10 Nov
EACC & Member News

Archipel Tax Advice – Dutch Tax Incentives for Innovation: Enhancing your Investment Case

As a small country with a high-income economy, limited natural resources and little manufacturing, the Netherlands has adopted policies to facilitate the knowledge economy. The Dutch government is therefore looking for ways to highly incentivize R&D activities performed in the Netherlands by providing tax incentives to Dutch companies and individuals. This is done by 1) greatly reducing wage taxes on the R&D performed in the Netherlands (the cost-side) and 2) providing a special corporate income tax regime for any profit generated with R&D (the profit side). Both lead to a lower Effective Tax Rate, thus higher free cashflows, and as such a higher Company Value on a DCF basis (check out our explanation of the DCF method for valuating companies: NL/ENG).

In this long-read, we will provide you with the ins and outs of these Dutch tax regimes that incentivize R&D activities.

1. The cost side: the ‘WBSO’

The WBSO is an R&D remittance reduction intended to incentivize businesses to invest in research & development. This incentive greatly mitigates the cost-burden of R&D-companies by reducing the wage tax of employees conducting R&D activities. To obtain the benefits, an application needs to be filed with the Dutch Enterprise Agency (RVO) (in Dutch: Rijksdienst voor Ondernemend Nederland). The application boils down to: 1) proving that you are dealing with a project that contains a technical bottleneck, which 2) cannot be solved by any known techniques, and 3) requiring you to perform R&D work to find a solution.

1.1 The wage tax reduction

For wage tax withholding agents (i.e. employers), the WBSO entails a reduction in the wage tax to be paid for its employees conducting R&D activities. In 2022, this so-called ‘R&D remittance reduction’ is 32% of the R&D base up to € 350,000, and 16% thereafter. If you qualify as a ‘starter’ (i.e. you employ people for less than 5 years and were granted the WBSO-statement for <3 calendar years), you are eligible for an R&D remittance reduction of 40% over the first € 350,000.

R&D Base Regular Starter
€0 till €350,00 32% 40%
From €350.000 16% 16%

The R&D base – which functions as the basis for the wage remittance reduction – can be calculated in two ways:

Method 1: based on the number of R&D hours: this is the more straightforward regime, where the amount is calculated based on the number of hours granted, with an average hourly wage of € 29 plus an additional amount of € 10 per R&D-hour (up till 1,800 R&D hours) and € 4 for any additional hours on top of the 1,800 hours.

Method 2: based on the actual costs and expenses that relate to the R&D activities.

In case you would like to calculate the potential WBSO-benefit yourself, feel free to use our open-source Excel-file. You can download the Excel file here:

Download here

1.2 The number of R&D hours: choose a reasonable number!

A WBSO-statement always applies to any future R&D work performed by the company. As a result, you will need to make a forecast of the number of R&D hours you are planning on spending (method 1).

Make sure to apply for a reasonable number of R&D hours. The reason is that the RVO 1) checks whether the number of R&D hours requested isproportionate to the project and the amount of FTE involved, and 2) the RVO regularly audits companies on their number of R&D hours spent. In case the number of R&D hours for which you applied cannot be justified, you risk a correction and a fine.

1.3 ‘But…our R&D project is not that innovative.’

While analyzing the R&D activities of a potential WBSO-applicant, we sometimes notice that the company itself does not consider the project to be ‘innovative’. In most cases this is caused by 1) R&D employees perceiving the R&D work as ‘simple’ due to them being experts in their respective field, or 2) comparing the R&D activities/ the unfinished product to the (finalized) product of a competitor. Though we understand that this might seem problematic when filing a WBSO-application, we would like to stress that both these factors are completely irrelevant for WBSO-purposes. The only relevant factor when determining if a project qualifies for WBSO-purposes is whether you aim to solve a technical bottleneck that cannot be solved by any known methods. It is therefore irrelevant if this work is perceived as simple by the R&D employees or whether a competitor has already solved this bottleneck. For instance:  the RVO will not reject a WBSO-application in case you are planning on solving a technical bottleneck for a new ‘Google-like’ search engine, just because Google itself might have a way of solving the technical bottleneck. What isn’t considered R&D work – and will not qualify for WBSO-purposes – is using existing technologies to solve technical bottlenecks. For example: creating a machine learning model by utilizing certain libraries (such as Tensorflow) will not qualify as R&D work, but developing a machine learning model from scratch (and solving a technical bottleneck in the process) will.

2. The profit side: the innovation box

The Dutch innovation box is a special corporate income tax regime for companies who generate profit via a self-developed intangible asset. Any profits that fall under the scope of the innovation box are effectively taxed at a corporate income tax rate of ~9% instead of the statutory rates of up to 25.8%.

2.1 The requirements: the WBSO and a patent/plant breeders’ right (in Dutch: Kwekersrecht).

The Dutch corporate income tax act differentiates between so-called small-sized companies and larger-sized companies. The requirements a company needs to meet in order to apply for the Dutch innovation box vary depending on its size. For the small-sized companies, the application can be filed as soon as a WBSO-statement is issued by the Dutch Enterprise Agency. Larger-sized-companies require a patent or a so-called plant breeders’ right (in Dutch: Kwekersrecht).

A company qualifies as a ‘small-sized company’ if:

  • The total gross margin of the company that relates to the intangible asset is ≤ € 37.5 million in the last 5 years (i.e. the sum of the last 5 years).
  • The total turnover of the company is ≤ € 250 million in the last 5 years (i.e. the sum of the last 5 years).

