HOLLAND granted partial relief in July to US companies that have made offshore investments through Dutch holding companies using a so-called CV-BV structure.
A new protocol to the US-Netherlands tax treaty took effect last January 1. Among other things, the treaty waives withholding taxes on dividends where a US parent company owns directly at least 80% of the voting rights in a Dutch subsidiary.
In a CV-BV structure, a US parent company owns a Dutch CV that, in turn, owns a Dutch BV that, in turn, owns a project company in another country. Holland taxes the BV like a corporation, but it views the CV as transparent so that dividends paid by the BV to the CV are considered received by the US parent directly. Meanwhile, the United States taxes in the opposite manner. The US parent company makes a “check-the-box election” to treat the CV like a corporation for US tax purposes, and the BV is treated as transparent. Thus, when a dividend is paid by the BV to the CV, it does not reach the US tax net but remains blocked in the CV.
Dividends paid by a Dutch company to someone without the benefit of treaty protection attract a 25% withholding tax. The new protocol to the US treaty has a clause that bars treaty benefits in cases where “hybrid” entities are used, like in this case. Even though the Dutch view a dividend paid by the BV as received in the US directly, the protocol rules out treaty benefits. The protocol language is intended to prevent governments from being whipsawed by clever tax planning.
The Dutch finance minister announced on July 6 that the Dutch government will not enforce the hybrid entity clause in cases where the hybrid entity is engaged in “real” activities in Holland. Dutch counsel are advising US companies to seek rulings from the Dutch tax authorities to confirm their status. To be considered “real,” among other things the hybrid company must have resident directors who make real decisions in Holland, and its main bank account must be in Holland. Having employees in the country will also help.
There is still uncertainty about whether the US company will face capital gains taxes in Holland upon any future sales of the BV shares. The treaty bars Holland from taxing US tax residents on capital gains from the sale of shares in Dutch companies. The July decree only applies to dividends paid by the BV. It does not address whether the Dutch government will waive the hybrid entityclause for purposes of capital gains taxes.
Separately, in mid-July, the European Court of Justice barred Holland from collecting a capital tax in a situation where a UK parent company made a capital contribution directly to a second-tier German subsidiary, bypassing its first-tier subsidiary in Holland.
The UK parent company owns a Dutch holding company that, in turn, owns a German subsidiary. The UK parent contributed approximately €5.1 million to the German subsidiary directly. Holland collects a 1% capital tax on funds passing through Dutch holding companies, and it insisted the tax had to be paid in this case because the money must have passed through the first-tier subsidiary in Holland to get to Germany. The court disagreed. The parent received no additional shares in the Dutch company, which the court said one should normally receive in exchange for a capital contribution.
The case has the potential to create an enormous hole in the Dutch capital tax. It is Senior Engineering Investments BV v. Staatssecretaris van Financien.