TaxConnections Picture - Government Buildings in NetherlandsOnly a few days ago the Dutch intent to curb tax abuse was put to paper when a draft Decree was sent to Dutch Parliament. As an introduction on August 30th, 2013, the Dutch Secretary of Finance of the Netherlands and the Minister for Foreign Trade and Development Cooperation issued a letter declaring the government’s intent to curb tax abuse while preserving the attractiveness of the Dutch investment climate.

In addition to large consumer base, availability of highly skilled labor and proximity to airports and seaports, investors are attracted to the Netherlands’ competitive Dutch tax framework and the availability of investment protection agreements. International companies choose the Netherlands because they are able to align their business models with the Netherlands’ tax-effective corporate structure.

Dutch Tax Framework

The competitive Dutch tax framework consists of sophisticated Advance Pricing Agreement and Advance Tax Ruling, (APR/ATR) regulations, a solid participation exemption as well as a competitive expanding tax treaty network. Furthermore, companies are not subject to a minimum tax nor are there any fees or duties when applying for an APR/ATR. Read More

TaxConnections Blogger Hendrik VanDuijn posts about Dutch LegislationOn 3 September 2013, the Dutch government released a bill that will allow for the partitioning doctrine for splitting benefits under the participation exemption to be applied in case of a legislative change.

The government originally released its proposal in June after the Dutch Supreme Court ruled that the doctrine does not apply when there is a change in the law unless the law provided transitional rules.

Under the participation exemption, corporate taxpayers are exempt from Dutch corporate income tax on benefits derived from qualifying shareholdings.  Several conditions must be met for income from shares to fall within the scope of the exemption. If the conditions are not met without interruption, a benefit must be split into a taxable and nontaxable periods.

The bill applies to both a change in the application of the participation exemption as a result of a change in legislation as well as a change in the relevant facts and circumstances.

Therefore, when there is a change in the eligibility of certain shares for the participation exemption, those shares would be revalued at the fair market value at the time of the change. The amount would be frozen and booked into a separate reserve that would be released upon disposal of the participation or in the case of a transfer as a result of a Read More

The Argentinian cancellation of the tax treaty with Spain followed by the financial crisis in Cyprus made companies aware of the pros and cons of their chosen holding company structure. Currently companies are looking into the options they have to strengthen their holding company structure within the EU. One of the jurisdictions which comes to mind is The Netherlands.

Introduction

Through domestic law changes and the EU jurisprudence, the international mobility of corporations is definitely increasing. One of the options EU/EEA body corporates have is to convert into the entity of another jurisdiction.
In The Netherlands domestic legislation is being prepared to ease a cross-border conversion. I will highlight the current practice of holding company restructuring and introduce the concept of conversion. Further the ECJ jurisprudence with regard to cross-border conversions as well as the draft Dutch domestic legislation is discussed. At the end I will provide some Dutch tax considerations regarding outbound and inbound conversions as well as my conclusions.

Current practice

Interposing a new holding company or a new holding company location within a group structure can be done many ways. Merely transferring the residency of a company by transferring the effective management and control is an option, however this may not always be practical. The body corporate is typically bound by law of its original home country and also needs to adapt to the host country rules. This increases the corporate compliance.

Another option is to create a new holding company in another jurisdiction and transferring the assets of the obsolete holding company to the new holding company. If no unilateral succession is needed in the corporate structure, then the transfer can be done via an asset deal or via a liquidation/dissolution. This has a couple of draw-backs, such as the legal transfer of ownership of assets and triggering unrealized capital gains, because a legal transfer is generally regarded to be a recognition event.

The assets of a company can be transferred under unilateral succession (within the EU) by performing a cross-border legal merger. In The Netherlands it is in any case possible to perform a cross-border legal merger between Dutch companies which have a capital divided by shares (BV/NV) and specific EU companies. A merger between a non-EU company and a BV/NV is not facilitated in Dutch corporate law.[2] Within the EU cross-border mergers are becoming more and more common practice. Cross-border mergers benefit from EU legislation which instructed the member countries to not hinder an EU cross-border merger. These rules are laid down from a EU corporate law perspective in the Directive 2005/56/EC[3] and from tax perspective via the EU Merger directive[4].

Conversion via ECJ jurisprudence

The Vale case[5] was ruled on July 12th, 2012 by the ECJ. The ECJ ruled that article 49 Treaty on the Functioning of the European Union (further: ”TFEU”) and 54 TFEU regarding the freedom of establishment are infringed if the host Member State does not treat the domestic conversions the same as a foreign conversion. In summary this entails that a cross-border conversion by a host Member State within the EU/EEA should be allowed, if a domestic conversion by the host Member State is also allowed. The judgment states:

“However, the principles of equivalence and effectiveness, respectively, preclude the host Member State from refusing, in relation to cross-border conversions, to record the company which has applied to convert as the ‘predecessor in law’, if such a record is made of the predecessor company in the commercial register for domestic conversions, refusing to take due account, when examining a company’s application for registration, of documents obtained from the authorities of the Member State of origin.”

The TFEU upholds that if you can domestically convert one company into another, this should also be allowed by the host Member State for companies from other EU/EEA countries. In The Netherlands it is possible to convert a Dutch legal entity into another Dutch legal entity. Conversions can take place in The Netherlands between BVs, NVs, foundations, cooperatives and associations. Based on the Vale case it could be argued that companies from other EU/EEA countries are eligible to convert into a vast array of Dutch legal entities as well.