2.2 Four methods to determine the profit subject to the innovation box

The innovation box benefit can be calculated via four methods:

  • The peel-off method (‘afpelmethode’).
  • The cost-plus method.
  • The single- intangible asset method (‘per activum’).
  • The flat rate method.

Which method is best suited for your business depends on your business model as well as the role R&D fulfills within your company. In practice, a functional analysis of your company will determine which method is most suited and which percentage of the profit is subject to the innovation box scheme. For completeness’ sake, we would like to note that it is a common misunderstanding that 100% of a company’s profits can attributed to the innovation box. Even the most high-tech companies in which R&D is interwoven in their entire business process cannot allocate all of their profits to the innovation box scheme. The tax authorities will – in such a case – always consider a part of the profits to be allocable to an entrepreneurship-like function within a company.

2.2.1 The peel-off method (in Dutch: ‘afpelmethode’).

In case R&D is a core activity within your company and the profits that relate to an intangible asset cannot be determined on a stand-alone basis, the peel-off method is the most suited method. The peel-off method is – in most cases – the most beneficial way of determining the innovation box profit, as the entire EBIT (‘Earnings before interest and tax’) of the company will be considered the starting point. This method works by allocating a small part of the profits to the more routine-like functions within the company. The remainder of the profits is then allocated to the core divisions/functions within the company. In a way: you are ‘peeling off’ the company’s functions layer by layer.

An example of the peel-off method allocation per core-division would be:

Entrepreneurship 20%
Sales 10%
Production 30% +
Total: 60%
Attributable to R&D 40% +
Total: 100%

In the above example, 40% of the company’s profits are allocable to innovation, and will therefore be taxed against an effective corporate income tax rate of ~9%.

2.2.2 When is R&D considered to be a core activity?

Well, that depends on the activities of the company. The Dutch tax authorities will take the position that the peel-off method is the most suited method if the R&D-activities are an essential part of the day-to-day operations. This is the case if R&D activities are interwoven in all of the company’s operations and the R&D function is one of the most important functions in terms of value creation for the company.

2.2.3 How do we determine the percentages attributable to each division/activity when applying the peel-off method?

When applying the peel-off method, a functional analysis determines which part of the profits is allocable to each division/function. The exact percentage per division depends on the size of the company (smaller or larger size), the industry and the function R&D fulfills within the company. Factors that may be relevant in this analysis are:

  • The number of WBSO-hours.
  • The intertwinement of R&D within the different business units of the company.
  • The different types of products/service lines within the company.

2.2.4 The hurdle – development costs

It is important to note that the innovation box regime contains a hurdle for the development costs that relate to the development of the intangible asset. In short: the innovation box regime will only be applicable if the development costs for the intangible are compensated by the profits generated by said intangible. The goal here is to prevent a deduction of development costs against the standard corporate income tax rate of 25,8% (maximum), while the profits are taxed against an effective tax rate of ~9%.

2.3 The cost-plus method

In case innovation is not considered a core-activity within the company but rather complementary to the company’s core activity, the Dutch tax authorities may take the position that the innovation box profits should be determined on a cost-plus basis.

The cost-plus method entails adding a mark-up on all costs (direct & indirect) relating to the R&D work. This mark-up is determined by benchmarking the remuneration an independent third party would receive for these R&D activities.

Under normal circumstances, a mark-up between 8% – 15% is accepted by the Dutch tax authorities.

2.4 The single intangible asset method

The single intangible asset method is very similar to the peel-off method. When applying the single intangible asset method, the operational profit needs to be divided between routine functions and core activities/divisions of the company. The difference here is that – while the peel-off method considers the EBIT (‘earnings before interest and tax’) as the starting point – the single intangible asset method only takes the development costs and the ‘benefits’ that directly relate to the intangible asset into account. The single intangible asset method is generally used to calculate the innovation box profits in royalty structures, where there is a direct and easily identifiable revenue stream that relates to the intangible asset.

Note that – same as for the peel-off method – a hurdle based on the development costs applies.

2.5 The flat rate method

In the event that the earlier described methods are deemed to be too complex, there is always the possibility of utilizing the flat rate method. Based on this method, 25% of the profit will fall under the scope of the Dutch innovation box. The benefit is however capped to € 25,000 on a yearly basis, making this – in most cases – only a viable option for a small/ start-up company.

2.6. The corporate income tax benefits

Although it may seem a bit nitty gritty, it is important to note that the innovation box benefit is actually a tax base exemption -rather than a tax rate reduction- calculated via the following formula: (16/25.8) x innovation box profits (2022). This exemption results in an effective tax rate of ~9% for any profits that are subject to the innovation box scheme. It also results in an additional – and in most cases unforeseen – benefit that the innovation box scheme ‘extends’ the first corporate income tax bracket.

2.6.1 Extending the first corporate income tax bracket and further reducing the effective tax rate

Besides the fact that the innovation box reduces the effective tax rate of profits that fall within its scope, the innovation box also positively influences the remainder of the profits. This is a result of the fact that the remainder of the profits (i.e. part of the profits that are not subject to the innovation box) are taxed against the regular, below-mentioned corporate income tax rates.

