The Netherlands historically did not levy a withholding tax on outbound interest and royalty payments. The original rationale for this policy was that the imposition of a withholding tax would at the end translate in a higher cost to the Dutch payer given that the non-resident recipient would partly or fully factor the withholding tax in the remuneration charged. With the changing international tax scene and the emphasis placed on the role of the Netherlands in the structuring of cross-border business, the Dutch government adopted several measures in furtherance of the country’s commitment to counter international tax avoidance. After the introduction of country-by-country reporting, mandatory disclosure rules (MDR/DAC6) and a strict implementation of the First and Second EU Anti-Tax Avoidance Directive (ATAD 1 and 2), the Netherlands, in a major break with a long-established policy, moved to impose a withholding tax on certain outbound royalty and interest payments (or accruals) as from 2021.
The withholding tax applies to interest or royalty payments (or accruals) to affiliated entities, in case:
- The beneficiary is a tax resident or a branch established in a low tax jurisdiction (“LTJ”); or
- The beneficiary is part of an abusive structure with the aim to avoid the withholding tax; or
- The payment is made to a (reverse) hybrid entity in a non-LTJ.
In this article we will further explain the most relevant elements of the new withholding tax framework.
1. Affiliated Entities
The beneficiary of the payment is deemed to be affiliated in case:
a. It has (directly or indirectly) a qualifying interest in the paying entity;
b. A third party has (directly or indirectly) a qualifying interest in the paying entity and this third party has (directly or indirectly) a qualifying interest in the beneficiary; or
c. It has (directly or indirectly) an interest in the paying entity and, together with other entities, it forms a cooperating group and that cooperating group has (directly or indirectly) a qualifying interest.
The beneficiary is deemed to have a ‘qualifying interest’ if it is able to exercise such influence on the decision-making process that the activities of the affiliated entity can be determined. Generally, this is the case when owning more than 50% of the voting rights in an entity. The withholding tax only applies to payments to beneficiaries that are entities and therefore does not apply to payments made to beneficiaries that are individuals.
2. The Beneficiary is a Tax Resident in a Low Tax Jurisdiction
A jurisdiction will be regarded as an LTJ in case its statutory tax rate on business profits is lower than 9%. The Dutch Ministry of Finance will publish a limitative list of low tax jurisdictions each year, with 1 October of the previous year as a reference date. The current 2021 list includes Anguilla, the Bahamas, Bahrein, Barbados, Bermuda, the British Virgin Islands, Guernsey, Isle of Man, Jersey, Cayman Islands, Turkmenistan, Turks and Caicos islands, Vanuatu and the UAE. With some of these countries (for example the UAE) the Netherlands has concluded a tax treaty, which may prohibit the Netherlands from applying the withholding tax. The introduction of the withholding tax with respect to listed treaty countries is, therefore, deferred to 1 January 2024. In the meantime, the Netherlands aims to renegotiate the relevant tax treaty.
Furthermore, a jurisdiction will be regarded as an LTJ in case it is included on the EU black-list of non-cooperative jurisdictions in the calendar year prior to the interest or royalty distribution. This list will be monitored on a continuous basis and will be updated regularly. Currently, the EU blacklist includes the US Virgin Islands, American Samoa, Anguilla, Barbados, Fiji, Guam, Palau, Panama, Samoa, the Seychelles, Trinidad & Tobago and Vanuatu.
3. The Beneficiary is Part of an Abusive Structure
The withholding tax also applies when the beneficiary of the royalty or interest payment is not a tax resident or a branch established in an LTJ, but is considered to be included in the structure with:
- The main purpose or one of the main purposes of avoiding the withholding tax on royalty and interest payments at the level of another entity (); and
- There is an artificial arrangement or a series of artificial arrangements which are not put in place for valid commercial reasons reflecting economic reality ().
Abuse is generally considered to be present in case the beneficiary is an intermediate company through which the interest or royalties are paid through to affiliate entities in an LTJ.
The subjective test and the objective test are cumulative tests: they both need to be met for the imposition of withholding tax to be triggered.
3.1 Subjective Test
For this test, a comparison should be made between the structure including the intermediate beneficiary and the hypothetical structure in which the participants in the intermediary hold the interest in the paying entity directly (the ‘look-through approach’ or ‘wegdenkgedachte’). The subjective test is deemed to be met if the withholding tax due under the look-through approach is greater than the withholding tax resulting from the structure under consideration.
3.2 Objective Test
For this test it should be reviewed whether an arrangement or a series of arrangements have been put in place for valid commercial reasons reflecting economic reality. These commercial reasons are reflected in the substance of the beneficiary and the business reasons of the structure.
As of 2020, meeting the substance requirements does no longer constitute a safe harbor. Instead, these requirements determine whether the taxpayer or the tax inspector has the burden of proof to substantiate that a structure is or is not an abusive structure. This means that in case the beneficiary meets all the substance requirements, the objective test is not met (and no withholding tax is due) unless the tax inspector substantiates the abusiveness of the structure (and vice versa).
4. The Payment is Made to a (Reverse) Hybrid Entity
As mentioned in the parliamentary proceedings, payments to hybrid entities are in first instance approached similarly to payments made to LTJ’s. Consequently, provisions are included in case the payment is made to a hybrid entity (i.e., an entity which is non-transparent from a Dutch tax perspective, but transparent from a foreign tax perspective), or a reverse hybrid entity (i.e., an entity which is transparent from a Dutch tax perspective, but non-transparent from a foreign tax perspective) in a non-LTJ1 . In such case in principle withholding tax is due, unless one of the following exceptions applies.
In case of a payment to a hybrid entity (non-transparent from a Dutch tax perspective), withholding tax is due unless the hybrid entity is considered to be tax transparent in the country of residence of the participants of the hybrid entity (and there is therefore a taxable pick up in the jurisdiction of the participants) and the participants can be considered as the beneficiaries of the payment. If such is the case, no withholding tax would be due, unless the participants are part of an abusive structure with the aim to avoid the withholding tax.
In case of a payment to a reverse hybrid, withholding tax will be due unless the reverse hybrid is considered as the beneficiary of the interest or royalty payment in its country of residence (and there is therefore a taxable pick up in the country of residence of the hybrid entity). If such is the case, no withholding tax would be due unless the reverse hybrid entity is part of an abusive structure with the aim to avoid the withholding tax.
In certain situations, the hybrid provision results in an overkill. This can be illustrated as follows:
- NL and LLC are tax transparent in the US based on the check the box qualification
- Due to this tax transparency of NL, no interest income is recognized in the US;
- Consequently, US Inc is not considered to be the beneficiary of the interest income and the interest payment to LLC is therefore subject the withholding tax on interest
This example illustrates that withholding tax can even be applicable in structures where no LTJ is included in the structure. Considering the purpose of the withholding tax (to counter tax avoidance through The Netherlands), this seems to be an unnecessary consequence.
5. Withholding Tax Rate & Formalities
The withholding tax rate is equal to the highest applicable corporate income tax rate (25% in 2021) and should be reported and paid by the paying entity on behalf of the receiving company within one month after the calendar year in which the payment is (deemed to be) made.
The Dutch withholding tax on interest and royalty payments can have a significant impact on the finance or licensing structures of multinational companies. It is therefore recommended to review whether these structures are still feasible or whether restructurings are required.
We note that as of 2024, this withholding tax will also apply to dividend payments alongside the existing dividend withholding tax rules.
Thijs Wiertsema ( firstname.lastname@example.org)
Hugo Everaerd ( email@example.com)
1If the hybrid entity is located in an LTJ, the main rule applies and payments made to this entity are subject to withholding tax.