Author: | Published: 8 Apr 2002
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The Netherlands has an excellent and long-standing reputation as a favourable tax jurisdiction for multi-national companies and financial institutions. The main attractions are its participation exemption, which exempts dividends and capital gains in respect of qualifying shareholdings, its extensive double-tax treaty network, the absence of withholding tax on interest and the chance to negotiate advance tax rulings with the tax authorities. In consequence of this The Netherlands has been used as a location for intermediate holding and finance companies and funds for more than three decades. Recently there has been much upheaval as EU Commisioner Mario Monti ordered an enquiry into, inter alia, the Dutch tax regime which he considered to be so beneficial for international investors that it could harm fair competion. The international business and finance community held its breath, but the outcome of the enquiry was reassuring: The Netherlands tax regime is indeed competitive but not at all harmful to fair competition. Only the group finance company regime, under which proceeds of group finance company activities are subject to a mere 7% tax, is subject to further scrutinisation. The Netherlands therefore remains an attractive jurisdiction for all sorts of international financing and holding structures, including fund and securitization structures. In this article some recent trends and developments in this respect will be summarised, taking the recently revised ruling practice into account. A separate chapter deals with the proposed rules on dividend stripping which are relevant for all investors in Dutch companies. Finally the temporary 20% surtax on "excessive dividends" is discussed.

Finance companies

In 2001, the Dutch Ministry of Finance issued a number of policy statements establishing a new Dutch tax ruling policy. The changes primarily affect the position of Dutch group companies engaged in group financing or licensing activities. This article focuses on financing activities. The experience to date with the new ruling policy shows that adequate arrangements can be made with the tax authorities as regards most types of financing structures at taxable margin levels which are lower than the 1/8% and 1/4% sliding scales which used to be applied under the old ruling regime; these scales were previously used to determine the taxable profit of finance companies. The new policy introduces a set of formal substance rules and, in fully intra-group situations only, minimum equity requirements. These are geared towards avoiding abuse and are not relevant for most regular and bonafide financing structures. The new policy increases the scope for cost plus or other fee-based remuneration arrangements (as opposed to taxable margins to be realised on the relevant transactions), although in these situations no tax treaty protection and foreign tax credits would be available. In general, certificates of tax residence of Dutch group finance companies will now be issued unconditionally again. The new policy also introduces 'Advance Pricing Agreements' or 'APAs'. APAs are based on the OECD transfer pricing guidelines rather than on standardised 1/8% and 1/4% scales. APAs will generally be valid for a period of four to five years but may have a longer term in the case of long-term contracts. A general requirement for obtaining an APA is that certain rights to object to an exchange of information are waived. An intra group financial services company is eligible for an APA, if it meets a set of minimum substance requirements. The activities of the intra-group financial services company should also involve sufficient financial risk. A sufficient level of risk is deemed to exist if the company maintains an equity that is at least equal to the lesser of (i) 1% of the par value of the loans extended to group companies, and (ii) €2 million. If the activities of the intra-group financial services company involve insufficient risk, an APA may still be obtained on the condition that the company agrees to the spontaneous provision of information by The Netherlands to the jurisdiction of the borrower. Where a company is not an intra-group financial services company these requirements do not apply. Prima facie, companies that borrow from third parties (eg Eurobond issuers) fall outside the scope of the intra-group financial services company regime. However, it is under discussion whether a parent guarantee in respect of the obligations of such issuer means that the borrowings are deemed to be intra-group. As already mentioned, the old 1/8% and 1/4% scales no longer apply. Instead, as regards intra-group financial services activities, the Ministry of Finance has published transfer pricing regulations, broadly following OECD transfer pricing guidelines (codification is expected later this year). No hard and fast rules are given, and it is clear that the interpretation of the guidelines will need further development in practice. This may lead to some form of new benchmarking of taxable margins per category of activities over the coming period. In most cases the outcome of the new policy is likely to be an improvement in terms of actual Dutch tax costs. In light of this, even for situations where a current ruling under the previous regime is extended, it could be worthwhile applying for a ruling under the new regime.

