THE NETHERLANDS Daamen & van Sluis

1 Speaker Name: Jeroen in ‘t Hout Title: International tax partner CompanyDaamen & van Sluis – Rotterdam Mobile:+ 31 (0)

2 Case study US company (consumer business) is doing business in the Netherlands The ultimate owner of the US company is an US individual The Dutch business operations create a net result of US$ 7 mio and after deduction of an at arm’s length US license fee for the use of the brand name (US$ 2 mio) a profit before tax remains of US$ 5 mio. The US company can set-up a (1) corporation or a (2) limited partnership in the Netherlands What are the tax consequences? What opportunities exist to mitigate the tax due?

OR - License fee - Dividend 3 Introduction: application of tax treaty NL/US US company sets-up a branch office in NL: The US company is considered to do business in the Netherlands. The taxing rights to tax the profits realized in NL are allocated to NL based on the tax treaty. The US should provide an exemption for the US profits allocated to NL. US sets-up a company in NL: The NL company is a separate NL tax payer of which the US is the shareholder. The US cannot tax the profits of this company. The US are able to tax dividend or royalty income paid by the Dutch corporation the US as income. Based on the tax treaty the withholding taxes withheld by NL on dividends or royalty payments can be reduced. US company Corporation US individual US NL PE

- License fee - Dividend 100% 4 Re 1: Tax consequences corporation Corporate income tax (CIT) due in NL: Net resultUS$ 7,000,000 License feeUS$ 2,000,000 – Profit before taxUS$ 5,000,000 Dutch CIT (20% - 25%)US$ 1,240,000 – Profit after taxUS$ 3,760,000 Withholding tax (WHT) on license fee: No WHT is levied by NL Dividend withholding tax (DWT) on dividend: (1) US company is subject to US tax: 0% DWT based on tax treaty US/NL (2) US company is not subject to US tax (for instance a “S-corp”): 15% DWT (available as foreign tax credit in US) US company Corporation US individual US NL 100%

0.01% 100% 99.99% - License fee - Dividend 100% 5 Re 2: Tax consequences partnership (subject to tax in NL) Corporate income tax (CIT) due in NL: Similar like corporation (profit after tax US$ 3,760,000) Withholding tax (WHT) on license fee: No WHT is levied by NL Dividend withholding tax (DWT) on dividend: Two dividend payments: Dividend payment to partner 1 (owning 99.99%): Similar like corporation (0% if US company is subject to tax and 15% if US company is not subject to tax) Dividend payment to partner 2 (owning 0.01%): 0% if partner 2 is not subject to tax (transparent) and partner 1 is subject to tax, 15% in all other situations US company Partnership US individual US NL US LLC

License 0.01% 100% 99.99% 6 Re 2: Tax consequences partnership (transparent in NL) Corporate income tax (CIT) due: Partner 1 and partner 2 become a foreign tax payer in NL (having a branch / PE in NL). They both have to register with the tax authorities and have to file a tax return (thus two commercial registrations and tax returns are required). A branch cannot pay a license fee to its “parent” (no internal payments are possible between a branch and its head office). This can be solved by creating a charge in the US that can be allocated to the branch / PE. If this structure is not possible the license fee cannot be charged to Dutch business and the taxable profit subject to NL tax may be increases with US$ 2,000,000 (as a result US$ 500,000 additional CIT would be due). If it would be possible to allocate the license fee to the Dutch activities the overall net result is US$ 3,760,000 like in the previous situations (but divided over two tax returns). Profit allocation instead of dividend payment (no DWT): The result of the Dutch branch / PE is allocated to the US parent and no dividend payment is required to transfer the profit to the US (as a result no DWT due). US company US individual US NL US LLC PE US company 100%

7 Tax opportunity 1: transfer pricing  Reduce functions and risks of the Dutch business as much as possible;  Determine the required tax result through a benchmark analysis;  In case of a sales entity the profit can be commission based (a percentage of sales);  The excess income can be transferred to a related low taxed group entity. Advance tax ruling (APA): It is possible to agree on the method and required at arm’s length commission in an APA agreement with the Dutch tax authorities. Such APA will provide full certainty about the tax treatment Example: Assume that in our situation the turnover is US$ 12 mio. If the arm’s length commission would be for instance 10% the required result would amount to US$ 1.2 mio instead of US$ 5 mio. The excess profit of US$ 3.8 mio can be transferred to a low taxed group entity (a principal entity).

8 Tax opportunity 2: debt financing  Finance the Dutch activities with debt as much as possible This opportunity can be combined with the following tax structures:  Structure i: Deduct interest expenses on a IC loan from the Dutch result and report the interest income in a US deferral structure (we refer to the visualization)  Structure ii: Deduct interest expenses on a bank loan twice in NL and the US (we refer to the visualization)

9 Visualization structure i: deferral structure Corporate income tax (CIT) due in NL: The taxable income is reduced with interest expense Tax treatment closed CV: Closed CV is transparent for Dutch purposes. As a result the interest income is not taxed in NL Closed CV is considered an entity for US tax purposes (check the box). The interest is not taxed until the closed CV distributes its profits to the US (deferral possible) US company US individual US NL Closed CV Dutch Opco Interest

10 Visualization structure ii: double interest deduction Corporate income tax (CIT) due in NL: Apart from the Opco another Dutch entity is set-up in between US and Dutch Opcp (Dutch BV). Both NL companies form a fiscal unity for NL purposes. The Dutch BV obtains a bank loan. The consolidated NL taxable income is reduced with interest expense to the bank Tax treatment Dutch BV: In the US the Dutch BV can be treated as a branch (check the box as a result of which the Dutch BV is treated as a branch for US purposes). Consequently, the Dutch interest is allocated to the US as well (double deduction) The Dutch Opco would not be checked as transparent and is considered an entity for US purposes US company US individual US NL Dutch BV Dutch Opco