Taxable profit (2022) Tax rate
€ 0 till € 395,000 15%
From € 395,000 25.8%

Consequently, the remaining profits will first be taxed in the first bracket at a tax rate of 15% up to € 395.000, thus further reducing the effective tax rate. In case you are wondering how this would affect the effective tax rate of your organization, feel free to use our Excel-file which shows you the effective tax rate depending on the taxable profit and the innovation box percentage. Note that we based this Excel file on the peel-off method. You can download our Excel file here:

Download here

3.  The ruling application process

The innovation box ruling process starts with a ruling application request. Once filed, the Dutch tax authorities will send over a standardized letter containing several questions to get to know the applicant. These questions relate to: 1) the line of business in which the company operates, 2) the intangible asset/ intellectual property developed by the company and 3) the preferred method to determine the innovation box profit. In most cases, the Dutch tax authorities will request a company specific questionnaire following the initial application. Once the Dutch tax authorities have a clear initial image of the company’s business, they will plan a meeting at the company’s HQ. This meeting is meant to help the Dutch tax authorities understand how the business operates and what role R&D fulfills within the company. After the meeting, the Dutch tax authorities and the company will conclude a tax ruling . The ruling will contain:

  • a description of the company;
  • a description of the R&D activities;
  • the method to determine the innovation box profit.

To further specify which part of the profits will be subject to the innovation box scheme, an addendum to the ruling request will be concluded, based on the company’s commercial forecasts. The ruling will be concluded for a period of 5 years.

Click on the image for a larger version.

4. FAQ

4.1 Can I outsource some of the R&D that contributes to my intangible asset?

You are able to outsource some of the R&D work as long as the costs that relate to the R&D work (as well as any potential risks) are borne by the innovation box applicant.

4.2 Does this mean that I can outsource the R&D work to an affiliated entity?

Outsourcing to an affiliated entity is possible, but may impact the total innovation box benefit. The Dutch corporate income tax act contains a limitation on the innovation box benefits that relate to the outsourcing of R&D work to an affiliated entity. The reason is that – in most cases – affiliated entities are able to structure their R&D activities between different jurisdictions.  To mitigate any unwanted tax structuring which might arise in such a case, the innovation box benefits will be limited based on the following formula:

Qualifying innovation box benefits = Qualifying expenses X 1,3
________________________
Total expenses		 X benefits

In the above formula, the outsourced R&D expenses to an affiliated entity are not considered ‘qualifying expenses’. As a result, a maximum of 30% of the expenses can be outsourced to an affiliated entity without it impacting the innovation box benefits.

4.3 An Innovation box ruling is concluded for a period of 5 years, what if my corporate structure/ my business model unexpectedly changes during this time?

Every tax ruling contains a clause stating that the ruling remains valid as long as the relevant facts and circumstances do not change. In such a case, you are obligated to notify the Dutch tax authorities accordingly. This may result in the termination of the current ruling.

4.4 I filed a WBSO-request for 2.000 R&D hours. In reality, my company conducted > 2000 R&D hours. Can I file a new WBSO-application to retroactively receive a wage remittance reduction for these additional R&D hours?

Unfortunately, it is not possible to file a WBSO-application to retroactively receive a wage remittance reduction for any additional R&D hours. As a WBSO-application does need to be filed on a yearly basis however, you are therefore able to file a new request next year. For completeness’ sake, we note that you are obligated to notify the Dutch Enterprise Agency in case you spend less than the requested number of R&D hours. As a result, the wage remittance reduction will be reduced accordingly.

4.5 So, the Dutch tax authorities agree to allocate 15% of my EBIT to the Dutch innovation box. Does this mean I can allocate 15% of my EBIT right of the bat?

While concluding an innovation box ruling, the Dutch tax authorities may consider an start-up phase to be present. The duration depends on the innovation type as well as the business structure. As soon as this period ends, you are able to allocate the full amount – 15% of the EBIT – to the Dutch innovation box. For example: in case you conclude a start-up phase of 3 years and an R%D percentage 15%, you will receive an innovation box allocation of 5% in the first year of the ruling, 10% in the second year and finally 15% in the third year.

5. Combine the WBSO and innovation box for an enhanced investment case and company value

Where R&D-cycles generally see any revenues being proceeded by a cost-burning phase, a cost-side tax benefit can logically make an R&D project more feasible, as it (1) reduces the burn rate and (2) lengthens the runway. The WBSO does exactly that and therefore provides great value in the ‘pre Break Even Point’ phase.

Investors investing in ‘post-BEP phase’ companies are generally enticed into the high-risk financing of an R&D cycle by the calculation of (1) the chance of success * (2) the rate of return. As the investor rate of return is influenced heavily by profit tax functions, the innovation box can make an R&D project in the post-BEP phase more feasible as well since it increases the outlook of factor (2).

By combing both the WBSO and subsequently the innovation box, a more attractive investment case can thus be achieved.

Click on the image for a larger version

Interested in applying the WBSO and/or innovation box to your company? Book a timeslot with us below, it’s on the house!

19 Oct
EACC & Member News

Two Views – Women on Supervisory Boards

Thaima Samman

Partner at SAMMAN, President at European Network for Women In Leadership, Board Member Focus Home Interactive

 

 

 

Liesbeth Mol

Chief Quality Officer and member of the Executive Board, Deloitte Netherlands

 

Women on Supervisory Boards: Why is this issue important? Who is affected?

Liesbeth

In the Netherlands, supervisory boards have traditionally shown the same picture: white men in grey suits. Luckily this picture has been changing over the past five years. As the role of the supervisory board became more relevant and gained in-depth, awareness rose that the presence of diverse viewpoints within them is important in order to avoid “groupthink” and tunnel vision. Yet the tendency was still to appoint new supervisory board members from the “old boys network.” Forcing a breakthrough legislation was necessary. In the Netherlands, we now have so-called quota legislation, in which it is ruled that 1/3 of the supervisory boards will have to be comprised of women. As long as this quotum has not been reached, appointments of new male supervisory board members are invalid. The impact of this legislation on the supervisory boards is already being felt. A lot of listed companies now have at least 1/3 of women on their supervisory boards. The next important step will be that management boards also have the necessary diversity.