Conversion via Dutch domestic legislation

Currently there is no Dutch legislation which covers the conversion of EU/EEA companies with a capital divided by shares into a similar Dutch company.[6] However, based on the ECJ Cartesio[7] case the Commission Corporation law spontaneously issued advice on February 12th, 2012. It advised to incorporate Dutch legislation to facilitate cross-border conversion of Dutch companies into EU/EEA companies. The reasons to incorporate domestic legislation was that the position of employees, creditors and minority shareholders might be infringed if no domestic legislation was in place. Moreover, it indicated that European Parliament requested the European Commission to draw-up a new Directive, but the uncertainty when this directive would come into force, made the need to come with domestic legislation greater. Therefore, the Commission advised to legalize the conversion of Dutch companies which have a capital divided by shares (BV/NV) into other similar EU/EEA companies.

The Dutch Minister of Security and Justice is working on legislation to protect the position of employees, creditors and minority shareholders. His focus is on the Dutch outbound situation, whereby there are various protection mechanisms in place for the benefit of the stakeholders. One example is that in case of abusive situations the Dutch Minister of Security and Justice has the right to object. For every protection mechanism which doesn’t apply for a Dutch domestic conversion it can be questioned if the legislation is in line with the prevailing ECJ jurisprudence.
For Dutch inbound situations the new legislation prescribes that an EU/EEA company can only be converted in a Dutch BV or Dutch NV. The requirements to be fulfilled are (a.o.) a notarial deed, which is drawn up in Dutch as well as documentation that the procedure in the home country has been full-filled. In case a conversion takes place in a Dutch NV an audit certificate is necessary to prove that the minimum capital requirement is met. Currently it is unknown when this legislation will be finalized.

Because Dutch domestic legislation currently allows the conversion of a variety of Dutch legal entities which conversions are not limited to the BV or NV, the draft legislation regarding cross-border conversions would likely not be all-inclusive enough and therefore not be in line with ECJ jurisprudence. Therefore, if a conversion into another company than a BV or NV is contemplated, the direct application of ECJ jurisprudence would need to be employed.

Dutch tax legislation

From a Dutch tax perspective a conversion of a BV into an NV and vice versa is not regarded to be a liquidation of the company for corporate income tax (CIT) purposes (article 28b of the Dutch CITA). If other Dutch companies (such as a cooperative) are converted into another legal form, this is regarded to be a liquidation from a Dutch CIT, Dutch dividend withholding tax (DWT) and Dutch personal income tax (PIT) perspective. The question arises how the conversion into an EU/EEA company will be treated in Dutch outbound situations. Will the conversion be treated the same as a BV/NV conversion, not entailing a liquidation, or would it be treated as a liquidation.

A company is deemed to be a Dutch resident for Dutch CIT and Dutch DWT purposes, if it is incorporated under Dutch corporate law. The question arises how this would be applied by the home and host state after a conversion takes place. The practical hurdles would likely be solved over time, the tax technical discussions have not yet begun.

Conclusion

International corporate mobility is providing for additional flexibility with regard to international corporate restructurings within the EU/EEA. The ECJ’s position is broader than the subsequent Dutch reaction reflected in the draft legislation. This article is aimed at providing alternatives to companies which wish to strengthen their holding company structure in the current volatile environment. Updates regarding this topic will be twittered….


[1] Author is Hendrik van Duijn, Independent Dutch tax lawyer at DTS Duijn’s Tax Solutions BV (www.duijntax.com)

[2] An option is to relocate the non-EU company to a suitable EU location where it can be converted into an EU company and then perform the cross-border merger with the Dutch BV/NV.

[3] Directive 2005/56/EC Of The European Parliament and of The Council of 26 October 2005 on cross-border mergers of limited liability companies.

[4] Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfer of assets and exchanges of shares concerning companies of different member States…

[5] ECJ 12 July 2012, nr. C-378-10 (Vale Építési kft).

[6] The SCE (European Cooperative Society, whereby SCE stands for Societas Cooperativa Europaea) has its own set of applicable rules, laid down in the Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society. An SCE can be converted into a Dutch cooperative without losing its legal form.

[7] ECJ 16 December 2008, nr. C-210/06 (Cartesio).

 

When your spouse goes to The Netherlands to work and you decide to go come along you may receive tax refunds. Even if you decide not to work you could reclaim Dutch personal income tax if you meet the conditions. It seems strange that you could receive tax refunds even if you have not paid any taxes, however, this is common practice in The Netherlands. In this article I will explain how this works.

How does this work?
Every Dutch resident individual has the right to receive a general tax credit if they have a partner who is sufficiently taxed in The Netherlands. This means that Dutch resident individuals, even an unemployed partner can receive tax refunds. The annual tax refunds can amount to EUR 2,001 depending on your age and/or whether you have children below the age of 5.

Are other tax credits available?
The most common tax deduction in The Netherlands is the deduction for educational expenses. If you or your partner pursues an education which aims at generating income in the future, itemized expenses are deductible. For educational expenses a EUR 500 (2012), EUR 250 (2013) threshold applies and the total amount cannot exceed EUR 15,000, per year per person. Other types of deductions may be available as well. These include medical expenses and charitable contributions. Therefore, it is important to use a comprehensive check-list to determine if you have claimed all possible deductions.

Is it beneficial to file a tax return?
Especially in the year of immigration you will usually be eligible for a substantial Dutch tax refund. This is caused by the difference between the tax on your monthly salary versus your yearly salary. In our experience the Dutch tax refund may amount to thousands of euros. Therefore, it is beneficial to file your Dutch tax return.

Conclusion
DTS specializes in Dutch taxation. As Dutch tax advisors would be happy to help you with filing your Dutch tax return. Connect with me at:  Hendrik Van Duijn