Securitization, repackaging and CDOs

Since 1996, the Dutch market has seen securitizations involving a number of asset classes, including residential mortgage receivables, (secured) consumer loans, trade receivables and corporate loans. The structure of a securitization transaction would typically involve a special purpose vehicle (SPV), which acquires the underlying assets. For domestic securitizations a Dutch SPV is the obvious choice, but the use of a Dutch SPV in cross-border securitization transactions is also becoming more and more popular as the jurisdiction of residence of the SPV appears to be an increasingly important issue that may seriously impact upon the sale of asset-backed securities to regulated EU investors; as opposed to tax haven SPVs, a Dutch SPV will certainly pass any "smell test". In structuring a securitization transaction the main issues to be taken into account are that:

The transfer of legal title to a receivable under Dutch law requires a written instrument evidencing the assignment and notification of the debtor; rather than notifying the debtor at the outset an undisclosed right of pledge may be granted, of which notification can be validly given at any time; in international transactions one could opt for foreign law that does not require notification for a valid assigment;

In order to benefit from an exemption from supervision under the Act on the Supervision of Credit Institutions 1992 the SPV in financing the transaction should attract debt funding from professional investors with a minimum maturity of two years (may be shorter in certain circumstances, eg where the SPV only engages in the business of borrowing by issuing short-term debt instruments which are rated by a recognised rating agency and the funds are used exclusively to acquire and hold assets originating from a pre-defined and homogeneous pool of assets of another enterprise or institution);

Issuing securities in, from or into The Netherlands could trigger prospectus and disclosure requirements for the SPV; certain exemptions are available, such as issuing debt instruments with a minimum denomination of $50,000.

As is the case with most jurisdictions, in The Netherlands there are typically four aspects which require attention from a tax perspective. In the first place, the sale of receivables by a Dutch originator for cash is considered to be a taxable disposal. This will not always have to result in an (immediate) taxable gain, eg part of the purchase price may be deferred. Also, in the case of a synthetic securitization there is no sale of receivables and hence no taxable gain. Secondly, depending on the nature of the receivables and the jurisdiction of residence of the orginator and the underlying obligors, payments under the receivables may have been subject to withholding tax. The transfer of the receivables may have an effect on the withholding tax position with respect to these payments, which may benefit from the reduced withholding tax rates under Dutch double tax treaties. As for Dutch withholding tax: The Netherlands do not generally levy withholding tax on interest payments, so this is not much of an issue when using a Dutch SPV, provided that the interest payments by the SPV are not in any way dependent upon its profits or distributions of its profits. Thirdly, the tax position of the SPV: it should report a minimal profit, the level of which depends upon the residence of the originator (Dutch or foreign), the class of assets, the type of transaction (cash or synthetic) and the identity of the other parties involved in the transaction (swap counterparty, service provider, etc). It is customary to obtain an advance tax ruling from the Dutch tax authorities confirming the deductibility of costs/ expenses, and the minimum profit margin. Finally, VAT: the assignment of receivables from the originator to the SPV is exempt from Dutch VAT. However, service fees payable by the SPV to the originator or another service provider may be subject to VAT, depending on the circumstances. As a consequence of this beneficial tax treatment, Dutch SPVs have been used in many asset-backed cross-border transactions; the orginator and the arranger are incorporated outside The Netherlands and the underlying assets are typically not governed by Dutch law. In addition to the possibilty of obtaining an advance ruling on the minimum profit margin that the SPV has to report, the Dutch double tax treaty network may have a positive effect on the withholding tax position in respect of payments on the underlying assets upon transfer to the SPV, or at least avoid the increased withholding which would have been imposed had they been transferred to an SPV in a tax haven jurisdiction. The Netherlands has concluded double tax treaties with over 60 countries, under which withholding tax rates are usually substantially reduced or eliminitated.