Thaima

The issue of the representation of women in all facets of life goes to the heart of democratic values and governance. In my role as President of the European Network for Women in Leadership, I see the subject of the feminization of leadership and management under discussion all over Europe. Studies have shown that companies with higher levels of gender diversity outperform those with male-dominated management, and the larger goal—beyond women on supervisory boards—is for more women in executive roles generally.

Following Norway’s lead in 2006, eight EU countries have adopted mandatory gender quotas for listed companies, including France, Belgium, Italy and the Netherlands, with ten others having taken a more incentive-driven approach. In their search for female talent, male leadership is discovering that this talent exists! The visibility of successful women and a constellation of heterogenous role models contributes to the development of a pipeline of female talent and future female leaders.

This trend, however, is not irreversible, and we need to remain vigilant, especially in times of social and economic upheaval. Some companies appoint women to their boards to comply with the law but make sure that they have no real power or influence. Having the same few women sit on several supervisory boards rather than looking for other talent is also not uncommon.

What have you seen on the ground?

Liesbeth

The NSE supervisory board has oversight over the NSE executive board. NSE is Deloitte’s European organization and consists of 28 geographies.

On our board, we have over 50% female representatives, all with different cultural backgrounds. We also have three independent non-executives on our supervisory board, which assures the objectivity of this board. We strive for a certain percentage of women and different cultures on this board and have open conversations about how to reach the targets. We have a strong focus on people and on the long term, and we keep in mind the impact our decisions will have on our legacy. We believe strongly that our diverse board provides the diversity of thought necessary for discussions and decisions of value, for both the short and long term.

My main takeaway is that inclusivity and diversity are a “must” for boards; we have to take firm steps and be open about dilemmas and our values. Whatever form of diversity we strive for, cultural diversity, gender diversity, ultimately, it is about diversity of thought. And we in our NSE board see the benefits of having diversity of thought: in decision making and in having meaningful discussions.

Thaima

The Deloitte example is a great one and a best practice to communicate broadly.

I am currently a board member of Focus Interactive, a gaming company. The company clearly wants to work with their supervisory board members on business strategy. The other board members coming from the same world, my female colleague and I bring fresh air and new perspectives, she with a financial background, and I with my law and public affairs perspectives—gained from ten years at Microsoft as Legal and Corporate Affairs General Counsel, and subsequent work with a Law and Corporate Affairs firm.

My takeaways:

  • Don’t be shy, and forget the impostor syndrome: the knowledge and experience that makes you different from the other members might very well be the reason you were chosen. If the company leadership is not interested by your ideas or recommendations, they will simply not act on them—don’t take it personally.
  • You are there to make/approve decisions engaging the company. Being assertive goes down well, provided you have a constructive approach. Feel free to ask questions and speak up, remind others of the rules and check compliance execution. You are protecting the company by doing so.

What’s coming next?

Liesbeth

An important next step is moving from diversity to inclusion. The good news is that there will be more women on boards as a result of quota legislation. However, if the culture does not change and women do not feel safe enough to ask questions and express differing views, there is no inclusion and no benefit from having diverse points-of-view. The Chair of the supervisory board must create an atmosphere in which everybody can be open to ask questions and express views. At this moment, diversity is too often seen as just a check-the-box exercise. If boards look different but still act the same, there has been no real progress—the company will not benefit from diversity of thought. More action is needed to go from diversity to inclusion.

Global progress on gender equality is encouraging, but overall, progress is slow. It has therefore become even more important to take concrete action, appointing more women not only to supervisory boards but also to boards of directors. We should also challenge if 1/3 of women on boards is sufficient because then it still doesn’t give a balance in boards since you have a predominance of men, which obviously has its effect on discussions, decisions and also on inclusion.

Thaima

Companies now have a diversity of profiles in their workforce, and management and leadership teams are more resilient and more successful as a result. The coming together of different skills and ideas helps align companies in the diverse societies they operate in and better understand their markets and customers. These types of factors, while well understood, are not always taken into account at the right level of management, and old reflexes and stereotypes are still alive and kicking.

Women are now equally, if not more, educated than men. Aside from the topic of women on supervisory boards, tackling the broader issue of women in leadership positions also addresses corporate governance and the need to recruit and retain female talent.

There is not one legal tradition in Europe but several. This results in huge differences between countries according to their cultures, histories and legal traditions. I believe it is necessary for the European Union to continue taking initiatives to align the policies of member states, levelling them up to the standards in the more advanced countries. The recent deal on the Directive on Women on Boards, which had been blocked for ten years, should make a big difference and will complement EU efforts to mainstream gender into wider policy-making processes, including, most recently, by making it a criterion for receiving EU Covid recovery funding.

Read More
23 Jun
EACC & Member News

EACC Network Survey on Business Travel to the US

#internationaltravel has resumed and as of June 12th #covidtesting requirements for passengers boarding flights to the #unitedstates are lifted!

Yet members across the #EACC #network report that entry to the #us remains fraught.

  • Are you based in Europe or the United States and are you having issues with #ESTAs or #USVisas?
  • Did you have to postpone or cancel your #businesstrip or #expatriation to the US?
  • Did you or your company lose #business opportunities as a result?
  • Or is everything back to normal?

Let us know either way through the link below!

