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 (25% 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 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 on 31 December 2020: Anguilla, Bahamas, Bahrein, Barbados, Bermuda, British Virgin Islands, Fiji, Guam, Guernsey, Isle of Man, Jersey, Palau, Panama Samoa, Trinidad and Tobago, Turkmenistan, Turks and Caicos Islands, US Samoa, US Virgin Islands, the Seychelles, Vanuatu and the United Arab Emirates.
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.
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).
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.
The relevant substance requirements are as follows:
- At least 50% of the members of the board of directors with decision taking powers must be tax resident in the country where the intermediate company is tax resident.
- The board members must be sufficiently competent and qualified to perform their tasks.
- The (most important) board decisions must be taken in in the country where the intermediate company is tax resident.
- The company should have qualified staff (own or outsourced) at its disposal, attending to an adequate processing and registration of the transactions the company will perform.
- The (main) bank account of the intermediate company is in the country where the intermediate company is tax resident.
- The bookkeeping of the intermediate company takes place the country where the intermediate company is tax resident.
- The intermediate company has at least EUR 100,000 (or a local equivalent) wage expenses.
The intermediate company has an office space at its disposal for a period of at least 24 months