The Netherlands - Taxation of cross-border M&A | KPMG | GLOBAL

The Netherlands - Taxation of cross-border mergers and acquisitions

The Netherlands - Taxation of cross-border M&A

The Dutch tax environment for cross-border mergers and acquisitions (M&A) has undergone some fundamental changes in recent years.

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Introduction

The Dutch tax environment for cross-border mergers and acquisitions (M&A) has undergone some fundamental changes in recent years.

These changes affect fundamental decisions that a prospective buyer will face:

  • What should be acquired: the target’s shares, or its assets?
  • What will be the acquisition vehicle?
  • How should the acquisition vehicle be financed?

Recent developments

This summary of recent Dutch tax developments is based on current tax legislation up to and including the Tax Plan 2018, which was announced in September 2017 and took effect as of 1 January 2018. This summary also discusses government plans based on statements as announced in the coalition agreement of the new Dutch government presented in October 2017.

Dividend withholding obligation cooperative

On 1 January 2018, the ‘Withholding obligation for holding cooperatives and expansion of the withholding exemption Act’ (the ‘Act’) took effect.

Until 2018, profit distributions from cooperatives were generally exempt from dividend withholding tax (WHT). Based on the new Act, dividend WHT is also levied on distributions made by holding cooperatives, where they have qualifying membership right holders (generally members owning an interest of at least 5 percent in the cooperative). A ‘holding cooperative’ is defined as a cooperative whose actual activity in the preceding year consisted primarily (70 percent or more) of the holding of participations or the direct or indirect financing of related entities or individuals.

A holding company with more than 70 percent of participations on its balance sheet is not regarded as a holding cooperative where it actively holds these participations, employs staff and performs other head office functions.

Under certain circumstances, a cooperative used in a private equity structure where the total assets on the balance sheet consist of more than 70 percent of participations may be ‘disregarded’ as a holding cooperative based on other factors, such as number of employees, office space and active involvement in the business of the participations.

Expansion of dividend withholding exemption

The new Act also extends the dividend WHT exemption. Normally, dividend distributions by a Dutch company are subject to 15 percent dividend WHT but an exemption may apply in certain circumstances. The exemption is extended not only for cooperatives but also for any company or other entity subject to dividend WHT. As of 1 January 2018, the WHT exemption applies for distributions where the recipient to the distribution is established in a state that has a tax treaty with the Netherlands containing a dividend provision and owns a qualifying interest in the Dutch company.

The new WHT exemption includes an anti-abuse provision. In short, this provision applies where the interest in the company or holding company established in the Netherlands is heldfor the principal purpose of, or one of the-principal purposes of, avoiding dividend WHT being levied on another party (subjective test) and the arrangement is an artificial structure or transaction (objective test).

The subjective test assesses whether less dividend WHT is payable by the taxpayer by interposing the direct shareholder of the Dutch entity (the ‘disregard principle’). If not, then there will be no avoidance of dividend WHT for another party.

The objective test assesses whether a structure is set up on the basis of valid commercial reasons that reflect economic reality. If not, the exemption may not apply. Valid commercial reasons are present, for example, where the entity holding the interest carries on a business and the interest in the Dutch company is a functional part of the business assets of that entity, and also where the shareholder fulfills a linking function and has relevant substance. There is relevant substance if the intermediate holding company cumulatively meets a number of conditions in the country where it is established. Among others, these conditions include a payroll expense criterion of at least 100,000 euros (EUR) (which must be a fee for the linking function activities) and a requirement that during a period of at least 24 months, the company must have its own office equipped with the usual facilities for performing holding activities. If the interest in the Dutch company is held by a hybrid entity, then specific provisions apply for purposes of the WHT exemption.

