The Netherlands as a Treasury Location: Tax Benefits

In the past 30 years, the Netherlands has transformed itself from a high tax country into a low tax country, according to the latest edition of the OECD’s annual Revenue Statistics publication. The study demonstrates that the Netherlands showed a big percentage-point drop in the overall share of taxation in its economy, with the tax-to-GDP ratio falling two percentage points to 39.3 per cent of GDP in 2004 from 41.3 per cent in 1975.

However, this tax reduction is not considered sufficient. With the aim of creating a business environment that is conducive to attracting business, the Dutch legislature announced a revision of the Dutch Corporate Income Tax Act (CITA), which is set to take effect on 1 January 2007. In addition, updating the CITA is considered necessary with a view to European developments in the area of income taxes, including corporate income tax.

In April 2005, the Dutch Ministry of Finance published a memorandum entitled ‘Werken aan Winst’ (loosely translated: ‘Working on Profit’). This was intended as a tool to stimulate further parliamentary discussion on the outlines of the new CITA. In the meantime the plans have been further developed. The ministry has announced that the final legislative proposal for the Corporate Income Tax Act 2007 will probably be published around 1 May 2006.

Reduction in Tax Rate

In an effort to get the Netherlands on the investors’ short list, a reduction of the Dutch corporate income tax rate has been announced. According to the plans, the current 2006 rate of 29.6 per cent will gradually be lowered to 26.9 per cent in 2008. The proposed rate reduction may, however, turn out to be a percentage point less due to the relation between the reduction of the corporate income tax rate and the proposed introduction of a royalty regime (see below).

Group Interest Regime

Particularly relevant to corporate treasurers is the proposed measure to introduce a special tax regime for interest payments within a group of related corporate bodies. This regime should serve as a substitute for the so-called ‘Dutch Finance Company regime’ that has been ruled contrary to EU law. The special tax regime on interest, also referred to as ‘the interest box’, is optional and will give rise to lower taxation on interest received from group companies.

Features of the Tax Regime on Corporate Group Interest

This tax regime will be available to all taxpayers subject to Dutch corporate income tax. In the ‘interest box’ the balance of inter-company interest income and interest expenses plus interest income on short-term investments for future acquisitions will be taxed at a substantially lower rate than the corporate income tax rate. The same applies to foreign exchange gains and losses.

Based on the ministry’s memorandum, this lower rate will be 10 per cent, although lobby groups have argued for a lower rate of 5 per cent. The final rate will be the outcome of a political negotiation process between the Dutch Ministry of Finance and the various lobby groups. This lower rate is only applicable to the extent that the net interest received from group companies exceeds interest paid to third parties.

Application of this regime will be optional. The choice to apply the regime will have to be a group decision and will probably be in effect for a three-year period.

Corporate Example

To illustrate the point above, consider the following simplified example of a Dutch Corporate’s group treasury. Interest rates are assumed to be 5 per cent on inter-company receivables, inter-company payables and external debt. The return on assets and short-term investments is assumed to be 10 per cent. The corporate income tax rate on the interest box is assumed to be 10 per cent

Obviously, this effective rate would be further reduced if the relative portion of equity funding increased or the company earned an arm’s length spread on inter-company financing activities.

The interest box will reduce the Dutch effective tax rate and is particularly of benefit if the interest expenses are deductible in a country with a corporate income tax rate higher than 10 per cent. The interest box will further increase the appeal of the Netherlands as a location for centralized treasury functions, such as in-house banks, shared services centres and cash pool concentration accounts. This appeal is supported by the fact that the Netherlands does not levy interest withholding tax, has concluded beneficial tax treaties with a vast number of countries and has a good regulatory environment.

In addition to the introduction of a group interest regime, the legislature has also expressed the intention to launch a special royalty regime – with a favourable reduced tax rate – for research and development activities. Besides being applicable to patents, the regime may also apply to brand names.

The Way Forward

This article is not exhaustive, i.e. it only covers the subjects of the tax revision that are of particular interest to treasurers. The issues as discussed above provide an overview of the current situation in relation to the proposed amendment of the Dutch Corporate Income Tax Act and the parliamentary discussions on this topic.

The final legislative proposal is expected to be published around 1 May 2006. Once approved by the Lower and Upper House of Dutch parliament the legislation should apply from 1 January 2007, provided the European Commission does not consider it forbidden state aid or harmful tax competition.