April 01, 2004 | By Keith Martin in Washington, DC

Holland and the United States agreed in a treaty protocol on March 8 to eliminate withholding taxes on certain dividends.

The protocol must still be ratified by the US Senate.

Under the protocol, there would be no withholding taxes on dividends received by a publicly-traded company that has owned directly for the last 12 months before the dividend is paid at least 80% of the voting stock of the company paying the dividends.  Alternatively, a private company could qualify if it owned at least 80% of the voting stock at least indirectly before October 1998.

The protocol also addresses how the tax treaty applies to income received through a company that is transparent under the tax laws on either the US or Holland.  For example, if a US company owned a Dutch company through a US limited liability company that is transparent for US tax purposes, then the US LLC receiving the dividend would get the benefit of the tax treaty so long as the dividend it receives will be distributed to US residents who are required to report the distributed earnings as income.

In another development, the Dutch tax court refused in February to treat a US limited liability company as transparent for Dutch tax purposes.  The ruling meant that a Dutch company with interests in two hotel companies in the United Kingdom could not avoid Dutch income taxes on the dividends from the hotel companies.  It might have avoided them under the “participation exemption” if it had owned the hotel companies directly.  However, it held them through a US limited liability company, with the result that the dividends passed through the US limited liability company on the way to Holland.  The limited liability company was transparent for tax purposes in the United States, but not in Holland, the court said.

Dutch lawyers caution that US LLCs may still be treated as transparent for Dutch purposes depending on the facts.

Keith Martin