Tax Advantages of Dutch Legal Entities
Limited liability companies
The Netherlands offers two different types of limited liability companies. There are both private and public limited liability companies. The private limited liability company is the most frequently used for international tax planning. In Dutch it is called ‘Besloten Vennootschap met beperkte aansprakelijkheid’, or simply, BV. Although the name says private, a sole shareholder will be registered in the publically available Chambers of Commerce. The liability of a shareholder in a Dutch BV is limited to his or her financial contribution. There is a nominal minimum capital requirement of only one Euro cent and shares are transferrable by notarial deed. Those transfers may be based on articles of association.
A BV is recognized as a Dutch tax resident starting from the day of incorporation, thus has to meet Dutch substance requirements in order to comply as resident entity for tax purposes in the Netherlands.
Foreign investors who prefer to remain anonymous may use a foundation as a legal entity to acquire shares in assets or companies in exchange for depository receipts. This is common practice in international tax planning. Technically, the investor is no longer legal owner of the shares. That ownership has been transferred to the administration office (the foundation), together with the voting rights belonging to those shares. The benefit for the investor lays in the fact that he remains entitled to all economic rights of the shares, for example dividends or bonus shares, while remaining anonymous. In order to do so, the investor needs to transfer his shares to the administration office, receiving depository receipts in exchange. The whole transaction is described in a non-disclosed contract between the parties concerned.
Specifically the Dutch foundation or ‘stichting’ in Dutch can be composed with one ore more entities or even individuals, with only the names of the management being disclosed. They can be established for purposes such as charity, estate planning, or asset protection. Tax wise, foundations are transparent entities for which the objectives are described in the articles of association.
In international tax planning the ‘commanditaire vennootschap’ or CV is the most commonly used.
It is a limited partnership, which in most cases is established by a general partner carrying unlimited liability and a limited partner with limited liability. Depending on if it is an open or closed CV, interests are freely transferrable or not. In a closed CV, such transactions will require the consent of all partners. That is not the case for an open CV where interests are freely transferrable. In any case, a minimum contribution is not required.
Also, where tax matters are concerned, there is a difference. An open CV is considered to be a taxable entity, contrary to a closed CV, which is tax transparent with the liability directly in the hands of each individual partner. Only the names of general partners are publically disclosed in the Chambers of Commerce.
Cooperatives are fully taxable bodies without a minimum capital requirement. Their most beneficial – tax related – feature is that, in general, they are not obliged to pay withholding tax on dividend distributions to their members, contrary to a BV that is subject to a dividend withholding tax of 15% . Some anti abuse rules have been established since 2012 to enforce paying withholding taxation on profit distributions in a few cases.
Dutch company law considers cooperatives to be entities with a legal status, being associations incorporated by notarial deed. That deed encloses the articles of association which must state that the objective of the cooperative is to provide for certain material needs of its members upon agreement. A minimum of two members is required to form a cooperative and transferring those membership is controlled by the articles of association.
How about the tax advantages?
The Netherlands has created a business-friendly climate to attract foreign investors. Here’s the top ten of tax friendly features the Netherlands has to offer:
- Beneficial and comprehensive Double Tax Treaty network providing reduced withholding tax rates on interests, dividends and royalties paid to Dutch companies and mostly excluding the capital gains from taxation arising from the sale of shares in source countries (pact with approximately 100 jurisdictions).
- Access to the Dutch Bilateral Investment Treaty network (BITs) composed of 96 jurisdictions. BITs usually protect against expropriation and protect investors in such a way that they receive the same treatment domestic investors or investors from third states would. Using a Dutch company in the corporate structure could safeguard you from foreign governmental intervention by incorporation dispute settlement clauses allowing international arbitration in favour of using the domestic court system.
- Access to EU Directives reducing withholding taxation on payments between related companies.
- Full exemption from taxation for income from qualifying foreign subsidiaries. The participation exemption regime allows no taxation in the Netherlands of eligible dividends and capital gains if a Dutch holding company holds an interest of at least 5% and meets at least one of the rules below:
- The consolidated assets of the subsidiary consist of less than 50% of low-taxed free passive investments.
- The objective for investing in the subsidiary is to obtain a return that is higher than what may be expected from regular asset management.
- The subsidiary is subject to a realistic tax levy according to Dutch standards, which consists of at least 10%. Also, Dutch law provides exemption from taxation for income from foreign permanent establishments of Dutch entities and tax efficient repatriation of profits.
- Innovation box regime, taxing profits from eligible intangible assets at an effective rate of 5%
- Financing (including hybrid debt) and IP arrangements without retention tax on interest, services, and royalty payments even when paid to tax havens.
- Supportive treatment for setting up businesses within the EU for Dutch holdings
- Tax-deferred basis for corporate reorganizations.
- Possibility to form a fiscal unity (subject to certain conditions for directly held subsidiaries of Dutch companies) allowing you to be taxed as a single taxpayer.
- Opportunity to defer taxation of gains realized on the sale or conversion of tangible or intangible business properties that are not held as a passive investment.
If you are looking for exclusive benefits and advantages regarding international tax planning, you will find that Dutch legal entities have a lot to offer. Moreover, the Netherlands is becoming progressively interesting as a jurisdiction for holding company entities. Wondering which opportunities the Netherlands has to you? Or do you already want to set-up a Dutch BV? Just give us a call, and our experts will provide you with tailored advice!