Does the Netherlands merit being designated as a tax haven? Most inhabitants of the Netherlands would not experience this as being the case; after all, the VAT on shopping, for crying out loud, has increased by 50% this year alone (from 6 to 9%), and the highest bracket in income taxation (over EUR 68,508) remains at 51.75%: a solid taks burden indeed. It is true that taxation on company profits has decreased from 20 to 19%, but this latter figure is still considerably higher than in Ireland (12.5%) or Bulgaria (10%), for example. Furthermore, companies making profits higher than EUR 200,000 continue to pay 25% over this threshold.
The supposed paradise-like status of the Netherlands can only therefore be based on the absence of withholding taxation on interest and royalties, and the so-called “ruling practice”. In many countries, for example, 5, 10 or 15% taxation must be paid on outbound interest or royalty payments. In principle, only dividends are subject to such levies here. Thus, if a Dutch B.V. pays a million euro in interest to its sister company in a low-tax place like Dubai, it is non-taxed and deductible here in the Netherlands, and subsequently taxed at 0% income tax in Dubai. Like this, profits are siphoned off, quite simply.
This is, of course, rather black and white. In practice, payments, as in the above example, are subject to “transfer pricing”: this means that related parties must charge each other the same prices and rates as they would when trading with independent third parties. In other words: 50% interest on a long-term borrowing, for example, is very unusual and will be corrected in the Netherlands, which leads to a higher taks base.
Which brings us to the ruling practice. It is difficult to comment on this, since, for many years, it remained outside of the public domain. Here are the facts: the European Commission has previously ruled that the Netherlands has made “illegal” agreements with Starbucks. These agreements, incidentally, relate to the transfer pricing referred to above. Just like other companies, Starbucks pays 19-25% taxation on profits. The question is, however: on what basis? How is the profit determined? Before or after the deduction of huge interest and trademark rights’ payments to affiliated entities in lower taxed jurisdictions?
The ruling practice is being adjusted: for the promotion of policy unity, all international rulings will be put before a Tax Authorities’ team. Additionally, anonymous summaries will be published, so that people on the outside can follow the policy. Furthermore, the substance requirements are being adjusted, and no more rulings will be granted involving countries on the black list of non-cooperative countries.
It will, therefore, become more difficult for multinationals to make too-good-to-be-true deals with the Tax Authorities, and this will, ultimately, benefit the tax authorities of other nations. Companies such as Starbucks have been set up in the Netherlands, after all, because of the rulings. For smaller entrepreneurs, fortunately, the Tax Authorities continue to be approachable and – usually – amenable to reason. One can still agree on a temporary lowering of the usual fee for a start-up, for example.
The Tax Authorities recognise us here at DTS as a taxation consultancy firm and, as such, we can help you making contact, negotiating and making agreements with them.