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The Withholding Tax Act 2021, or the conditional source taxation on interest and royalty payments, will apply as from 1 January 2021. The withholding tax will apply to payments made to affiliated companies in designated low-tax jurisdictions, and in certain tax abuse situations.
Interest and royalty payments made by Dutch entities resident in the Netherlands are currently not subject to withholding tax in the Netherlands. This will change: as from 2021 onwards, interest and royalty payments to affiliated entities in designated low-tax jurisdictions will become subject to a withholding tax. The same applies to tax abuse situations, e.g. where payments are artificially diverted. The withholding tax will be levied at a rate equal to the highest rate of Dutch Corporate Income Tax in the current year. For 2021 this rate is 25 per cent. The withholding tax rate may also be reduced by a tax treaty, if applicable.
The Dutch government has confirmed that the purpose of the new withholding tax is to prevent the Netherlands from being used any longer as a gateway for interest and royalty payments to low-tax jurisdictions and in tax abuse situations. For that reason, no exception has been made for companies with a real economic presence.
The withholding tax is levied from the Dutch resident entity that makes interest or royalty payments. E.g. if your company makes 100 worth of interest or royalty payments which are subject to the new withholding tax, your company will pay the amount minus the withholding tax to the recipient. In case the rate is 25 per cent this means you will pay 75 to the recipient and withhold 25. This 25 is paid to the Dutch tax authorities when filing the withholding tax return.
The new withholding tax will only be levied on payments between affiliated companies. In Dutch tax law there are several definitions of affiliated companies. For purposes of the new withholding tax, companies are affiliated in a situation in which the shareholder can - directly or indirectly - exercise decision-making influence. This is the case when the shareholder has more than 50 per cent of the voting rights under the articles of association. In addition, the company can be affiliated through a third party and also through a cooperating group.
As mentioned, the withholding tax applies to payments made to affiliated companies in designated low-tax jurisdictions. Low-tax jurisdictions are jurisdictions with a statutory corporate tax rate of less than 9 per cent and jurisdictions on the EU list for non-cooperative jurisdictions. These countries are together regarded as low-taxed jurisdictions (‘Listed Countries’).
For 2021, Listed Countries are Anguilla, Bahama’s, Bahrein, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Fiji, Guam, Guernsey, Isle of Man, Jersey, Oman, Samoa, Seychelles, Trinidad and Tobago, Turkmenistan, Turks and Caicos Islands, United Arab Emirates, US Samoa, US Virgin Islands, and Vanuatu.
The Dutch list of low-taxed jurisdictions is updated annually on October 1st, and is applicable to the following year. The EU-list is updated twice a year and the latest update is applicable to the conditional withholding tax in the following year.
Jurisdictions with a profit tax levied at a statutory rate of less than 9 percent are taken into account rather than jurisdictions with a profit tax levied at an effective rate of less than 9 percent. According to the government, the conditional withholding tax should ideally be in line with the effective rate, but that requires extremely complex legislation. The feasibility and legal certainty therefore call for application of the statutory rate.
Apart from direct payments made to affiliated companies in Listed Countries, the withholding tax may also apply to tax abuse situations. Abuse situations are defined as situations where artificial structures are put in place with the main purpose or one of the main purposes to avoid the Dutch withholding tax, e.g. where an interest payment to a Listed Country is artificially routed via a low-substance financing company in a non-Listed Country. Accordingly, for each interest and royalty payment to an affiliated company it must be checked if an artificial structure is put in place and the main purpose of the structure must be tested.
A transaction or structure may be regarded as artificial if the structure is put into place without business motives that reflect economic reality. If the relevant substance of the recipient reflects the business motives of the structure, then this may be an indication that the structure is not artificial. However, the tax authorities may - considering the facts and circumstances - still successfully state that the structure is artificial regardless of the substance at the level of the recipient.
If the structure may be considered artificial it should be checked if the main purpose of the structure is the avoidance of Dutch withholding tax.
If for instance the direct recipient is not located in a Listed Country but has low substance and directly repays the amounts onwards to another company in a Listed Country, it is assumed that the main purpose of the structure is the avoidance of Dutch withholding tax. Another example is where the payment is made to a hybrid entity in a non Listed Country with shareholders located in a Listed Country. Please note that the tax abuse situation is evaluated based on the facts and circumstances of the specific case. Dutch companies may request an ‘Advance Tax Ruling’ with the Dutch tax authorities in order to gain certainty in advance.
The tax is in principle levied from the company that makes the interest or royalty payment and that withholds the withholding tax. However, if the withholding tax has not been applied correctly, the tax inspector may also issue an additional tax assessment to the recipient of the interest or royalty payment. Directors of the withholding company may also be held liable for the (timely) payment of the correct amount of withholding tax. However, a director is not liable insofar he can show that it is not his fault that the correct amount of withholding tax was not paid (timely).