The Netherlands a pass-through country
At present The Netherlands is commonly known as a tax haven. The Centraal Plan Bureau (CPB) however, labels The Netherlands as a pass-through country. Why is Holland fiscally so appealing?
Fiscal planning
Fiscal planning is something companies all over the world do to pay the least amount of taxes possible. Tax treaties and tax haven are used to facilitate this.
Tax treaties
To prevent that the income is taxed by several countries, countries conclude treaties with each other. A tax treaty between two countries is meant to determine which country is entitled to a certain taxation, preventing double taxation. The contents of a tax treaty is not the same for each country. Enterprises utilise, for their fiscal planning, the fact that tax treaties and the tax regulations differ per country, to minimise their taxation. Such treaties can contribute to the appeal of a country for the establishment of companies and paving financial routes.
Tax haven
Tax havens are often associated with a tropical country. No or barely any tax is paid in such a country, there is no effective information exchange with the tax authorities and there is a lack of transparency. They are often used a final destination of a fiscal route over several countries. Income is channelled to a tax haven, causing the country where the income has been generated to lose the tax income. Examples of such tax havens are, for example; Bermuda, The Cayman Islands, The British and American Virgin Islands and Monaco.
Business Climate of The Netherlands
Foreign investments are often advantageous for the welfare and economy of a country. Governments utilise various tax instruments to make their country more appealing.
Tax treaties
The Netherlands have concluded over ninety tax treaties with other countries. In this, Holland is one of the leading countries regarding tax treaties. This is not entirely crazy as The Netherlands have one of the most open economies of the world considering the size of her international trade. The concluded tax treaties are eagerly utilised for the fiscal planning of enterprises.
Low withholding taxation
The Netherlands knows several withholding taxes. Withholding taxation means that at the source of the payment, tax is levied. The foremost forms of withholding taxation in The Netherlands are dividend tax and payroll tax. However, withholding tax is also levied over interest and royalties.
The Dutch legislator has chosen not to levy taxes on outgoing interest- and royalty flows. This tax is nought disregarding whether or not the receiving country is a treaty country. In such interest- and royalty flows can leave The Netherlands tax free. A very appealing concept for enterprises.
The Dutch Withholding tax for dividend flows to a receiving country that is also a treaty country is 15%. However, when Holland has concluded a tax treaty with this country, this tax is usually a lot lower. The average Dutch rate is 3,6% in this and with that one of the lowest in the world. Because of the low Dutch withholding taxation little tax is levied when channelling money flows out of The Netherlands.
Participation exemption
The Netherlands were on of the first countries that applied the participation exemption. This exemption entails that profit distribution of subsidiaries are exempt with the parent company. The principle of this is that profits that have already been taxed with the subsidiary are not taxed again with the parent company. In such, double taxation is prevented. By applying the participation exemption Dutch enterprises receiving a profit distribution from their (foreign) subsidiaries, do not pay taxes.
Tax rulings
The Dutch Tax Authorities are usually accessible and foreign enterprises can make so called tax rulings with the tax authorities. These are agreements between the tax authorities and an enterprise regarding the tax payments. Tax rulings offer security to enterprises in The Netherlands concerning certain fiscal affairs and prevent differences in interpretation in retrospect. Large multinationals can through agreements with the Dutch Tax Authorities make arrangements that their tax is lessened when they establish in Holland.
Climate
Throughout the years, The Netherlands have acquired a lot of knowledge and experience concerning the establishment of fiscal structures and the legal testing of these structures. In addition, a stable political- fiscal- and legal climate stimulate enterprises to establish in The Netherlands.
Fiscal status of The Netherlands
The Dutch government ensures that The Netherlands is appealing for foreign enterprises, but does that make Holland a tax haven? Partly because the economic crisis in the South European countries and the social view of third world countries, the fiscal status of The Netherlands is an often discussed topic. It is common knowledge that The Netherlands are often utilised in the fiscal planning of many companies, which can cause the taxation in the before mentioned countries to drop. Research has shown that in 2011 about €2.500 billion, 14% of the global flow of foreign investments has flowed in and out of Holland.
The CPB has stated that The Netherlands are not a tax haven, The Netherlands does not meet the aforementioned requirements to qualify as a tax haven. In The Netherlands a regular tax rate is used and a full information exchange with the Dutch Tax Authorities exists.
Nonetheless, The CPB does qualify The Netherlands as a pass-through country in the benefit of the tax planning of multinationals. Many multinationals use The Netherlands as a pass-through country so they can use the large treaty network and various exemptions. Pass-through countries profit at the cost of the tax income of the countries where the investments have been made and usually are a intermediate step before a tax haven is reached.
Added value
The Netherlands
The Netherlands appear to be an appealing foundation location when passing through investments. Foreign companies benefit from the Dutch treaty network, various exemptions and the possibility for tax rulings to alleviate the taxation.
Research has shown that the added value of the establishment of these enterprise in The Netherlands is between €3 and €3.4 billion per year. This added value consist of tax income for the Dutch state, the paid wages to employees and the services purchased by companies with corporate service providers. In doing so, these established companies generate between 8.800 and 13.000 jobs.
But not only foreign companies profit from the favourable Dutch business climate, all Dutch enterprise with participation abroad and foreign companies with participations in The Netherlands can profit from this.
Investment country
What Holland earns as a pass-through country in income taxes, is lost in the investment country. This loss influences, among others, the capacity of governments of poor countries to supply their inhabitants with their basic needs and the capacity of Western countries to contribute in development cooperation.
Yet, The CPB has discovered that investment countries also benefit from pass-through countries such as The Netherlands. Research has shown that a concluded tax treaty with a country leads to an increase in investment of 20%. This is explained further in the following examples.
Example:
A company from the US wants to invest in an African country. Because both countries have concluded a tax treaty with The Netherlands, distributed dividends can, against a lower tax rate channelled to the US Through The Netherlands.
Because of the tax treaties it is more appealing for the US company to establish and invest in the African country. Because of these investments the African country profits from, among others, added jobs. It could very well be that without these tax treaties the US company would never have established itself in that country.
Still, the missing tax income because of the international fiscal planning has a great disadvantageous consequence. Tackling of just the Dutch location advantages is of little use. Because of the global tax competition and the international treaty network , one sided measurements against these negative consequences is of little use. Companies will simply chose another country as a pass-through country. Only international cooperation can offer solutions in this matter.
FD, 10th of September 2013
Lejour, A. en M. van 't Riet, 2013, CPB Policy Brief: bilaterale belastingverdragen en buitenlandse investeringen, 2013-07.
SEO Economisch Onderzoek, 2013, Uit de schaduw van het bankwezen, SEO-rapport 2013-31.
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