Asset & Tax Planning – Case Study 2019-01-21T14:44:51+00:00

Dutch Tax Planning and
Asset Protection Structures

Special relationship between the Netherlands and Curacao, previously the Netherlands Antilles.

Netherlands does not impose a withholding tax on outbound royalties

As experienced international tax experts we are used to assist clients with their international tax planning in combination with transparent but effective asset protection structures.

If you are interested in our services or if you have any questions, please feel free to contact us via e-mail, or call one of our Consultants near your area.

What is an asset protection structure?

In its most pure form, an asset protection structure is a legal structure through which the legal title of assets is split off from the equity and/or control of the original owner.

In the simplest form an asset protection structure requires a transfer of legal title of the asset(s) to a separate corporate entity with legal personality.

More sophisticated structures can involve the use of alternative financial instruments, contractual arrangements or alternative legal forms of business.

Why enter into an asset protection structure?

There are various reasons why someone, company or individual, would desire/ require to enter into an asset protection structure. It can be financial, legal, or tax driven. In most cases it will be a combined motive.

Examples of efficient asset protection structures

Financing/ securitisation:  a company is required to split off certain assets from its business to provide as collateral to a bank for a finance facility.

Bankruptcy: a company splits off certain assets from its business to avoid that these assets are put at risk in case of bankruptcy or insolvency.

Joint venture: a joint venture partner wants to retain legal title of assets which are utilised by a partnership with another party.

Tax planning: a company or individual wants to shelter assets and income from taxation through relocating assets to low tax jurisdictions.

Intellectual property: a company or individual creates a separate vehicle for the tax and legally efficient ownership of intellectual property rights.

Voting power: a company or individual wants to retain voting power over shares or assets whereas other parties become beneficiary to the assets and/or the income from the assets.

Pension: company or individual building up pension rights within a protected environment.

Wealth planning: an individual transfers assets to his/her designated legal successors without losing control over the assets.

Limitations

A properly set up asset protection structure can generate significant legal and tax benefits.

Proper tax planning is however always required to keep the structure within the boundaries of the law and to avoid incremental tax exposures for the involved parties.

For example, the following limitations are to be considered:

A non-disclosed structure can create high risks for the parties involved (tax fraud);
The transfer of tangible or intangible assets when the asset protection structure is set up may trigger taxation, like income tax imposed on capital gains or transfer taxes;
The prices charged within a group of related parties may become subject to close scrutiny from the local tax authorities (transfer pricing);
Future cross border income flows may become subject to taxation at source, like withholding taxes or VAT/trade tax;

The ultimate beneficiaries of the structure may be taxed in their home countries for the profits generated through the structure.

Dutch asset protection structures

The Netherlands offers a rather unique environment for establishing asset protection structures. The main advantages of The Netherlands are:

Stable financial, political and fiscal environment
Well-developed infra-structure of professional service providers
Easy access to financial markets
Flexible legal system
Tax treaties with more than 90 countries worldwide
Special relationship with Curacao (previously) the Netherlands Antilles (tax haven)
No withholding tax on outbound royalties and interest
Exemption from foreign withholding taxes imposed on dividends, interest and royalties within the European Union
Tax exemption for income from subsidiaries (participation exemption)

The Dutch Foundation

The Dutch foundation (“Stichting”) is the most commonly used entity for Dutch based asset protection structures.

The Stichting has legal personality and equity separated from its owners.

The Stichting has no shareholders but it can issue “certificates” which provide the owners with entitlement to the economic benefits of the assets/ revenues of the Stichting.

In fact the Stichting can closely resemble the Anglo-Saxon trust, be it that it is not legally regulated but instead leaves great flexibility to the articles adopted by the incorporators of the Stichting. The voting power of the Stichting rests with a board of directors, which is appointed upon incorporation.

An important feature of the Stichting is that it will only become subject to Dutch corporate tax to the extent it actually conducts an enterprise. The Dutch tax laws do not define “an enterprise”, but case law has shown that this is a broad concept; basically every activity which exceeds the level of a portfolio investment is to be considered an enterprise. Hence, only the passive ownership of assets does not constitute a Dutch corporate tax liability.

The Dutch BV

Within the scope of international tax planning it can sometimes be required to have an entity which is subject to taxation.

If for instance the future income flow is subject to a foreign withholding tax (which is quite common for cross border dividend, interest and royalty payments), tax treaties may offer reduction of the withholding taxes only if the recipient of the income is subject to tax.

There may also be a “subject to tax requirement” at shareholder level in order to qualify for tax exemption or tax credits upon repatriation of profits (dividends).

The vehicle which can be used as a “subject to tax vehicle” is the Dutch BV. The BV is a limited liability company, comparable with a Ltd, GmbH or SARL.

The Dutch BV can be a useful tool within an asset protection structure because:

There is no minimum capital requirement and the BV offers flexibility for the creation of special classes of shares

Certain categories of assets qualify for special tax treatment or tax exemption (like ships, vessels, environmental friendly assets, energy saving assets)

The Dutch tax laws provide extensive possibilities for tax deferral

The Dutch international tax environment offers tax exemptions for foreign owned assets, either through direct ownership of foreign-based assets (branch/foreign real estate) or through the ownership of foreign subsidiaries which can hold the assets.

Dutch BV with Dutch assets

A Dutch BV may for certain assets be entitled to a tax exemption.

The most important tax exempt assets are shares in (foreign) subsidiaries (participation exemption) and foreign assets (tax treaties), as briefly describe below.