START SURVEY HERE

(takes 1 minute)

 

28 Jan
EACC & Member News

Update to the transfer pricing guidelines

On Thursday the 20th of January 2022 the Organisation for Economic Co-operation and Development (also known as: ‘OECD’)  released an update to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. This update mainly incorporates earlier released documents, but it also makes some consistency changes to the OECD Transfer Pricing Guidelines of 2017. These consistency changes were needed to produce the consolidated version of the Transfer Pricing Guidelines and were approved by the OECD/G20 Inclusive Framework on BEPS on the 7th of January 2022.

The following documents are incorporated in the Transfer Pricing Guidelines 2022:

Revised Guidance on the Application of the Transactional Profit Split Method

The guidance set out in this report responds to the mandate under Action 10 of the BEPS Action Plan, which requires the development of:

“rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: … (ii) clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains”

Since 2010, the Transfer Pricing Guidelines states that the most appropriate method should always be used. This method can be (among others) the profit split method. This revised guidance provides clarification and significantly expands the guidance on when a profit split method may be the most appropriate method. It describes certain indicators such as the unique and valuable contributions each party makes to the transaction and the share of economically significant risk. Furthermore, the revised guidance includes several examples illustrating the principles discussed.

Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles

BEPS Action 8 addresses transfer pricing issues to controlled transactions involving intangibles, since intangibles are by definition mobile and they are often hard-to-value which makes base erosion and profit shifting possible. The OECD states that misallocation of these profits has heavily contributed to base erosion and profit shifting.

The hard-to-value intangibles approach disarms the negative effects of information asymmetry, by ensuring that tax administrations can consider ex post outcomes as presumptive evidence about the appropriateness of the ex-ante pricing arrangements. I.e. administrations can take later outcomes in consideration of the earlier dealt with pricing agreement. At the same time, taxpayers have the possibility to rebut such presumptive evidence by demonstrating the reliability of the information supporting the pricing methodology adopted at the time of the controlled transaction took place. This is to prevent later information to rule over the earlier information, which would certainly subvert the legal security of the taxpayer.

The guidance aims at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of the hard-to-value intangibles approach. The guidance should improve consistency and reduce the risk of economic double taxation.

Transfer Pricing Guidance on Financial Transactions

The 2020 report on financial transactions pertains to Action 4 and provides guidance in the accurate delineation of financial transactions, particularly in capital structures of multinational enterprises. Furthermore, it analyses the pricing of a controlled financial transaction. The report describes the transfer pricing aspects of financial transactions such as intra-group loans, treasury functions, cash pooling, hedging, guarantees and captive insurance.

Action 4 constitutes the limitations on interest deductions, and aims to limit base erosion through the use of interest expenses to achieve interest deduction or to finance the production of exempt or deferred income.

21 Jan
EACC & Member News

ATAD 3: the end for shell companies?

What’s happening?

On the 22th of December, the European Commission (hereinafter: ‘EC’) has presented an initiative to combat the misuse of shell entities for improper tax purposes (‘ATAD 3’). This proposal will ensure that shell companies in the EU with no- or minimal economic activity are unable to benefit from any tax advantages, consequently discouraging their use. Furthermore, the Commission Ter Haar published a report on ‘doorstroomvennootschappen’ in the Netherlands last October.

Shell companies can be used for aggressive tax planning or tax evasion purposes. Businesses can direct financial ‘flows’ through these shell entities towards tax friendly jurisdictions. Similar with this, some individuals can use shell entities to shield assets – more specific real estate – from taxes, either in their respective home country or in the country where the property is located. The main purpose of this proposal is therefore to address the abusive use of so-called shell companies, being referred to as legal entities with no, or only minimal, substance and economic activity.

History intermediary holding companies

International groups often use intermediate holding companies to hold shares in subsidiaries organized on a regional or divisional basis. Furthermore, holding companies are often used as the vehicle for investing in portfolio companies in a private equity context. In past times, it was not particularly controversial that holding companies were entitled to the potential benefits of tax treaties and potential directives in their country of residence. This would frequently restrict the right of investee jurisdictions to tax dividends and gains derived by the holding company from its local subsidiaries. As shown in the timeline underneath, the perception and position of these companies has changed, with an accumulation of measures that potentially restrict the access to the benefits and directives.

This all started with the introduction of the term “beneficial ownership” into the OECD’s Model Tax Convention in 1977. The question was asked: who does actually benefit from this/these payment(s)? Whilst being slightly controversial in the 70’s, the term now appears in most tax treaties and intents to prevent treaty shopping by ensuring that the benefits of the dividends, royalties and interest articles are only accessible to residents of the contracting state that are the beneficial owners of the payment. After this, the OECD’s report on the use of conduit companies in 1986 ruled conduit companies out of the beneficial ownership regard. Nevertheless, there was no generally agreed definition of the term ‘beneficial ownership’ in tax treaties and the interpretation would follow the domestic law of the contracting states. The first hint of an international fiscal meaning of this term stems from the Indofood case (Indofood International Finance Ltd. V JP Morgan Chase Bank NA, 2006). To prevent falling foul of the beneficial ownership test, certain groups reviewed their holding structure(s) and looked to eliminate fully back-to-back financing arrangements. Furthermore, some structures which involved payment chains were set up with an “equity gap”. These structures reflected a widespread view that beneficial ownership was an objective test that was indifferent to the motives behind these holding company arrangements.

