Tax structuring and planning via the Netherlands can be worthwhile
November, 11th 2006
MR MARC KUIJLAARS, chairman of KPMG Meijburg & Co's India desk, the Netherlands.
What is common to Ballarpur Industries, Crompton Greaves, NIIT, HCL Technologies, ONGC Videsh, Jubilant Organosys, Infosys, Wipro, Satyam and iGate? These are some of the Indian companies that have set up, or are in the process of setting up, operations in the Netherlands. Why? "Because the country has emerged as a favourite in Europe," says Marc Kuijlaars, a Senior Tax Manager within the International Tax Practice and chairman of KPMG Meijburg & Co's India desk. Marc is also a member of the Dutch Association of Tax Advisors (Nederlandse Orde van Belastingadviseurs) and practices in all fields of (inter)national corporate tax (including tax planning) with a focus on (re)structuring, reorganisations, mergers, acquisitions and joint ventures. His career with the firm has principally involved him with multinational clients and Marc provides tax advisory services to several clients from (outbound) and into (inbound) India. Here, he takes on a few questions from Business Line.
What are the factors that weigh in the choice of an overseas business location?
The "soft" factors like commercial/business opportunities, infrastructure, knowledge and local expertise are obviously very important. After all, it's a business decision aimed at making profit. Taxation is still not generally the key driver to determine a location, although CEOs and CFOs of multinational companies focus more and more on reduction of their worldwide overall tax burden. Hence, taxation is becoming more and more important in choosing a location to set up a company.
Why is the Netherlands a favourite in Europe?
With a host of advantages in terms of state-of-the-art infrastructure, financial benefits in the form of tax advantages, the cooperative approach of the Dutch Revenue, government grants, etc., the Netherlands is certainly a preferable investment location for Indian companies seeking to establish or expand their presence in the EU.
The Netherlands, in north-western Europe, is favourably located on the North Sea. It is bordered by Germany in the east and Belgium in the south. The Netherlands is the gateway to Europe, with a first-rate logistics network, major seaports in Rotterdam and Amsterdam, and an excellent public transportation and road infrastructure. Major European cities, such as London, Berlin, Paris, and Milan, are all within about an hour's flight time of Amsterdam's Schiphol Airport. Besides that the tax treaty between India and the Netherlands has some very attractive features.
How does the regulatory set-up favour the setting up of units there?
Dutch regulations encourage incoming investment and start-ups, ease transition, stimulate commerce, and generally show no bias against firms that have their home base outside the Netherlands. In addition, the Dutch are proactively sensitive to the special needs of foreign firms and expatriate workers. Support from the Dutch Government is available in various forms including grants and incentives, credits and guarantees (additional grants and incentives may also be available from the EU).
The procedure for setting up an enterprise in the Netherlands is quite straightforward. A foreign individual or a company may operate in Netherlands through a company (generally a BV or an NV) or unincorporated (partnership) entity or a branch office.
What are the tax nuances?
Dutch corporate income-tax is levied on the net taxable income of entities specified in the Dutch Corporate Income Tax Act. The current rate is 29.6 per cent. However, the Dutch Government is currently considering a proposal designed to boost the investment climate of the Netherlands and reduce this rate to 25.5 per cent with effect from January 2007. Lower step-up rates will apply to certain levels of taxable income.
The conditions for applying the renowned "participation exemption," which exempts from tax income (dividends and capital gains, but also some other specific types of income) a Dutch company receives from qualifying investments, are likely to be more relaxed from 2007. Under the proposed conditions, as a general rule, a Dutch company holding a 5 per cent or greater participation (either domestic or foreign) in a company involved in an active trade or business will qualify. Only shareholdings in companies which hold predominantly passive investments and which are subject to an effective tax rate of less than 10 per cent, when calculated in accordance with Dutch rules, will be ineligible to apply the participation exemption (although a credit may be available).
Furthermore, there may be no withholding tax on dividend, capital gains, interest, and royalties relating to transactions with other EU Member-States (generally subject to the fulfilment of conditions in tax treaties or applicable EU directives). Interest and royalties paid by a Dutch company are not subject to any interest or royalty withholding tax. As from 2007, the withholding tax on dividends is likely to be reduced to 15 per cent, although of course lower rates may apply under tax treaties or the EU Parent-Subsidiary Directive.
Are there specific benefits that are available in the treaty between India and the Netherlands, compared to what India has with other countries?
The tax treaty between the Netherlands and India has some very attractive features that make tax structuring and planning via the Netherlands worthwhile. The Netherlands does not levy any withholding tax on royalties and/or interest (no basis in domestic law) so these can be paid to India free of any withholding. In addition, the scope of the royalty article in the tax treaty between the Netherlands and India is far narrower than what India has with some of the other countries, resulting in interesting planning opportunities. All this, combined with the option to obtain Advance Tax Rulings and/or Advance Pricing Agreements (on transfer pricing), thus providing certainty and assurance in advance regarding the acceptability of the proposed approach or structure, results in companies focussing on what they do best doing and generating business.
In most cases, the withholding tax rates for companies based in non-EU countries are very low because of the Netherlands' vast tax treaty network (comprising almost 80 treaties). The Netherlands generally also allows an exemption for profits earned through a Permanent Establishment or representative for treaty purposes, thereby preventing double taxation. As regards employees, qualifying expatriates are effectively exempt from tax on 30 per cent of their Dutch employment income for up to 10 years (the 30 per cent ruling). The remittance of Customs duties can be efficiently planned by importing goods into a bonded warehouse facility, where they can be stored free of any import duties until they are shipped to a customer within the EU.
Other pluses (IPR, accounting and so on).
The Netherlands is not only an excellent holding company jurisdiction, but a favourable jurisdiction for intellectual property holding companies as well. The laws for IPR protection are very sophisticated in the Netherlands and treaties have been concluded to protect these investments. Apart from these beneficial tax aspects, the Netherlands also complies with international accounting standards and policies, thus enabling companies to ensure that their accounting records accord with international standards.
On the locational advantages. Any examples of companies benefiting by locating in the Netherlands?
Economies of scale, flexibility, and efficiency are compelling companies to find operating bases from which they can reach a large market and locate high-quality companies and strategic partners to support them in their day-to-day business. For foreign businesses, the geographic location of the Netherlands, which facilitates entry into a still-growing European market, combined with a Government that puts great effort into attracting foreign investments/companies by creating a beneficial tax climate, is a very important consideration for investing in this country. For many years, a significant number of US and Japanese multinationals have chosen to base their regional headquarters or top holding companies in the Netherlands.
Is the political climate conducive?
The Netherlands is a constitutional monarchy and has a stable political climate. As a long-term member of the European Union (EU), it benefits from various harmonising EU regulations and Directives. It is a free-market economy and is one of the richest countries in the world. Dutch industries include a varied assortment of small- and medium-sized enterprises and many large, publicly listed enterprises that are particularly strongly represented in the oil and gas, banking, construction, dredging, chemicals, paper, and packaging industries.
Are there cultural issues that overseas companies face in the Netherlands?
The Netherlands is a multicultural country with a total population of about 16 million, with a working population of about seven million. Dutch workers are generally well-educated, service-minded, internationally oriented, multilingual (almost everyone can speak English), adaptive and extremely productive. Because the Netherlands is a relatively small country, the Dutch business environment is familiar with cross border business. Another benefit of that is that Dutch service providers and consultancy firms are known for their ability to think outside the box and put things in a broader perspective.