Changes in foreign substantial interest rulesT

The new Act aligns the current national anti-abuse provisions with EU law and treaty anti-abuse provisions. In the future, the foreign substantial interest rules for corporate income tax would only apply where the taxpayer holds the substantial interest for the primary purpose of, or one of the primary purposes of, avoiding personal income tax at another party. The deduction of costs is possible. Tax is levied at the corporate income tax rate (20–25 percent). Any withheld dividend WHT can be deducted.

Tax aspects of the coalition agreement

On 10 October 2017, the new Dutch government coalition presented the result of their coalition negotiations. The agreement in principle covers 2017 to 2021 and includes a number of plans relative to the Dutch tax system. The most relevant plans are as follows:

  • Corporate income tax will be incrementally reduced. As of 2019, both corporate income tax rates will be reduced in three steps by a total of 4 percent. The normal rate of 25 percent will drop to 21 percent in 2021 and the reduced rate of 20 percent (on taxable profits up to EUR200,000) will be reduced to 16 percent in 2021.
  • For corporate income tax purposes, a loss can currently be set off against the profit of the preceding year (‘carry back’) and the nine following years (‘carry forward’). The carry-forward term will be limited to 6 years. This change is intended to take effect as of 2019.
  • The new Cabinet intends to abolish Dutch dividend WHT, except for abusive situations and distributions to low-tax jurisdictions. Although the coalition agreement does not state when this will take effect, underlying documents suggest the WHT will be eliminated as of 2020.
  • In addition to the proposed (partial) elimination of dividend WHT, a WHT on interest and royalty payments to low-tax jurisdictions will be introduced for ‘letterbox constructions’. The coalition agreement indicates this WHT would be introduced as of 2023.

Implementation of the Anti-Tax Avoidance Directive

On 10 July 2017, a document for internet consultation was published describing the planned introduction or amendment of a number of tax provisions following the requirement for the Dutch government to transpose the European Anti-Tax Avoidance Directive (ATAD) in its domestic tax laws. For some of these measures, actual legislation has been proposed in the meantime. The ATAD requires the Netherlands to implement five measures against the avoidance of corporate income tax:

  1. limits on the deductibility of interest by way of earnings- stripping rules (described below)
  2. exit tax rules
  3. a general anti-abuse rule (GAAR)
  4. rules for foreign companies and permanent establishments (controlled foreign companies — CFC; described below)
  5. a measure against hybrid mismatches (hybrid entities and hybrid financing).

The consultation document only covered the first, second and fourth set of measures. The third measure has not led to a proposal for additional legislation because the Cabinet believes this measure is already in place through the abuse of law doctrine (fraus legis). The fifth measure does not have to be implemented until the end of 2019 (unlike the first four that must be implemented in principle by 1 January 2019) and is deferred pending an internet consultation.

Earnings-stripping rule

Under the earnings-stripping rule, as of 2019, interest is no longer deductible insofar as the balance of payable and receivable group and third party interest exceeds 30 percent earnings before interest, taxes, depreciation and amortization (EBITDA). The new Cabinet has opted for a threshold of EUR1 million in interest. The new legislation will not include the possibility of a group escape offered by the ATAD. Some existing specific interest deduction limitations will be abolished (except for the specific interest deductio limitation targeting base erosion).

Because banks usually receive net interest, the earnings- stripping rule is not expected to affect them. However, a thin capitalization rule is being introduced for banks and insurers, which will limit the interest deduction on debt exceeding 92 percent of the balance sheet total for accounting purposes.

Controlled foreign companies

As of 2019, a CFC measure will apply to a taxpayer’s controlled entities and permanent establishments. A controlled entity exists where the taxpayer, whether or not together with an affiliated entity or affiliated individual (with a 25 percent affiliation criterion applying), directly or indirectly has an interest of more than 50 percent (based on nominal paid-in capital, statutory voting rights or profit) in the respective entity. To be regarded as a controlled entity requires that the particular entity is not subject to a profit tax that is fair according to Dutch standards. Broadly, a tax rate of less than

12.5 percent on the taxable profit determined according to Dutch standards is not considered as a sufficient tax.