Whilst having a long history, reverting back to said changes in the OECD model treaty in the 70’s, the real challenge to the treaty status of holding companies began in 2015, when the Base Erosion and Profit Shifting project (‘BEPS’) recommended measures to restrict inappropriate usage of tax treaties. The bar is consequently set higher and higher for the criteria that holding companies need to meet in order to benefit from relief from withholding taxes and exemptions to non-resident capital gains tax. The high apex for this approach is the just published proposal to end the misuse of shell entities. Some of the statements suggest that it may never be appropriate for an intermediate holding company (using the term ‘shell entity’) to benefit from reductions in withholding taxes under tax treaties and EU directives.

Click on the image for a bigger version

The Dutch government already set up a commission that investigated the use of the so-called shell companies and their potential misuse of the Dutch tax system. This report was published last October.

Dutch investigation on shell companies (Commission Ter Haar)

‘Doorstroomvennootschappen’ (as they’re often referred to in Dutch) provide little benefit to the Dutch economy, disadvantage developing countries disproportionately through loss of tax revenue for developing countries in particular, and the phenomenon damages the reputation of the Netherlands. These are the main conclusions of the Committee on Flow-through Companies, chaired by Mr. Ter Haar, which presented its final report recently.

The committee describes the relevant components of the Dutch tax system that, at least until recently, have made the Netherlands attractive to flow-through companies. These include the participation exemption, the extensive treaty network, the absence of a withholding tax on interest and royalties and the ruling practice. The report describes examples of unintended use of each of these aspects of the Dutch tax system. In combination with the well-organized financial advice and services sector, this has led, according to the Committee, to a sizeable financial flow. The Committee believes that the measures already taken are expected to put an end to (part of) the tax-driven flow of interest and royalties. This does not mean that the Netherlands should be expected to lose its position as a country of establishment for empty holding companies, even though the Dutch tax system is no longer unique compared to other countries. According to the Committee there will still be a large group of (almost) empty conduits that make use of the Dutch tax infrastructure, whose contribution to the economy is small. The Committee therefore recommends further steps, but at the same time sees that far-reaching unilateral measures do not immediately offer a solution. In the first place, the Committee recommends a proactive attitude and a pioneering role with respect to international and European initiatives. These include the revision of the international tax system within the Inclusive Framework of the OECD and the announced EU Directive proposal on flow-through companies. According to the committee, the Netherlands should advocate measures that involve both the targeted exchange of information and to limit the benefits of the Interest and Royalties Directive and the Parent-Subsidiary Directive.

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The advantage of this structure is that the dividends, by making use of the Dutch treaty network, without or with reduced withholding of local tax, arrive at the company in the country of residence (Country A), without or with reduced withholding of local tax, compared to the situation where the payment is made directly to the country of residence (Country A) by the source country (Country C). This is just one example of a (flow-through) structure in which the Dutch treaty network plays a role, in combination with the participation exemption and the dividend withholding tax exemption in treaty situations.

Because the Netherlands has long had a large bilateral tax treaty network, the Netherlands is an attractive country for ‘treaty shopping’. When the tax treaties are concluded, it is assumed that it is up to the source country to prevent the reduced rate of withholding tax, which is wrongly applied mostly.

Unilateral measures cannot prevent other countries from playing the role as flow through country. To avoid international tax avoidance through ‘empty entities’, international agreements are therefore necessary. The committee lastly advises also a constructive attitude by the Netherlands to the ongoing initiatives of the European Commission.

ATAD 1-2

The public perception of tax evasion has shifted in recent years, by taking a drastic turn. In particular, the credit crisis of 2008 has changed the social acceptance of tax avoidance by multinationals in particular. With government deficits and rising government debt, it was considered unfair that a number of multinationals paid (relatively) little tax on their world profits.

This all accumulated into a public hearing of officials of Amazon, Google and Starbucks organized by the Public Accounts Committee in the UK in 2012. The committee chair Ms. Hodge said (the later iconic words):

“We’re not accusing you of being illegal, we’re accusing you of being immoral”.

This all led to the BEPS-project and consequently ATAD. There have been 2 Anti-Tax-Avoidance-Directives already put into effect. ATAD 1 introduced 5 sets of minimum standards (interest limitation rule, GAAR, CFC rules, hybrid mismatches and exit taxation). In the second ATAD, subsequent rules relating to hybrid mismatches were finalized on 29 may 2017 when the ECOFIN accepted this directive. ATAD is based on Article 115 of the Treaty on the Functioning of the EU (‘TFEU’).

ATAD 3

Shell Companies

The definition of the widespread term ‘shell’, often interchangeably with terms such as ‘letterbox’, ‘mailbox’, ‘special purpose entity’, special purpose vehicle’ and similar, is defined differently in different contexts. For the purpose of ATAD 3, shell companies refer to three types of shell companies:

  • Anonymous shell companies
  • Letterbox companies
  • Special purpose entities

The main common feature of the above three types is the absence of real economic activity in the Member State of

registration, which usually means that these companies have no (or few) employees, and/or no (or little)

production, and/or no (or little) physical present in the Member State of registration

What will change?

The proposed rules will establish transparency standards around the use of shell entities, so that their abuse can be detected more easily by tax authorities. Using a number of objective indicators related to income, staff and premises, the proposal will help national tax authorities detect entities that exist merely on paper.

The proposal introduces a filtering system for the entities in scope, which have to comply with a number of indicators. These different levels constitute a type of gateway. This proposal sets out three gateways. If an entity crosses all three gateways, it will be required to annually report more information to the tax authorities through its tax return.

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Gateways

First gateway

The first level looks at the activities of the companies based on the income they receive. This gateway is met if >75% of an entity’s overall revenue in the last two tax years does not derive from the entity’s business activity or if more than 75% of its assets are real estate or other private property of particularly high value.