Apart from these specific exemptions, the Dutch corporate tax regime has some general features which can make The Netherlands an attractive location for the ownership of assets.

For certain categories of income, the Dutch tax regime provides the possibility to defer taxation.

According to the Dutch tax rules income is taxed on an accrual basis, but income recognition can in general be deferred until realisation. Losses and expenses can be taken in the year when they occur.

It is generally allowed to defer income recognition of capital gains until the moment of the realization. If a business asset is sold, it is under certain conditions allowed to form a “replacement reserve”, which basically allows the capital gain to be rolled over into the taxable basis of the new replacing asset.

The Dutch tax regime generally allows tax depreciation of an asset and interest deduction on funding loans. Basically all business assets which decrease in value over time are allowed to be depreciated. This includes real estate and most intellectual property rights. Interest on loans utilised to fund the acquisition of an asset are within certain limitations tax deductible.

Due to the aforementioned features of the Dutch tax regime, the Netherlands can offer a tax friendly environment for the ownership of assets which:

Tend to generate low cash flows but high capital gain, like most categories of real estate and certain categories of intellectual property

Are acquired with a relatively high leverage

Are acquired with a significant amount of goodwill

Qualify for the benefits provided by tax treaties or EU Directives, like reduced foreign withholding tax rates, tax (sparing) credits for foreign withholding tax incurred or tax exemption for certain categories of foreign sourced income.

Dutch BV with foreign subsidiary (holding company)

Within an asset protection structure a foreign subsidiary of a Dutch BV may become the owner of the assets. This can be tax effective if the foreign subsidiary is subject to a low effective tax rate or no tax at all.

In general terms a Dutch BV is allowed a full tax exemption for dividends and capital gains derived from qualifying subsidiaries (participation exemption).

For the participation exemption to apply, various conditions must be met. We refer to the page The Dutch holding company. Relevant for this structure to work is that:

The foreign subsidiary is a corporation with an equity divided in shares;

And if

The shares in the subsidiary are held as portfolio investment; the subsidiary must be subject to a profit tax of at least 10%

The second condition can be a sincere hurdle for the use of a Dutch BV in an asset protection structure if the assets consist of portfolio investments or group loans. In daily practise this problem can however be solved by transferring other activities (like the holding of shares in active companies) to the foreign subsidiaries, so that the main activity of the foreign subsidiary is no longer the ownership of portfolio investments.

Dutch BV with foreign assets

Within an asset protection structure, a Dutch BV may become the owner of foreign-based assets. This can be tax effective if the foreign activity is subject to a low effective tax rate.

The Dutch tax system is based on the assumption that income which has been legitimately taxed abroad, is tax exempt in the Netherlands. In order to qualify for the exemption the foreign source income must however meet certain criteria. These criteria are defined in the tax treaties concluded by the Netherlands or alternatively, if there is no tax treaty in force with the source state, the Dutch unilateral rules for avoidance of double taxation.

The criteria of the tax treaties and the Dutch unilateral rules are comparable, with one remarkable distinction; under the Dutch unilateral rules it is required that the foreign income has been subject to tax, which requirement is in general not imposed by the Dutch tax treaties.

Amongst others, the following sources of income can qualify for a tax exemption:

Real estate
Branch (foreign enterprise)
ships and vessels managed/operated abroad

It is noted that under most tax treaties profits generated with a foreign branch, which main activity consists of the passive ownership of real estate or the financing of group companies, are generally eligible for a tax exemption.

Dutch BV with offshore shareholder

If you want to shelter income from taxation, the ownership of the underlying asset can be transferred to a company which is not taxed for the income it receives or which is subject to a very low tax rate. Such companies can be found in many offshore locations (tax havens).

It is an acknowledged fact that high tax countries try to counter the use of such schemes. High tax countries do generally not conclude tax treaties with tax havens, so that income flowing to such locations is exposed to incremental (withholding) taxes on outbound income flows. Furthermore, high tax countries tend to deny tax deduction of payments made to tax havens.

In order to avoid such tax exposures, one can interpose a BV between the offshore location and the source state of the income. Interposing a BV can in particular be beneficial if treaty benefits can be obtained which reduce the effective tax burden on the income.

As the Netherlands has concluded tax treaties with more than 90 countries worldwide it is a popular location for establishing flow through companies. The primary activity of these kinds of companies (usually BV’s) is receiving income and passing it on to the ultimate beneficiary.

What makes the Netherlands specifically attractive for establishing flow through companies is the possibility to obtain an advance tax ruling. The Dutch government has issued policy on the issuance of tax rulings for these kinds of structures. Tax rulings provide certainty about the future taxation of the income flows.

The Attractive Structure
Netherlands BV and Curacao

As the Netherlands has a special relationship with Curacao (previously the Netherlands Antilles) the ownership of the assets is usually transferred to a corporation established in Curacao (the Netherlands Antilles). The Curacao company may be eligible for a 0% tax rate, 3% rate, or alternatively a 1.75% effective tax rate.

We note that due to the fact that the Netherlands does not impose a withholding tax on outbound royalties and interest, the corporation which owns the assets can also be established in other tax havens.

What we can do for you

Advice on setting up an effective asset protection structure
Advice on the Dutch tax and legal regime
Comparison and feasibility study
Setting up a holding, finance or royalty company
Select suitable service providers, like trust companies, lawyers, accoutants, etc.
Advice on immigration or emigration issues
Obtaining advance tax rulings
Dealing with tax compliance matters