By Heléna Klumpp, Waldo Kapoen and Marc Klerks, of Loyens & Loeff in The Hague, and Keith Martin

Recent changes in law should revive interest in the Netherlands Antilles as a place to put offshore holding companies. The Netherlands Antilles are a group of islands in the Caribbean: Curaçao, Sint Maarten, Saba, Bonaire and St. Eustatius.

Most US companies investing in infrastructure projects outside the United States try to structure the investments so that US taxes can be deferred on earnings so long as the earnings are retained offshore. This requires investing through an offshore holding company. The Cayman Islands are currently the most popular jurisdiction for such holding companies, although Bermuda, the British Virgin Islands and Holland also are used frequently.

Companies that invest through Holland usually do so in order to take advantage of the wide network of tax treaties that Holland maintains with other countries. However, the problem with Holland is there is usually a withholding tax at the Dutch border to repatriate earnings eventually to the United States, and the Netherlands collect a 1% capital tax on equity contributions run through a Dutch holding company.

The Netherlands Antilles amended their own laws effective last January and have been in negotiations with Holland this year in order to attract more holding company business. The net effect of the changes thus far is that any company planning already to invest through Holland should use a two-tier holding company structure — Dutch Antilles on top and Holland below. This will reduce the withholding tax to repatriate earnings eventually to the United States.

Perhaps later this year — if the Netherlands Antilles are able to qualify for direct benefits under the wide Dutch treaty network with other countries — the Dutch Antilles might eclipse the Cayman Islands as the jurisdiction of choice.

Ancien Regime

Previously, certain offshore holding companies incorporated in the Netherlands Antilles were subject to tax at a very low rate — sometimes as low as 3%. The new legislation abolished this offshore company regime as of January 1, 2000. Instead, all Dutch Antilles companies are now subject to a 34.5% profit tax. A grandfather rule provides that offshore companies existing on December 31, 1999 will be taxed at their pre-2000 rate through 2009 or 2019, depending on the type of activities in which the offshore company is engaged.

In place of the offshore company regime, the new legislation created a new type of company that is exempt from all profits tax and dividend withholding tax, an “exempt company.” Any Netherlands Antilles private limited company can qualify, but it may only engage in certain very limited activities (holding and financial). These companies will not be entitled to any benefits under Dutch tax treaties with other countries.

The substitution of the blanket profits tax and the limited exempt company for the popular offshore holding company seems at first glance to be a negative step for residents of the Netherlands Antilles. However, looking forward, this move was designed to create much greater flexibility for Netherlands Antilles taxpayers. By restructuring its tax regime the Netherlands Antilles hope to become a party to a number of bilateral tax treaties to which the Netherlands is a party and to bring itself in a position to negotiate its own tax treaties directly with third countries. (Currently, aside from a treaty with the Netherlands and Aruba, the Netherlands Antilles are party to only one tax treaty, with Norway.)

The Dutch treaties upon which the Netherlands Antilles are hoping to capitalize contain a provision entitled “territorial extension.” Taken from the Netherlands-Canada treaty, that provision says that “This Convention may be extended ... to the Netherlands Antilles or Aruba, if those countries impose taxes substantially similar in character to those” in Holland or the other treaty partner. Abolishing the offshore holding company regime and imposing a blanket tax on all taxpayers was designed to meet this standard. Examples of treaties containing such language are Canada, Venezuela, India and Mexico, along with a number of European countries.

Participation Exemption

A key feature of the new law is a participation exemption. Dividends and capital gains one Netherlands Antilles company derives from “qualifying shareholdings” in another Netherlands Antilles company are now completely tax-exempt to the recipient. If the payor is a non-resident company, dividends and capital gains are 95% tax-exempt. The exemption only applies if the recipient owns at least 5%, by vote or value, of the distributing company.

Withholding Taxes

A new 10% withholding tax applies to dividends distributed out of the Netherlands Antilles. However, exceptions apply. A liquidating distribution is not subject to dividend withholding tax. Dividends distributed by a company that is listed on a qualifying stock exchange — for example, NYSE, London, Frankfurt — and distributions by a Netherlands Antilles company that is, directly or indirectly, owned by a qualified listed company are not subject to dividend withholding tax. Furthermore, distributions made to any nonresident shareholder that has owned 25% of the payor’s outstanding shares (by vote or value) for at least one year are exempted from dividend withholding tax.

Under certain circumstances, an additional profits tax levy at a maximum rate of 5% may apply with respect to liquidating distributions or distributions to or by companies that are listed on a qualified stock exchange.

Tax Treaty with Holland

Negotiations are underway to amend an existing tax treaty among the Netherlands Antilles, Aruba and the Netherlands to provide that no withholding tax will apply to dividends paid by a Netherlands company to a shareholder in the Netherlands Antilles. The exemption would only apply if the recipient owns 25% or more of the payor. These negotiations are expected to be finalized in mid-2000. The negotiations are expected to be concluded later this year.

A word of caution — although the new legislation took effect on January 1st of this year, it is not yet set in stone. The Netherlands may require the Netherlands Antilles to make a few changes to the law as part of the negotiations for the withholding tax exemption.

Wild Card

The one wild card in the equation is the Netherlands Antilles appear on a “blacklist” of tax havens that the Organization for Economic Cooperation and Development, or OECD, released at the end of June. Companies investing through listed tax havens risk sanctions starting a year from now (assuming OECD members take action to implement such sanctions). The Cayman Islands are not on the list of tax havens. The Netherlands Antilles can escape the list by taking the same steps — to which the Cayman Islands have committed — to share tax information and subject banking transactions to greater scrutiny.