Second gateway

The second level requires a cross-border element. If the entity receives the majority of its relevant revenue through international transactions linked to another jurisdiction or passes this relevant income on to other entity’s situated abroad, the entity passed to the next and last gateway.

Third gateway

The third, and last, level focuses on whether corporate management and administration services are performed in-house or are outsourced.

Crossed all gateways?

An entity crossing all levels will be obliged to report information in its tax return related to the premises of the entity, its bank accounts, the tax residency of its directors and employees etc. These are the so-called substance requirements. All declarations should be accompanied by supporting evidence. If one of the substance requirements isn’t met, the entity will be presumed to be a ‘shell company’.

When will the proposal come into force?

Once adopted by the Member States, the Directive should come into effect on 1 January 2024.

Rebuttal arrangement?

If the substance criteria are not met, entities still have the opportunity to rebut the presumption of being a shell. Additional evidence needs to be presented, such as detailed information about the commercial, non-tax reason of their establishment, the profiles of their employees and the fact that decision-making takes place in the Member State of their tax residence.

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Tax Consequences

If an entity is deemed to be a shell company, the benefits and reliefs of the tax treaty network of its Member state are not applicable. Furthermore, the company will not be able to qualify for the treatment under the Parent-Subsidiary and Interest and Royalty Directives. To support the implementation of these consequences, the Member State of residence of the company will either deny the shell company a tax residence certificate or the certificate will specify that the company is a shell.

Furthermore, payments to third countries will not be treated as flowing through the shell entity, and will be subject to withholding tax at the level of the entity that paid to the shell. According with this, inbound payments will be taxed in the state of the shell’s shareholder. Relevant consequences will apply to shell companies owning real estate assets for the private us of wealthy individuals and which as a result have no income flows. Such real estate assets will be taxed by the state in which the asset is located as if it were owned directly by the individual.

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Scenario 1 EU source jurisdiction of the payer – EU shell jurisdiction – EU shareholder jurisdiction

In this case, all three jurisdictions fall in the scope of the Directive and are consequently bound by ATAD3:

  • EU subsidiary: this entity will not have a right to tax the payment, but may apply domestic tax on the outbound payment to the extent it cannot identify whether the undertaking’s shareholder is in the EU.
  • EU shell: this entity will continue to be a resident for tax purposes in the respective Member State and will have to fulfil relevant obligations as per national law, including by reporting the payment received; it may be able to provide evidence of the tax applied on the payment.
  • EU shareholder: this entity will include the payment received by the shell undertaking in its taxable income, as per the national law and may be able to claim relief for any tax paid at the source, including by virtue of EU directives. It will also take into account and deduct any tax paid by the shell.

Scenario 2 Non-EU source jurisdiction of the payer – EU shell jurisdiction – Non-EU shareholder jurisdiction

  • Third country subsidiary: may apply domestic tax on the outbound payment or can decide to apply tax according to the tax treaty in effect with the third jurisdiction of the shareholder if it wishes to look through the EU shell entity as well.
  • EU shell: will continue to be a resident for tax purposes in a Member State and fulfil relevant obligations as per national law, including by reporting the payment received; it may be able to provide evidence of the tax applied on the payment.
  • Third country shareholder: while the third country shareholder jurisdiction is not compelled to apply any consequences, it may consider applying a treaty in force with the source jurisdiction in order to provide relief.
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Scenario 3 Non-EU source jurisdiction of the payer – EU shell jurisdiction – EU-shareholder jurisdiction

In this case the source jurisdiction is not bound by ATAD 3, while the jurisdictions of the shell and the shareholder fall in scope.

  • Third country source jurisdiction: this entity may apply domestic tax on the outbound payment or may decide to apply the treaty in effect with the EU shareholder jurisdiction.
  • EU shell: this entity will continue to be resident for tax purposes in the respective Member State and will have to fulfil relevant obligations as per national law, including by reporting the payment received; it may be able to provide evidence of the tax applied on the payment.
  • EU shareholder: this entity shall include the payment received by the shell undertaking in its taxable income, as per the national law and may be able to claim relief for any tax paid at source, in accordance with the applicable treaty with third country source jurisdiction. It will also take into account and deduct any tax paid by the shell.

Scenario 4 EU source jurisdiction of the payer – EU shell jurisdiction – third country shareholder jurisdiction

In this case only the source and the shell jurisdiction are bound by ATAD3 while the shareholder jurisdiction is not.

  • EU subsidiary: this entity will tax the outbound payment according to the treaty in effect with the third country jurisdiction of the shareholder or in the absence of such a treaty in accordance with its national law.
  • EU shell: will continue to be resident for tax purposes in a Member State and will have to fulfil relevant obligations as per national law, including by reporting the payment received; it may be able to provide evidence of the tax applied on the payment.
  • Third country shareholder: while the third country jurisdiction of the shareholder is not compelled to apply any consequences, it may be asked to apply a tax treaty in force with the source Member State in order to provide relief.

Scenarios where shell entity’s are resident outside the EU fall outside the scope of ATAD3.

What to do?

First of all, monitoring the developments in the BEPS 2.0 and ATAD 3 proposals is advised. Also, looking at whether there are operating entities withing the group in low tax jurisdictions, entities with primarily passive income, and companies where the local substance may fall short on the types of criteria suggested by the EC. When the key risks are identified, choices may include removing problematic holding companies, using different jurisdictions, or taking steps to bolster local substance. International groups should take the appropriate measures in time to get ahead of these changes.

