The Netherlands has a tax regime that supports Dutch entrepreneurs to do business and make investments abroad, as well as foreign entrepreneurs to do business and make investments in the Netherlands. This goes well with the open economy of the Netherlands. However, this is also one of the reasons why the Netherlands receives criticism, in particular on its favorable tax regime which is considered to facilitate conduit companies making payments to tax havens.
For this reason, the Netherlands has been described incorrectly as a tax haven. This is not good for the Netherlands and harmful for the Dutch investment climate for genuine businesses. This puts pressure on the base for the favorable tax regime of the Netherlands that should support international businesses, including the extensive double tax treaty network and the advance tax ruling practice of the Netherlands. This is undesirable.
Consequently, the Netherlands has put together its own list of low tax jurisdictions that will be used for new measures to combat international tax avoidance and evasion, in particular where the Netherlands is used as a conduit jurisdiction.
This tax haven blacklist was published on December 28, 2018. Low tax jurisdictions for this purpose are defined as jurisdictions that levy no corporate income tax or corporate income tax at a rate of less than 9 percent.
The list contains five countries that are currently on the blacklist of the EU: American Samoa, United States Virgin Islands, Guam, Samoa and Trinidad and Tobago.
In addition, the Netherlands has listed another 16 countries as low tax jurisdictions. These are: Anguilla, Bahamas, Bahrain, Belize, Bermuda, British Virgin Islands, Guernsey, Isle of Man, Jersey, Cayman Islands, Kuwait, Qatar, Saudi Arabia, Turks and Caicos Islands, Vanuatu and the United Arab Emirates.
The Dutch tax haven blacklist includes more jurisdictions than the EU tax haven blacklist of “non-cooperative jurisdictions.” This is because the EU tax haven blacklist does not include all jurisdictions that the Netherlands considers as low tax jurisdictions.
Menno Snel, State Secretary of Finance for the Netherlands said: “By drawing up its own stringent blacklist, the Netherlands is once again showing that it is serious in its fight against tax avoidance.” The Dutch tax haven blacklist shall be updated every year. The EU tax haven blacklist will be updated in the first quarter of 2019.
Function of the Dutch Tax Haven Blacklist
The Dutch tax haven blacklist will be used primarily in connection with the introduction of three measures against international tax avoidance.
First, Controlled Foreign Corporation (“CFC”) measures.
New CFC rules took effect on January 1, 2019. The CFC rules will apply to any Dutch resident corporate taxpayer which has a—direct or indirect—interest of more than 50 percent in a subsidiary or permanent establishment based in a jurisdiction listed on the Dutch tax haven blacklist.
Under the CFC rules, certain passive income of the CFC such as dividends, interest and royalties, to the extent not distributed to the shareholder of the CFC within the year the passive income has been received by the CFC, will be included in the taxable base of the Dutch (direct or indirect) shareholder and be subject to Dutch corporate income tax.
Note that the CFC rules shall not apply to CFCs which carry out genuine economic activities in the foreign jurisdiction. This is deemed to be the case when the CFC meets the minimum Dutch substance requirements, which include, among others, residency, qualified board members/personnel, bank accounts, salary threshold of at least 100,000 euros ($113,000) per annum and office space for at least 24 months in the country of residence of the CFC.
Secondly, Conditional Withholding Tax (“WHT”) measures.
As of January 1, 2021, interest and royalties paid by a Dutch resident corporate taxpayer to companies resident in a jurisdiction that is on the Dutch tax haven blacklist are expected to be subject to a conditional withholding tax at a rate of 20.5 percent. This tax will need to be withheld and paid to the Dutch tax authorities by the Dutch resident corporate taxpayer.
In addition, artificial structures set up to avoid Dutch withholding tax shall be within the scope of the conditional withholding tax. This should prevent Dutch conduit companies being used by investors resident in jurisdictions listed on the Dutch tax haven blacklist.
To the extent that such jurisdiction listed on the Dutch tax haven blacklist has concluded a double tax treaty with the Netherlands, the Netherlands will have to renegotiate the interest and royalty provisions of the relevant double tax treaty in order to be allowed to levy this conditional withholding tax.
Thirdly, advance tax ruling restrictions.
The Ministry of Finance has announced that as of July 1, 2019, the Dutch tax authorities will no longer issue an advance tax ruling in respect of transactions involving companies that are resident in a jurisdiction listed on the Dutch tax haven blacklist.
This may prevent certain investors resident in a tax jurisdiction listed on the Dutch tax haven blacklist from making investments in or through the Netherlands. At this stage, it is not yet clear what is meant by “transactions” and whether this includes, for example, dividend distributions received or made by Dutch taxpayers.
