New Amendment to the US-Netherlands Tax Treaty
The Netherlands is an attractive country for doing business. Traditionally, the Netherlands has been a preferred jurisdiction for establishing holding companies. The main tax advantages of using a Dutch holding company are the participation exemption for dividends and capital gains, an extensive tax treaty network, the lack of a withholding tax on interest and royalty payments, and the possibility to obtain advance tax rulings.
As of January 2005, the Netherlands has made further improvements in its fiscal investment climate. A new protocol entered into force amending the US – Netherlands (NL) treaty. One of the consequences of this amendment is that the access to the Treaty through the so-called limitation on benefits (LOB) provision has been simplified and improved so that the Netherlands joins a select group of countries that have a 0 per cent dividend withholding tax rate in its tax treaty with the US.1
In this article I will describe, on the basis of examples, the circumstances under which a US or Dutch company can obtain the 0 per cent dividend withholding tax rate upon a distribution of dividends to NL or US, respectively.
If a US or NL resident company distributes a dividend to a Dutch, or respectively a US parent company, the dividend withholding tax under the treaty is already reduced to 5 per cent provided certain conditions are met. As of February 1, 2005 dividend withholding tax was further reduced to 0 per cent.
No dividend withholding tax will be due if a company residing in one of the two states pays a dividend to a company which is the beneficial owner to the dividend residing in the other state, and:
Below, I will illustrate how a US or Dutch resident company can obtain the 0 per cent dividend withholding tax rate if it distributes a dividend to respectively NL or US on the basis of the direct – or indirect stock exchange test, the derivative benefits test or on the basis of discretionary relief.
NV1 is a Dutch company listed at a recognized stock exchange for US – NL treaty purposes.3 NV1 acquired the shares in a US company on January 1, 2000. The US company distributes a dividend to NV1 on April 1, 2005. NV1 and the US company would like to obtain the 0 per cent dividend withholding tax rate on the basis of the direct stock exchange test.
NV1 owns more than 80 per cent of the voting power in the company paying the dividends for a 12-month period ending on the date the dividend is declared. NV1 should receive treaty benefits based on the direct stock exchange test if the company is listed at a recognized stock exchange (US, the Netherlands, France, Belgium) and the company’s shares are regularly traded4 at a recognized stock exchange.5
In addition, the company needs to have substantial presence in the state of which it is a resident. Substantial presence requires that the volume of NV1’s trade in Europe is larger than in the US and that 10 per cent or more of the worldwide trading in its shares occurs at a stock exchange in Europe. If a company does not have substantial presence based on one of these two stock trading tests, substantial presence can also be achieved by having the primary place of management and control in the state of residence, i.e. the Netherlands.
In case a Dutch company (i.e. BV1) is not listed at a stock exchange but its parent company is (i.e NV2), the Treaty may still be applicable if NV2 is listed at a recognized stock exchange. To receive treaty benefits based on the indirect stock exchange test at least 50 per cent of the shares in the company should be held directly or indirectly by 5 or fewer entities which fulfil the direct stock exchange test and the intermediate owner should be a resident company of either state. In this example, the latter condition is fulfilled because BV2 is a Dutch resident.
Three French corporate shareholders that are not listed at a stock exchange hold 100 per cent of the shares in a Dutch BV (BV). The BV obtained the shares in a US company on April 1, 2000. The US company distributes a dividend to the BV on April 1, 2005. The Dutch BV and the US company would like to obtain the 0 per cent dividend withholding tax rate6
The BV owns more than 80 per cent of the voting power in the company paying the dividends for a 12-month period ending on the date the dividend is declared. Given the facts, the BV can only apply for the 0 per cent dividend withholding tax in case it qualifies for the derivative benefits test.
A company qualifies for the derivative benefits test if:
Equivalent beneficiaries are:
In the case of the shareholders being French. The US – France Treaty contains a similar LOB provision, however, the US – France Treaty does not provide for a 0 per cent withholding tax rate on dividend distributions. Consequently, it is not possible to apply for the 0 per cent withholding tax rate in the US – NL Treaty. The 0 per cent withholding tax rate would be applicable in case the shareholders of the BV were Dutch, English, Mexican, or Canadian since the derivative benefits test requires that the shareholder(s) are established in a Member State of the EU, EER or NAFTA and that the concerned Member State also concluded an exclusive home state taxation for dividends.
In the case where the French shareholders hold all shares in the US company and the US company would in turn hold all shares in the Dutch BV it is possible for the US company to apply for the 0 per cent withholding tax rate. According to the NL – France Treaty the dividend withholding tax rate can be lowered to 5 per cent. However, in case the BV distributes a dividend to a French shareholder, the Netherlands would not withhold any dividend withholding tax based on the EU Parent-Subsidiary Directive. Therefore, the Protocol stipulates that the EU Parent-Subsidiary Directive will be taken into account for the purposes of the derivative benefits test. Consequently, the US company could apply for the 0 per cent withholding tax on dividends provided that the US company passes the base-erosion test.
In the case where the Dutch or US resident cannot apply for the 0 per cent dividend withholding tax rate on the basis of the abovementioned requirements, the resident could request the competent authority (authority of the Source State) for application of this Treaty benefit. It is our understanding that the Dutch International Fiscal Department is currently collecting requests and will discuss them with the US International Fiscal Department. At the moment, the result of such a discretionary relief is therefore unknown.
By amending the Protocol to the US – NL Treaty, the fiscal investment climate of the Netherlands has further improved. This article provides an overview of circumstances under which a US or Dutch company can obtain the 0 per cent dividend withholding tax rate on its dividend distributions to NL or the US, respectively. Of course, it should be determined on a case-by-case basis whether the US or Dutch company can obtain this Treaty benefit under particular circumstances.
1 At the moment only the United Kingdom, Japan, Mexico and Canada have a 0 per cent dividend withholding tax rate in their Tax Treaty with the US.
2 The date of October 1, 1998 is arbitrary in respect of the relationship between the Netherlands and the US. The same date is used in the dividend article of US – UK Treaty.
3 In this case the recognized stock exchanges are located in the US, the Netherlands, France and Belgium.
4 Shares are regularly traded if 6 per cent of the outstanding shares are traded in the year before the Treaty benefits are claimed.
5 In this case the recognized stock exchanges are different from those mentioned in note 3. The shares should be traded on stock exchanges as mentioned in Article 26, paragraph 8 of the Treaty (for example, Frankfurt, Hamburg, Johannesburg, London, Madrid, Milan, Paris, Stockholm, Sydney, Tokyo, Toronto, Vienna).
6 Without requesting discretionary relief from the competent authority (i.e. the US tax authorities).
7 At arm’s length payments for services and tangible property are excluded. This also applies to payments attributable to a taxable presence of a bank in either of the States.
8 In this case a qualified person is a US or Dutch individual, a company that qualifies for the direct stock exchange test, an exempt pension trust, or a not for profit organisation.