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On December 17, 2019, the bill introducing a new Dutch withholding tax on interest and royalty payments was adopted. This tax will be imposed on payments to affiliated entities in low-tax jurisdictions and in situations of abuse. The new Dutch withholding tax will apply from 1 January 2021.
- Dutch Interest and Dutch royalty tax
- Low Tax Jurisdictions
- Affiliated entities
- Anti-abuse measure
- Dutch Withholding Tax Liability
Dutch Interest and Dutch royalty tax
Up until December 31, 2020, interest and royalty payments made by Dutch companies are not subject to Dutch withholding tax. However, this may well be the case as of 1 January 2021. Interest and royalty payments to low tax countries are to be taxed. In addition, payments that are not diverted on an arm’s length basis will also be subject to Dutch withholding tax, which will be equal to the highest corporate tax rate. In 2021, the Dutch withholding tax rate will be 21.7%.
The government has announced that the main purpose of the Dutch withholding tax is to ensure that the Netherlands is no longer used as a gateway for interest and royalty flows to low-tax countries and to prevent situations of abuse. No exceptions will be made for companies with a real presence in the Netherlands.
The tax will be levied on the Dutch entity that makes the relevant payments.
A Dutch company makes a payment of € 200 that is subject to Dutch withholding tax. This company then pays 21.7% tax on this amount, € 43.40. The tax is levied by withholding at source, the paying entity transfers the tax to the tax authorities. This means that the receiving entity will receive € 200 -/- € 43.40 = € 156.60.
Low Tax Jurisdictions
Dutch withholding tax will only apply to payments made to entities in low tax jurisdictions or if there is abuse. What is the definition of a low tax jurisdiction in this law?
In this case, jurisdictions are classified as low tax if there is a statutory rate of less than 9% in respect of income tax. Countries on the EU’s list of non-cooperative jurisdictions will also be subject to the withholding tax law.
As the new Dutch withholding tax will only be levied on payments between affiliated entities, it is important to have a clear understanding of what exactly an affiliated entity is. In this case it concerns situations where the shareholder, either directly or indirectly, has such influence on decision-making that they determine the activities of the company; here this means an (in)direct shareholding of at least 50%. In addition, companies may also be affiliated with joint shareholders or through a collaborative group.
Dutch withholding tax does not apply only to payments to affiliated entities in a low-tax country. The Dutch withholding tax will also be levied if there is a situation of abuse. A situation of abuse occurs when artificial structures are used with the purpose of avoiding Dutch withholding tax. An example of this is when an entity makes an interest or royalty payment to another entity in a low-taxed country and that payment is routed through an intermediary step by means of a flow-through entity with little to no relevant substance in a non-low-taxed country.
This means that for all interest or royalty payments, it must be examined whether there is an artificial construction aiming to avoid Dutch withholding tax.
A structure is considered artificial when it exists without business motives that reflect economic reality. In the event that the receiving entity has sufficient substance in the country where the payment is made, the construction may not qualify as artificial and the Dutch Withholding Tax Act 2021 will not apply. However, there is an exception to this. Namely that, based on the relevant facts and circumstances, the Dutch Tax Authorities can demonstrate that the structure is nevertheless artificially designed. We can help you determine whether there is sufficient substance. In addition, we can have discussions with the Dutch Tax Authorities on your behalf in the case that they designate your structure as artificial.
Dutch Withholding Tax Liability
In principle, the entity that makes the interest and/or royalty payment (the withholding agent) will be charged. However, if the withholding agent has not paid or has not fully paid the Dutch withholding tax, the tax inspector can levy payment from the recipient of the payment. In addition, the directors of the withholding agent are jointly and severally liable for paying the correct amount of withholding tax.
Would you like to know whether your company is required to withhold Dutch withholding tax on interest and/or royalty payments or would you like to avoid unnecessary Dutch withholding tax? If so, please contact us.
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