Fund structures

In the Dutch market various types of funds are used, depending on the investor category, the underlying investment, the desired tax, accounting or regulatory treatment and organisational requirements of the participants or the sponsor. The 'beleggersgiro' is an example of a tax and cost-efficient structure which is suitable for resident and non-resident Dutch investors. A 'beleggersgiro' is a register of debt claims which give entitlement to securities rather than cash. A Dutch stichting (foundation) usually holds legal title to the securities on behalf of the participants in the beleggersgiro.The stichting also keeps the register. The stichting is a bankruptcy-remote entity. Under certain circumstances a licence from the Securities Market Supervising Authority is required. The stichting is transparent for tax purposes, ie the stichting itself is not subject to any tax but the participants are taxed as if they held the underlying investments directly.

The Dutch stichting pooling structure is widely used by institutional investors.

If the participants qualify as professional investors within the terms of the Wtb, the pool is exempt from supervision by the the Dutch Central Bank. Also, no prospectus is required. The sponsor marketing the investment in the pool would generally qualify as a securities intermediary under the Securities Markets Supervision Act 1995. If securities intermediaries offer their services in or from The Netherlands they must obtain a licence. However, a number of exemptions could apply, eg under the sponsor's single passport under the EU Investment Services Directive. For tax purposes, the stichting is a transparent entity, provided it only has a passive and formal role as holder of the assets. As a result, the investors are effectively in the same position that they would be in if they were directly investing in the underlying assets. To ensure that the pool itself will not be taxable for Dutch corporate income tax purposes, the transferability of units is limited. Units can be made freely redeemable. Provided adequate consent procedures are put in place for the admission of additional participants after the formation of the pool, no Dutch capital tax is due on contributions to the pool.

Both the Dutch stichting pooling structure and the 'beleggersgiro' are suitable structures for resident and non-resident investors. In addition, a BV or NV with fiscal investment company status may be used as an investment vehicle. It is subject to tax at a zero rate. As such it is entitled to double tax treaty relief. However, dividends are subject to 25% withholding tax. This does not apply to capital gain dividends; a BV or NV with fiscal investment status in that situation may also be used by non-resident investors.

Dividend stripping

Dividend stripping is a generic expression denoting a transaction or a series of interrelated transactions entered into by a shareholder with the aim of reducing or eliminating tax on dividends while maintaining an economic interest in the relevant shares. At this point a short overview is given of recent developments with respect to dividend-stripping transactions with underlying Dutch shares. A dividend-stripping transaction in its most basic form entails the transfer of the shares or dividend coupons to a party entitled to a reduction of, or credit for, Dutch dividend withholding tax payable at a 25% rate in respect of the dividends, where the transferring shareholder is not entitled to such reduction or credit. After distribution of the dividend, the shares are transferred back to the original shareholder. The tax advantage is generally shared between the original shareholder and the recipient of the dividend in a commercially negotiated ratio. Securities lending, repos and equity swaps are typically transactions which are used in practice for dividend stripping.

The Dutch tax administration has long sought to deny any refund or credit of Dutch dividend withholding tax claimed by parties involved in dividend-stripping transactions. The tax administration's policy caused uncertainty among taxpayers as to what was possible and what was not. In 2001, the Dutch Supreme Court decided a milestone case. Amsterdam market makers had acquired shares shortly before the company's decision in a general meeting to distribute a dividend. They had also acquired put option rights with respect to these shares on the very same day on which the shares were acquired. The put options were deep-in-the-money and it was almost certain that the market makers would exercise their options. The Supreme Court held that the market makers were entitled to credit the full amount of dividend withholding tax against their corporate income tax liability, irrespective of whether they were involved in a tax avoidance scheme. This ruling cleared the way for dividend-stripping transactions in a national context which did not seem appropriate pending the Supreme Court's decision. The Supreme Court had already sanctioned dividend stripping in an international context in a previous decision. In addition, both rulings seem to imply that dividend stripping should not be seen as an abuse but rather as an entirely legitimate means of tax planning.

