Introduction of a withholding tax on interest and royalty payments per 2021

Jacob Mook Jacob Mook

The Netherlands will introduce a withholding tax on interest and royalty payments to low-tax jurisdictions on 1 January 2021. The aim of the tax is to counter aggressive tax structures.

Key features

As per 1 January 2021, interest and royalty payments made by a Dutch tax resident company or by a Dutch permanent establishment of a foreign tax resident company to related companies situated in low-tax jurisdictions will become subject to a withholding tax.

The withholding tax will be levied at a rate equal to the highest Dutch corporate income tax rate applicable (which is expected to be 21.7% in 2021). The withholding tax rate may be reduced by a tax treaty, if applicable.

Definition of related companies

For purposes of the new withholding tax, companies are related in case of a direct or indirect control (e.g. in case one company has more than 50% of the voting rights in another company). Companies can also be related through a third party or via a so-called cooperating group. 

Low-tax jurisdictions

Low-tax jurisdictions are designated jurisdictions which have a statutory corporate tax rate of less than 9% or are on the EU list for non-cooperative jurisdictions. The list of designated jurisdictions is updated annually on 1 October. The following countries are considered low-tax jurisdictions in 2020 based upon this list: Anguilla, Bahama’s, Bahrein, Barbados Bermuda, British Virgin Islands, Cayman Islands, Fiji, Guam, Guernsey, Isle of Man, Jersey, Marshall Islands, Oman, Samoa, Trinidad and Tobago, Turkmenistan, Turks and Caicos Islands, United Arab Emirates, US Samoa, US Virgin Islands, and Vanuatu. We note that the EU list for non-cooperative jurisdictions was updated on 18 February 2020 and the Cayman Islands, Palau, Panama and the Seychelles have been added to the list.

Anti-abuse rules

Specific anti-abuse rules will apply in situations where artificial transactions or structures are put in place with the main purpose or one of the main purposes to avoid the Dutch withholding tax on interest and royalty payments to low-taxed jurisdictions.

A transaction or structure may be regarded as artificial if the structure is put in place without business motives that reflect economic reality. In case a structure is regarded as artificial, it needs to be determined whether the structure is put in place with the main purpose or one of the main purposes to avoid the Dutch withholding tax. This could, for example, be the case when an interest or royalty payment is indirectly made to a related company in a low-tax jurisdiction via an intermediate company in a high-tax jurisdiction. If the intermediate company in the high-tax jurisdiction fulfils the relevant substance requirements outlined in Annex I, this would be an indication that it does not concern an artificial transaction or structure that is put in place with the main purpose or one of the main purposes to avoid the Dutch withholding tax. However, the Dutch tax authorities may still argue the opposite.

Other abuse situations where the anti-abuse rules apply may occur in relation to payments to a hybrid entity where the participants in the hybrid entity or the hybrid entity itself are situated in low-tax jurisdictions. 

Interest and royalty payments

The withholding tax is levied on the gross amount of the interest and royalty payments taking the arm’s length principle into account.

Interest payments include any consideration in relation to a loan agreement. Royalties are defined in line with the OECD Model Tax Convention.

Tax compliance

The payor of the interest or royalty in the scope of the withholding tax acts as the withholding tax agent. The withholding tax agents should withhold the tax at the moment that the interest and/or royalty is paid or is deemed to have been paid (31 December in relation to accrued interest or royalties). 

The withholding tax withheld should be transferred to the Dutch tax authorities within one month of the calendar year in which the tax is withheld. A tax return needs to be filed by the withholding tax agent within the same time period.

In case the withholding tax agent did not (fully) pay the withholding tax due, the Dutch tax authorities may issue an additional tax assessment to the withholding tax agent or the recipient of the interest or royalty payments for the amount of the withholding tax (still) due. Penalties and late payment interest may be due as well.

Way forward

Dutch taxpayers should analyze whether they are or will be making (deemed) interest or royalty payments that fall within the scope of the new withholding tax.

We note that transactions or structures involving interest and royalty payments subject to the withholding tax may also have to reported under the Mandatory Disclosure rules that are effective as of 25 June 2018. From a Dutch corporate income tax perspective, the deductibility of the payments should also be analyzed, especially in view of the implementation of the anti-hybrid rules of ATAD 2.