Turkish Law Blog

Fiscal Law: International Aspects of Doing Business in the Netherlands

Akın Alan Akın Alan/ Manz Legal
Hans van Bunnik Hans van Bunnik/ Manz Legal
07 April, 2019
552

Introduction

Expanding a business abroad is a challenging idea. For some, this might even be a huge leap into the complete unknown. It, however, all starts with finding the right business opportunities. Additionally, a sound business case needs to be developed and put into practice. This means that there are many hurdles to take and many arrangements to make, which can be quite complex. Let alone dealing with all legal aspects that normally is something beyond the entrepreneur’s scope as being the expert in the core business that the entrepreneur is running.

In this article, we will elaborate on the subject of Dutch fiscal law. We will highlight some of the most important tax opportunities from which companies can benefit when doing business in the Netherlands.

Doing Business in an International Developing Fiscal Context

When setting up a company in an international environment, there are several aspects that may lead to a certain way in which the business will be structured. One can think of the following reasons for choosing a location, country or business structure:

  • the economic climate in domestic versus foreign sales markets, growth scenarios and competition, innovation and R&D;
  • local possibilities for establishing a business, like investment allowances, investment tax credits or other business location incentives;
  • geographical aspects (e.g. seaports), the situation on the local labor market, or social interests;
  • organization of (the logistic function of) the business activities in relation to the supply of raw and ancillary materials and the distribution of goods;
  • spreading of business risks and limitation of company liabilities;
  • ways of (group) financing and improving access to capital markets.

There are various types of legal entities in which a business can be structured in The Netherlands. The most commonly used is the Dutch limited liability company (besloten vennootschap or B.V.) other types of legal entities are the public limited liability company (naamloze vennootschap or N.V.)., the limited partnership (commanditaire vennootschap or C.V.), a foundation (stichting), the cooperative company (cooperatie) or an association (vereniging), the latter mostly founded for non-profit businesses.

If an enterprise consists of more than one legal entity, a group entity is formed that practically operates as one economic unity, albeit that in that capacity the economic unity remains a collection of separate legal entities.

In practice, this means that each and every legal entity is independently subject to legal requirements like reporting its statutory financial statements and declaring its (Dutch) corporate income tax[1]. As a consequence, if goods are transferred within the group from entity A to entity B, tax will already be due on the profit that has been realised by entity A although this has not yet led to a benefit within the group because the goods are not yet sold to a third party.

From a group perspective, this is an unfavorable situation that has been distinguished by the Dutch legislator. For this reason, certain facilities (benefits) are incorporated in the Dutch Corporate Income Tax Act (Wet op de Vennootschapsbelasting 1969 (VpB)). An example of such a facility is the Dutch Fiscal Unity (fiscale eenheid).  A Dutch Fiscal Unity can be formed, under certain conditions, by group entities that are based in the Netherlands[2]. Besides other facilities, corporate tax is not levied on intergroup transactions between the entities that join the Dutch Fiscal Unity.

Another example of the forementioned facilities is the participation exemption[3], a Dutch tax facility that – in case certain conditions are met - prevents double taxation of dividends received from domestic as well as foreign investments.

Offering tax facilities nevertheless also introduces the phenomenon of tax arbitration. Companies tend to look for the best way of optimizing their business economics, and as part of that, to effectuate the most optimal tax burden. When doing business on an international scale, arbitration will come into play on an international level as well if there are varying international tax jurisdictions in the countries where the company is active. For example tax jurisdictions that apply lower corporate tax rates or where other relevant tax items are exempted. On its turn, this may lead to excessive tax planning or, in general terms, tax avoidance.

The volatility of capital and the current spread of the digital economy led to practices of tax avoidance that recently caused huge public indignation. For example, the publication of the Panama Papers was a bombshell in the international media, which also affected the governmental and public opinion on tax planning in various countries.

Earlier on, and on request of the G20, the Organisation for Economic Co-operation and Development (OECD) published an action plan to regulate excessive forms of tax planning, known as Base Erosion and Profit Shifting (BEPS)[4]. This action plan should equip governments with domestic and international instruments to address tax avoidance and better align the location of taxable profits with the location of economic activities and value creation. It also aims at improving the information available to tax authorities to apply their tax laws effectively.

The BEPS action plan identifies 15 actions in a comprehensive manner and sets deadlines to implement those actions. The action plans vary from general revisions to more concrete actions on subjects like Country-by-Country (CbC) Reporting and Transfer Pricing (TP).

The level of interest and participation in the work has been unprecedented with more than 60 countries[5] directly involved in the technical groups and many more participating in shaping the outcomes through regional structured dialogues. Regional tax organisations such as the ‘African Tax Administration Forum’ (ATAF), ‘Centre de Rencontre des administrations fiscales’ (CREDAF) and the ‘Centro Interamericano de Administraciones Tributarias’ (CIAT) joined international organisations like the International Monetary Fund (IMF), the World Bank (WB) and the United Nations (UN) in contributing to the work.

Countries are sovereign in implementing the recommendations. Changes and measures may be implemented in different manners, as long as they do not conflict with their international legal commitments, e.g. state members of the European Union in relation to translating EC Directives into national tax and civil law.

Some of the revisions may be immediately applicable such as the revisions to the OECD’s Transfer Pricing Guidelines. Others require changes that can be implemented via tax treaties, including through the multilateral instrument. Some require domestic law changes, such as the outputs of the work on hybrid mismatches, CFC (Controlled Foreign Company) rules, interest deductibility, Country-by-Country Reporting, mandatory disclosure rules, as well as to align, where necessary, domestic rules on preferential IP regimes with the harmful tax practices criteria.


[1] Article 2 Dutch Corporate Tax Act (Wet op de Vennootschapsbelasting 1969)

[2] Article 15 Dutch Corporate Tax Act (Wet op de Vennootschapsbelasting 1969)

[3] Article 13 Dutch Corporate Tax Act (Wet op de Vennootschapsbelasting 1969)

[4] OECD (2015), Explanatory Statement, OECD/G20 Base Erosion and Profit Shifting Project, OECD., www.oecd.org/tax/beps-explanatory-statement-2015.pdf 

[5] Albania, Argentina, Australia, Austria, Azerbaijan, Bangladesh, Belgium, Brazil, Canada, Chile, Colombia, Costa Rica, People’s Republic of China, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kenya, Korea, Latvia, Lithuania, Luxembourg, Malaysia, Mexico, Morocco, Netherlands, New Zealand, Nigeria, Norway, Peru, Philippines, Poland, Portugal, Russian Federation, Saudi Arabia, Senegal, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Tunisia, Turkey, United Kingdom, United States and Vietnam.

 

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