International tax planning - The tax cost of repatriating profits from the Netherlands

Dividends paid by a Dutch company to foreign shareholders are generally subject to a withholding tax. The domestic rate is 25%, but in many cases the rate can be reduced through the application of tax treaties or the EU tax exemption.

For the Dutch treaty rates for dividends we refer to the page Overview of the dividend withholding tax under Dutch tax treaties. For more information about the EU exemption for corporate dividends we refer to the page The Dutch Holding Company.

The Netherlands do in general not levy a withholding tax on outbound interest or royalty payments. The Netherlands do in most cases also not levy a capital gain tax when the shares in a Dutch holding company are transferred. This means that the levy of Dutch withholding tax, if any after application of tax treaties or the EU tax exemption, can easily be avoided or kept minimal through high loan funding of the Dutch company in anticipating of a tax free capital gain upon exit.

A standard route for a tax efficient repatriation of profits from the Netherlands is the Netherlands Antilles. The Netherlands Antilles are part of the Dutch Kingdom as a consequence of which there is a special constitutional relationship between these countries, which includes a regulation for the avoidance of double taxation. With the tax haven status of the Antilles this makes The Netherlands one of the very few countries worldwide who has a "tax treaty" in place with a tax haven country.

The current withholding tax rate on dividends paid to Antilles corporate shareholder is 8.3%, but there are negotiations pending to reduce this rate to 0%. At the level of the Antilles no additional tax becomes due. The Antilles levy no withholding tax on dividends.

It is noted that:

• The Dutch thin capitalization provisions, allowing a 3:1 debt equity ratio, do only apply to the levy of Dutch corporate tax and are in essence not relevant for the levy of withholding taxes, meaning that the payment of interest is generally a tax efficient method to subtract profits from the Dutch company without incurring Dutch withholding tax.
• As a general principle of tax law, the expenses paid by a Dutch company (like interest and royalties) must be "at arm’s length" i.e. not excessive in comparison to market practice. Expenses in excess of market rates can be qualified as a constructive dividend.
• For holding companies a minimum equity funding of 15% of the cost price of the subsidiary(ies) is recommended.
• Dutch income tax and corporate law provide for a capital gain tax on the alienation of shares, but usually tax treaties prohibit the Netherlands to execute this right on taxation.
• Interest paid on certain categories of profit sharing loans or interest paid to qualifying substantial shareholders can become subject to Dutch (corporate) income tax, but also here, tax treaties generally prohibit the Netherlands to effectuate this right on taxation

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