The rulings prompted the Dutch tax legislator to present a bill, which is before parliament, under which only the beneficial owner of a dividend would be entitled to a refund or reduction of Dutch withholding tax. Under the wording of the proposal the recipient of a dividend is not regarded as the beneficial owner if the recipient has entered into a series of interrelated transactions whereby it is likely that:

  • the dividend is, directly or indirectly, in whole or in part, for the benefit of an individual or legal entity who or which is entitled to a lower level of reduction or refund than the recipient of the dividend; and
  • such individual or legal entity continues to hold or acquires a position in shares, profit-sharing certificates or bonds comparable to its position in similar shares, profit-sharing certificates or bonds prior to the moment of execution of the series of interrelated transactions.

The series of interrelated transactions may be entered into through a regulated stock exchange or market. Furthermore, the mere acquisition of one or more dividend coupons or the mere vesting of a short-term usufruct right or similar right in respect of shares is treated as a series of interrelated transactions for the purpose of the proposed anti-dividend stripping rules. It is not certain if and when the new rules will be enacted; the scheduled vote in the 1st Chamber of Parliament was postponed for reasons which are unclear on February 26 2002. In the meantime, however, on the basis of Dutch tax law and case law there would seem to be ample room for dividend-stripping transactions.


Dutch companies are subject to a temporary surtax at a rate of 20% to the extent that any excessive dividends are distributed on their shares in the period from January 1 2001 up to and including December 31 2005. This tax has been introduced to discourage companies from deferring dividend payments before 2001, in anticipation of new legislation by virtue of which Dutch individual investors could receive dividends tax free. Dividends include distributions that qualify as income from shares for dividend withholding tax purposes. Income from shares typically includes regular dividends but – in certain circumstances – also includes other distributions, such as liquidation distributions, cash distributions of paid-in surplus, the nominal value of new shares issued, payments on a share repurchase and distributions on profit-sharing debentures. For the purposes of this surtax, dividends are excessive when during a particular calendar year, the total proceeds distributed by the company exceed the highest of the following:

  • 4% of its market capitalization at the beginning of the relevant calendar year;
  • twice the amount of its average annual dividend distributions (exclusive of extraordinary distributions) in the three calendar years immediately preceding January 1 2001;
  • its adjusted consolidated commercial results for the preceding book year;
  • if the company is a fiscal investment company (FIC): the amount of profit that the company as an FIC has to distribute to its shareholders during the eight months following the end of the book year to its shareholders (with certain adjustments; see below).

The temporary surtax is not levied to the extent that the aggregate of the profit distributions during the period from January 1 2001 up to and including December 31 2005 are in excess of the balance of its assets, liabilities and provisions, calculated on the basis of the fair market value, reduced by the paid-up capital at the end of the book year that ended before January 1 2001.

Further the surtax due is reduced pro rata to the extent that the shares of the company were held, at the time of the distribution of the excessive dividends, for an uninterrupted period of three years, by individuals or entities (other than FICs) holding at least 5% of the nominal paid-up capital of the company. As the surtax is imposed on the company, the benefit of this reduction will not inure to the shareholders in question, but to the company and therefore, indirectly, to all its shareholders. Shares that were held by individuals or entities (other than FICs) on September 14 1999, are deemed to be held by these individuals or entities for an uninterrupted period of three years. The reinvestment reserve of an FIC existing on January 1 2001 will fall within the scope of the tax. Distribution of the reserve (including distribution in the course of a liquidation of the FIC) would trigger the surtax. This surtax stands in the way of (international) restructurings and similar transactions, but in practice techniques may be available to structure around the surtax.

Clifford Chance
Droogbak 1A
1013 GE Amsterdam
Tel: +31 20 711 9000
Fax: +31 20 711 9999