When applying the rule, the type of income received by the controlled entity should be considered. The CFC rule may apply where the income of the controlled entity comprises interest, royalties, dividends, capital gains on shares, benefits derived from financial leasing, benefits derived from insurance, banking or other financial activities or specific invoicing activities (‘tainted benefits’).

The tainted benefits derived by the controlled entity (to the extent not distributed by the controlled entity before the taxpayer’s year-end) are allocated to the taxpayer, becoming part of its Dutch profit. This allocation should also take place where the controlled entity is part of a chain of companies where, at the taxpayer’s level, the participation exemption applies to the first link in the chain (e.g. on the basis of the intention test, subject-to-tax test or assets test).

In accordance with ATAD 1, the CFC measure would not apply where 70 percent or more of the benefits received by the controlled entity or permanent establishment consist of benefits other than tainted benefits or a regulated financial institution is involved (provided certain conditions are met). The measure would also not apply insofar as the controlled entity performs a significant economic activity, supported by staff, equipment, assets and premises.

The Netherlands chose not to use the option in ATAD 1 to limit this exception to European Union (EU) and European Economic Area (EEA) situations. Accompanying measures are proposed for the interaction with the participation exemption and for tax credits granted for foreign tax levied on a controlled entity or permanent establishmen

Multilateral Instrument

The Netherlands has signed the Multilateral Convention to implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) and improve dispute resolution mechanisms, also referred to as the Multilateral Instrument (MLI).

The MLI is designed as a quick and effective mechanism to allow governments to bring their treaties in line with recommendations arising from the Organisation for Economic Co-operation and Development’s (OECD) BEPS project, instead of renegotiating individual treaties.

The convention will implement minimum standards to counter treaty abuse (BEPS Action 6) and to improve dispute resolution mechanisms (BEPS Action 14). Jurisdictions can choose to implement optional provisions of the MLI, which will come into force in bilateral relations where there is a ‘match’ in the choices made by the treaty partners. To what extent tax treaties will be amended by the MLI depends on these matches.

The MLI will have effect for bilateral tax treaties that are listed by both participating jurisdictions, after both partners have ratified the MLI domestically and the MLI waiting periods have expired. The date on which the MLI applies to a specific tax treaty depends on the two jurisdictions involved and when they adopt the MLI.

The MLI does not override or amend existing bilateral tax treaties, as an amending protocol does. Rather, the MLI applies alongside the covered tax agreements, modifying their application in order to implement BEPS measures. On signing the MLI , the Netherlands opted for a principal purposes test (PPT) to counter treaty abuse. The PPT denies treaty benefits where it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless granting that benefit in the circumstances would meet the object and purpose of the relevant treaty provisions.

The Netherlands’ ratification procedure is expected to be completed during 2018 and the MLI expected to take effect as of 1 January 2019.

EU Court of Justice ruling on “per element approach” On 22 February 2018, the Court of Justice of the European Union (CJEU) rendered judgment in two corporate income tax cases for which the Dutch Supreme Court had requested preliminary rulings.1 The CJEU joined both cases as they have a common key issue: whether taxpayers, despite being unable to enter into a fiscal unity with subsidiaries established elsewhere in the EU, are still eligible for benefits from separate elements of the fiscal unity regime as if the foreign subsidiaries could enter a fiscal unity (the ‘per element’ approach).

In one case concerning an interest deduction limitation (profit shifting, Section 10a Corporate Income Tax Act 1969), the CJEU ruled that the limitation is contrary to the freedom of establishment. In response to the Advocate General’s opinion, the Dutch Cabinet had already announced emergency remedial measures that would be implemented with retroactive effect to 11:00 a.m. on October 25, 2017, should the CJEU follow the Advocate General's opinion.