Do you have questions regarding the implications of ATAD 3 for your company or do you need certainty in advance? Feel free to call us! This is really dynamic work, which also gives you insight into your compliance with the changing international rules. We are happy to help.

30 Sep
EACC & Member News

Deloitte: 2022 Dutch Tax Plan – Budget Day (Prinsjesdag)

On 21 September 2021, the government submitted the 2022 Tax Plan Package to the Lower House. This package includes the following bills:

  • 2022 Tax Plan
  • 2022 Miscellaneous Tax Measures
  • Act amending the tax treatment of stock option rights
  • Act introducing delegation provisions for compensation in cases of hardship
  • Act implementing the tax liability measure from the second EU Anti-Tax Avoidance Directive.
  • Rate reduction and monthly adjustments to the landlord levy

Moreover, a bill has been presented that aims to counter mismatches in the application of the arm’s length principle in corporate income tax.

Most measures will enter into force on 1 January 2022. Where this is not the case, we have indicated this. The bills may be amended during their parliamentary debate. The proposed measures per type of tax type are listed below.

Webcast Tax Plan 2022

Corina van Lindonk, Aart Nolten and Eddo Hageman discussed the most noticeable measures of Tax Plan 2022.

View (in Dutch) 

Measures by type of tax:

Corporate income tax and dividend witholding tax

Outline of corporate income tax and dividend withholding tax measures

Wage and income tax

Outline of wage and income tax

VAT and excise

Outline of VAT and excise

Procedural tax law, collection of taxes and supplementary benefits

Outline of procedural tax law, collection of taxes and supplementary benefits

Car taxes and environmental taxes

Outline of car taxes and environmental taxes

Landlord levy and property transfer tax

Outline of landlord levy and property transfer tax

 

Schedule parliamentary debate Tax Plan 2022

Tuesday 21 September 2021 Budget Day: introduction.
Wednesday 29 September 2021 Closed technical briefing by civil servants of the Ministry of Finance.
Wednesday 6 October 2021 Contribution date for the report.
Tuesday 19 October 2021 Memorandum of reply.
Monday 25 October 2021 First legislative consultation.
Thursday 28 October 2021 Written answers to questions in response to the first legislative consultation.
Monday 1 November 2021 Second legislative consultation.
Tuesday 9 and Wednesday 10 November 2021 Plenary hearing.
Thursday 11 November 2021 Letter on evaluation of motions and amendments.
Thursday 11 November 2021 Voting.
16 Feb
EACC & Member News

Houthoff launches the Dutch Scheme Tool: a visualisation tool for the new Dutch Scheme (Wet Homologatie Onderhands Akkoord)

Houthoff launches the Dutch Scheme Tool: a visualisation tool for the new Dutch Scheme (Wet Homologatie Onderhands Akkoord). The tool is freely and publicly available at whoa.houthoff.com.

WHAT IS THE DUTCH SCHEME?

The Dutch Scheme is a Dutch pre-insolvency procedure inspired by the scheme of arrangement in the UK Companies Act 2006 and Chapter 11 of Title 11 of the US Bankruptcy Code. The Dutch Scheme allows a debtor or restructuring expert to propose a plan that may help avoid the debtor’s insolvency. The Dutch Scheme entered into force on 1 January 2021.

The Dutch Scheme combines a fast and flexible framework for concluding pre-insolvency schemes with a high degree of deal certainty. Such instrument did not exist in Dutch insolvency law until now. As a framework, the Dutch Scheme does not prescribe the contents of a plan. Proponents can draft a plan as they see fit (e.g. extending and/or reducing debt, debt for equity swap, sale of assets, limited to only a subset of the capital structure, etc.). The Dutch Scheme provides plan proponents with a high degree of flexibility on structuring the process (e.g. timing, electronic voting, etc.).

A two-pager describing the key features of the Dutch Scheme can be found here.

WHAT DOES THE DUTCH SCHEME TOOL DO?

The Dutch Scheme Tool visualises the changes in a company’s capital structure, outstanding liabilities and value distribution under a possible plan under a Dutch Scheme. As such, the Scheme Tool offers you a first visual impression of a proposed plan under a Dutch Scheme and helps better understand such plan. In addition, the Scheme Tool offers a first rough analysis whether the main tests for confirmation (homologatie) of the plan under the Dutch Scheme are likely met or not. We invite anyone to try the Dutch Scheme Tool at whoa.houthoff.com.

HOUTHOFF’S RESTRUCTURING AND INSOLVENCY PRACTICE GROUP

The Tool is developed by the Restructuring and Insolvency practice group at Houthoff. For more information about Houthoff’s Restructuring and Insolvency practice please click here.

13 Oct
EACC & Member News

Deloitte: Side-by-side comparison of Biden’s and Trump’s tax policy

On November 3, 2020, the 59th United States presidential elections will be held. President Donald Trump (Rep.) will try to get re-elected against challengers Joe Biden (Dem.), former vice-president of the Obama administration. Based on announcements and publications made available so far, it is clear that both candidates have (strongly) diverging agendas ranging from (US and international) tax topics to broader policy considerations and issues such as the Economy, Healthcare and Climate Change.

Given that differences between the plans of Trump and Biden as well as the uncertainty regarding the outcome/winner, these elections can potentially have a big impact for international businesses headquartered or operating in the United States.

Download the full report for a side-by-side comparison of Biden’s and Trump’s respective proposals. The publication offers a high-level discussion of the two candidates’ tax policy proposals on TCJA and other issues, along with a side-by-side comparison of their positions on certain key tax questions.

Side-by-side comparison of Biden’s and Trump’s tax policy proposals

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