The government proposed the move in a “white paper” in late April. The capital tax is currently 0.55%. It would be abolished in 2006. The government also proposed a cut in the corporate income tax rate in 2007 from the current 31.5% to 26.9%. The proposals must still be approved by parliament.

Holland has been losing ground in recent years to Luxembourg as the European country of choice for offshore holding companies. The latest moves are a bid to restore its luster.

A protocol negotiated last year to the US-Netherlands tax treaty will help. The protocol eliminated withholding taxes at the Dutch border on dividends paid by a Dutch company to any US publicly-traded company that has owned directly for the last 12 months before a dividend is paid at least 80% of the voting stock of the Dutch company paying the dividend. Elimination of the capital tax on top of the protocol will cause many US companies to give Holland another look.

Meanwhile, an issue has arisen under the protocol. One popular holding-company structure in Holland involves setting up a Dutch entity called a CV that, in turn, owns a BV. The US parent company treats the CV as a corporation for US tax purposes; the CV serves as a blocker to prevent overseas earnings from being taxed in the United States. The BV is a “disregarded entity” for US tax purposes, meaning that it is treated as if it does not exist.

The Dutch tax treatment is the opposite: the CV is transparent and the BV is a taxable company.

Under the protocol, dividends are not exempted from Dutch withholding tax unless the US company receiving dividends owns “directly” at least 80% of the Dutch company paying dividends. As far as Holland is concerned, the company paying dividends in these structures is the BV.

The Dutch finance minister said, in response to parliamentary questions in early May, that Holland will look through any entity that is treated as transparent for US tax purposes. Thus, if the CV were transparent in the US, the dividend withholding tax would be waived. However, a withholding tax will be collected when the dividend is blocked from the US tax return of the US company because the CV is treated as a blocker corporation for US tax purposes — with one possible exception where a CV-BV structure is used to develop real economic activities. A government decree with more details is expected in June.

Finally, the Dutch Supreme Court is considering when dividend withholding taxes can be avoided by having the Dutch company redeem its shares. As a general rule, share repurchases trigger a withholding tax. The difference between the repurchase price and the average capital contributions on that class of shares is considered a dividend. However, no tax is collected on shares that are repurchased as a “transitory investment” with the intention of reselling them.

The case before the court involves a company that was considering using its own shares to acquire another company. It did not want to issue additional shares since that would dilute the ownership percentages of its existing shareholders, so it moved instead to buy back shares from some of its shareholders as a way of amassing currency that could be used to take over the target company. The government is arguing that there was a dividend because the share repurchase reduced the equity that shareholders had in the acquiring company at a time when there was no legal obligation to use the shares to buy the target. A merger agreement had not been executed.