As a result, some corporate income tax and dividend WHT rules — even in domestic relationships — will have to be applied as if there is no fiscal unity. Based on a letter by the Deputy Minister of Finance also published on 22 February 2018, a draft bill should be presented to the Lower House in the second quarter of 2018.

Asset purchase or share purchase

Generally, from a seller’s perspective, a sale of assets is likely to generate a taxable gain or loss unless tax relief applies or the gain can be deferred by creating a reinvestment reserve. This reserve operates by way of a rollover, so that the gain on the sale of one business asset can be used to reduce the tax basis of another business asset or assets. The relief is subject to various conditions, including a proven intent to reinvest in a 3 year reinvestment period and, in some cases, the type of new asset.

Where shares or assets are acquired from an associated party at a price that is not at arm’s length, a deemed dividend distribution or capital contribution may result.

Capital gains realized on the sale of shares qualifying for the participation exemption are tax-exempt. For details, see ‘Purchase of shares’ later in this report.

Purchase of assets

When a Dutch company acquires assets, the assets are reported in the acquiring company’s financial statements in accordance with generally accepted accounting principles (GAAP).

Any financing costs relating to the acquisition of assets are generally deductible on an accruals basis for Dutch corporate income tax purposes. See, however, the restrictions discussed in ‘Choice of acquisition funding’ later in this report.

The transfer of Dutch real estate may be subject to transfer tax at a rate of 6 percent.

Generally, any resulting gain (sometimes referred to as tax on hidden, i.e. untaxed, reserves) on the sale or other transfer of assets by a Dutch-resident company (or a non-resident company that holds the assets through a Dutch permanent establishment) is subject to Dutch corporate income tax, unless the transaction qualifies for relief as a business merger, legal merger or demerger (division). Corporate reorganizations involving simple transfers of assets and liabilities between companies forming a fiscal unity for corporate income tax purposes are generally tax-exempt, as are transfers of any other assets or liabilities within a fiscal unity (although claw- backs may apply). See ‘Group relief/consolidation’.

A business merger essentially involves the transfer of a business (or independent part thereof) by one company to another company in exchange for the issue of new shares to the transferor. The relief consists of an exemption from tax for the transferor and a rollover of the transferor’s existing tax basis in the transferred assets and liabilities to the acquiring company, effectively deferring any gain.

In principle, the relief is not restricted to resident companies or companies incorporated under Dutch law. In practice, the involvement of non-resident companies does have implications (described later).

The relief applies automatically where certain conditions are met (e.g. ensuring that avoidance opportunities are not present). In other cases, the relief must be specifically requested and may be granted subject to additional conditions. The relief does not apply where the merger is primarily aimed at avoiding or deferring taxation, as would generally be the case if the merger was not performed for business reasons. A business merger is deemed to have been performed for non-business reasons where shares of a company involved in a business merger are sold within 3 years after the date of the merger (subject to counterproof). Advance certainty (in the form of an advance tax ruling) can be obtained from the Dutch Revenue.

Generally, the transferor’s pre-merger losses may not be transferred to the acquiring company, and the acquiring company’s post-merger losses may not be carried back to be set off against the transferor’s profits. However, an exception to this rule, subject to conditions and a request being filed, is made where a Dutch permanent establishment is converted into a private limited liability company (Besloten Vennootschap — BV) or public limited liability company (Naamloze Vennootschap — NV) by way of a business-merger.

In a legal merger, the assets and liabilities of one or more companies are transferred to another new or existing company, and the transferor(s) then cease(s) to exist. As a rule, the acquiring company issues new shares to the shareholder(s) in the transferor(s) in exchange for the transfer.

The tax relief available for a legal merger consists of an exemption from tax for the transferor and a rollover of the transferor’s existing tax basis in the transferred assets and liabilities, as well as fiscal reserves, to the acquiring company, effectively deferring any gain. A legal merger may involve non- Dutch companies, subject to conditions. Generally, the tax relief is not restricted to resident companies but also applies to companies resident in the EU. A Dutch NV can also merge with similar entities from other EU member states to form a new societas Europaea (SE).

