Turkish Law Blog
Fiscal Law: International Aspects of Doing Business in the Netherlands - 2
Structuring an Organisation, Legal and Fiscal Aspects
As mentioned in Part I of this article, the nature of business activities and related legal forms will affect your choice how to structure your organisation. The existence of a Bilateral Investment Treaty (BIT) may furthermore substantiate this choice.
Most BITs grant investments made by an investor of a contracting state in the territory of the other a number of guarantees, which typically include fair and equitable treatment, protection from expropriation, free transfer of means and full protection and security.
The distinctive feature of many BITs is that they allow for an alternative dispute resolution mechanism whereby an investor whose rights under the BIT have been violated could have recourse to international arbitration rather than suing the host State in its domestic courts (investor-to-state dispute settlement). A BIT between Turkey and The Netherlands is in force as per November 1, 1989.
From a fiscal perspective the following structures can be distinguished:
- a holding structure to manage or ring-fence a company’s capital in relation to its risk-full or treasury activities;
- a dividend- interest- and royalty structure to manage or minimize the cash flow of withholding taxes;
- an Intellectual Property (IP) structure to manage the income from patents, brands, copyrights or other IP;
- import and export structure to economically manage the transfer of goods and services in international operations.
Takin into account these possible structures, the available fiscal facilities within national tax legislation should also be taken into consideration. Based on Dutch tax law the most relevant facilities are the:
- Availability of participation exemption;
Level of withholding tax on dividends, interest and royalties (or, if any, other sources like management- and (technical) service fees, rental payments or income from factoring or franchises);
- Existence of tax treaties.
The Dutch Corporate Tax Act exempts dividends and other profits that are received from domestic and/or foreign participations in which the parent company has an interest of 5% or more. This facility makes the participation exemption a valuable factor when setting up a national or international structure. A few countries have no exemption at all, other countries exempt only dividends whereas some countries like The Netherlands apply full exemption. This full exemption makes these countries an attractive place of residence.
In The Netherlands the percentage of withholding tax on dividends is 15% (interest and royalty payments are exempted from withholding tax). In other countries, this percentage can be considerably higher. Within the European Union, additional arrangements are made on the level of withholding tax on dividends, interests and royalties. As compared to the participation exemption, some countries will levy withholding tax on all kind of sources whereas other countries, like The Netherlands, only levy withholding tax on the payment of dividends, which in its turn, also makes these countries an attractive place of residence.
With regard to tax treaties, three groups of treaties are distinguished within the Dutch tax legislation. These are:
- agreements for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income;
- agreements for the avoidance of double taxation with respect to inheritance tax;
- international agreements on taxation of marine and aviation income.
The first group is the most generally known. A company can invoke this type of agreement to avoid that it has to pay income tax on its worldwide income more than once.
If for instance the residency of a company is claimed, based on national law, by two countries where this company has any substance, this company can be subject to taxation in both countries. If the right to levy taxes according to national and international regulations is assigned to another country than the Netherlands, such income shall not be subject to income tax in The Netherlands. In this case, there will be an income tax relief in the Netherlands. The way this double tax relief is calculated depends on the type of income, the country in which the income is received, and the company’s resident or non-resident taxpayer status. In general, there are two methods for tax relief: exemption or setoff.
The Netherlands has concluded tax treaties with a considerable number of countries around the world. If the Netherlands has not concluded a tax treaty with the country concerned, the ‘Double Taxation (Avoidance) Decree (2001)’ applies. Application of this Decree will also result in the avoidance of double taxation.
On the issue and number of tax treaties, the Netherlands holds quite a unique position in the world, and as a hub for treaties with a lot of other countries, this provides the Netherlands a third reason for attractiveness if you’re looking for a convenient residency.
With regard to the relation between Turkey and the Netherlands a tax treaty between the Netherlands and Turkey has been put in force in March 1986.
The taxes covered in this agreement in case of Turkey are:
- income tax (gelir vergisi);
- corporation tax (kurumlar vergisi);
- levy on behalf of the fund for the support of the defense industry (savunma sanayii destekleme fonu).
In case of the Netherlands the taxes are:
- income tax (de inkomstenbelasting);
- wages tax (de loonbelasting);
- company tax (de vennootschapsbelasting);
- dividend tax (de dividendbelasting).
