is subject to corporate income tax at a rate of at least 10% and the tax basis in that country is comparable to the Netherlands, the subsidiary is considered adequately taxed (‘subject to tax test’) and the participation exemption will still be applicable.
Real estate company
Finally, please note that if the subsidiary’s direct or indirect assets comprise at least 50% real estate, the participation exemption will also be applicable at all times.