Below are some initial comments on the impact of the Dutch tax haven blacklist in combination with the introduction of the CFC rules by January 1, 2019, the advance tax ruling restrictions by July 1, 2019 and the expected introduction of the conditional withholding tax on interest and royalty payments by January 1, 2021.
The list of blacklisted countries surprisingly includes certain jurisdictions in the Middle East, such as Bahrain, Kuwait, Qatar, Saudi Arabia and United Arab Emirates.
It is a general misunderstanding that those jurisdictions do not levy corporate income tax or have low corporate income tax rates. Those jurisdictions just should not have been included on the Dutch tax haven blacklist.
Nonetheless, all these Middle East jurisdictions are now considered low tax jurisdictions for Dutch tax purposes, including for the purposes of the CFC measures as of January 1, 2019, the conditional withholding tax on interest and royalty payments as of January 1, 2021 and the advance tax ruling restrictions as of July 1, 2019. Oman is the only exception.
Consequently, the CFC rules may have an impact on structures involving Dutch resident taxpayers that have a—direct or indirect—controlling interest in subsidiaries or permanent establishments in those jurisdictions.
However, note that although these jurisdictions are designated as low tax jurisdictions, this does not necessarily mean that controlled subsidiaries or permanent establishments ("PE"s) resident in those jurisdictions qualify as a CFC for Dutch tax purposes. A subsidiary or PE that meets the minimum Dutch substance requirements, including a minimum of 100,000 euros in annual salary expenses and having office space for at least 24 months in the relevant jurisdiction, is not considered a CFC for Dutch tax purposes.
In addition, a controlled subsidiary or PE is not considered a CFC, if less than 30 percent of its income consists of passive income. This means that active businesses should not qualify as a CFC—consequently there should not be any impact on existing structures involving operational companies.
The calculation of passive income is based on Dutch tax standards. This means that for calculating the taxable amount of passive income of the CFC, it should be determined what the taxable amount of passive income would have been if the CFC would have been a resident of the Netherlands.
If, for example, certain (dividend) income of a CFC would have been exempt under the Dutch participation exemption if the CFC would have been a resident of the Netherlands, that (dividend) income of the CFC should not be included in the taxable income of the Dutch taxpayer holding a controlling interest in the CFC. Further, when the CFC receives passive income, and distributes this to its shareholder(s) within the year of receipt of the passive income, this passive income is excluded for the calculation of the taxable amount of passive income of the CFC.
The list of low tax jurisdictions also includes certain jurisdictions that are frequently used by alternative investment funds, such as Bermuda, the British Virgin Islands, Jersey, Guernsey, the Isle of Man and the Cayman Islands. And again, the same applies to sovereign wealth funds in certain jurisdictions in the Middle East, such as Bahrain, Kuwait, Qatar, Saudi Arabia and United Arab Emirates.
Consequently, the introduction of the conditional withholding tax on interest and royalty payments at a rate of 20.5 percent as of January 1, 2021 may have an impact on investment funds in those jurisdictions making investments in or through the Netherlands. This should also prevent Dutch conduit companies being used by alternative investment funds in those jurisdictions.
On the basis of the limited guidance available to date, it seems that interest and royalty payments made by and to operational companies may also fall within the scope of the new conditional withholding tax. However, as details of the conditional withholding taxes are not yet known, the actual impact on interest and royalty payments to low tax jurisdictions remains uncertain until draft legislation is published. Further guidance is expected during the course of 2019.
Multinational companies that do business in the Middle East from or through the Netherlands are encouraged to review how the introduction of the Dutch tax haven blacklist in combination with the introduction of the CFC rules by January 1, 2019 and restrictions as to advance tax rulings by July 1, 2019 may affect the current structure and if so, which steps should be taken to manage the potential impact on existing structures.
Alternative investment funds and sovereign wealth funds resident in a jurisdiction included in the Dutch tax haven blacklist that receive any interest of royalty income from the Netherlands should monitor the impact of the introduction of the conditional withholding tax at a rate of 20.5 percent by January 1, 2021.
They should also consider steps that can be taken to reduce any tax costs as of January 1, 2021, including the reduction of any conditional withholding tax under a double tax treaty in effect between the Netherlands and the jurisdiction of residence of the alternative investment fund and sovereign wealth fund.
René van Eldonk is a Partner and Steven den Boer is a Senior Associate with the Simmons & Simmons Tax Team in Amsterdam, The Netherlands