The agreement applies to persons who are residents of one or both of the States. The term ‘persons’ includes an individual, a company and any other body of persons, and the term ‘resident of one of the States’ means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, legal head of office, place of management of any other criterion of a similar nature.
Furthermore, the agreement defines fiscal terms like residency and permanent establishment and describes the taxation of income and the way in which double taxation can be eliminated. The agreement also deals with special provisions as non-discrimination, mutual agreement procedure and the exchange of information.
On June 21, 2016 the European Council of the European Union reached an agreement on a draft directive addressing tax avoidance practices, commonly used by large companies. The directive is part of the above-mentioned initiatives to strengthen rules against corporate tax avoidance, based on the 2015 OECD recommendations.
The drafted measures lay down anti-tax-avoidance rules in five specific fields:
- Interest Limitation Rules: multinational groups may finance group entities in high-tax jurisdictions through debt, and arrange that they pay back inflated interest to subsidiaries resident in low-tax jurisdictions. The outcome is a reduced tax liability for the group as a whole. The draft directive sets out to discourage this practice by limiting the amount of interest that the taxpayer is entitled to deduct in a tax year to 30% of their gross-margin.
- Exit Taxation Rules: corporate taxpayers may try to reduce their tax charge by moving their tax residence and/or assets (or Intellectual Property) to a low-tax jurisdiction. Exit taxation prevents tax base erosion in the state of origin when assets that incorporate unrealised underlying gains are transferred, without a change of ownership, out of the taxing jurisdiction of that state by the levy of tax on the underlying gains in the state of origin.
- General Anti-Abuse Rule: this rule is intended to cover gaps that may exist in a country's specific anti-abuse rules. Corporate tax planning schemes can be very elaborate and tax legislation doesn't usually evolve fast enough to include all the necessary defences. A general anti-abuse rule therefore enables tax authorities to deny taxpayers the benefit of abusive tax arrangements.
- Controlled Foreign Company (CFC) Rules: in order to reduce their overall tax liability, corporate groups can shift large amounts of profits towards controlled subsidiaries in low-tax jurisdictions. A common scheme consists of first transferring ownership of intangible assets such as intellectual property to the CFC and then shifting royalty payments. CFC rules reattribute the income of a low-taxed controlled foreign subsidiary to its - usually more highly taxed - parent company.
- Rules on Hybrid Mismatches: corporate taxpayers may take advantage of disparities between national tax systems in order to reduce their overall tax liability. Such mismatches often lead to double deductions (i.e. tax deductions in both countries) or a deduction of the income in one country without its inclusion in the other.
To conclude on the international tax developments initiated as BEPS revisions, we will be confronted with more and more consistency and convergence in tax jurisdictions in the near future, albeit that in our opinion, mutual differences in tax law between countries nevertheless will last to exist because of each country’s understandable wish to safeguard their internal tax revenues.
However, on the matter of Interest Limitation Rules and Controlled Foreign Company (CFC) Rules, The Netherlands has enacted specific articles in the Dutch Corporate Income Tax Act 1969 as per January 1, 2019 (NL was already compliant on subject 2 and 3).
Other member states did already the same before, and others are about to follow in due course. All with the aim to have anti-abuse tax legislation in place in local tax law on the above-mentioned issues within the timeframe set by the OECD with a horizon of 2020 – 2022.
 ‘Agreement on Reciprocal Encouragement and Protection of Investments between the Kingdom of the Netherlands and the Republic of Turkey’.
 Like profits on sale of the investment (capital gains). Losses on the contrary however are not deductible except for liquidation losses. Deductibility of finance costs related to investments is limited to € 750.000.
 In The Netherlands this is laid down in the ‘Moeder-Dochter directive’ and ‘Interest- and Royaltydirective’.
 ’Agreement between the Kingdom of the Netherlands and the Republic of Turkey for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income’, Ankara, March 27, 1986.
 Article 2 of the Agreement.
 Article 1 of the Agreement.
 Article 3 of the Agreement.
 Article 4-1 of the Agreement.
 Respectively chapters III, IV and V of the Agreement.
 The member states will have until 31 December 2018 to transpose the directive into their national laws and regulations, except for the exit taxation rules, for which they will have until 31 December 2019. Member states that have targeted rules that are equally effective to the interest limitation rules may apply them until the OECD reaches agreement on a minimum standard or until 1 January 2024 at the latest.
 European Union press release 370/16, dated 21/06/2016