A similar procedure to that of business mergers is available for obtaining the relief and advance certainty. The transferor’s pre-merger losses may be transferred to the acquiring company, and the acquiring company’spost-merger losses may be carried back to be set off against the transferor’s profits, provided a request is filed and applicable conditions are satisfied. There are two basic forms of demerger (division) under Dutch civil law. The first generally results in the division of a company’s business between two or more acquiring companies, with the transferor ceasing to exist (pure demerger). The second involves a transfer of all or part of a company’s business to one or more new or existing companies, but the company continues to exist (split-off). In both cases, new shares are issued in exchange for the transfer. Typically, the acquiring /company issues the new shares to the shareholders in the transferor. The tax relief applies in the same way as for legal mergers. A similar procedure to that of asset mergers is available for obtaining the relief an advanced certainty.

For a pure demerger, pre-demerger losses can be carried forward and post-demerger losses carried back, as is the case for legal mergers. However, for a legal merger, a request must be filed with the Dutch tax authorities. For a split-off, losses may only be transferred to the acquiring entity subject to certain conditions, including that the demerging entity ceases to be a taxpayer in the Netherlands. The tax losses available for carry forward and carry back then remain available at the level of the company that continues to exist.

For a legal merger and legal demerger involving an acquisition company that has been debt-funded, the interest deduction limitation rule applies in the same way as for acquisition holding companies that have been included in fiscal unities. See ‘Choice of acquisition funding’.

Purchase price

Acquisition prices from affiliated parties may be challenged under transfer pricing rules. There are no particular rules for allocating the purchase price between the assets acquired, other than using the fair market value for each of the assets acquired.

Goodwill

Goodwill is reported in the acquiring company’s financial statements for financial reporting and tax purposes as the difference between the value of the acquired assets and the price paid. The maximum annual  amortization of goodwill for tax purposes is 10 percent of the acquisition or development costs. Under a merger or demerger where tax relief is granted, any goodwill recognized for accounting purposes as a result of purchase price accounting is not tax-deductible.

Depreciation

Depreciation is available on the acquired assets that are necessary for carrying on the business, provided that their value diminishes over time. Maximum annual amortization and depreciation percentages apply togoodwill (10 percent) and business assets other than goodwill and real estate (20 percent).

Depreciation of real estate is possible until a residual value is reached. For investment properties, the minimum residual value equals the value established by the municipality under the Valuation of Immovable Property Act (WOZ). For properties used as part of one’s own business (such as the business premises), the residual value is half the value determined under the WOZ. Under the new depreciation system, it continues to be possible to record impairment to buildings at a lower going-concern value.

Accelerated amortization/depreciation is possible in respect of qualifying environmental assets.

Tax attributes

Tax losses are not transferred on an asset acquisition. They remain with the company. However, an exception to this rule is made for qualifying mergers or divisions, and where a Dutch permanent establishment is converted into a BV or an NV by way of an asset merger or split-off. In the latter cases, where the transferor is no longer subject to Dutch tax after the transaction, a request may be submitted to allow a carry forward or carry back of losses, subject to the losses being offset against the profits attributable to the assets that generated the losses.

The transfer of assets within a fiscal unity does not generally affect tax attributes, so the transfer does not, for example, result in taxable gains. A claw-back may apply where the fiscal unity is dissolved within 6 years after the transfer.

Value added tax

Valued added tax (VAT) is the most important indirect tax in the Netherlands.

Dutch VAT is levied on the net invoiced amount charged by businesses for supplies of goods and services taxable within the Netherlands. Businesses are only allowed to reclaim the input VAT on their investments and costs attributable to:

  • activities subject to VAT
  • VAT-exempt financial services rendered to non-EU persons and to non-EU permanent establishments.

Input VAT can only be recovered where the business is the actual recipient of the services and a correct invoice is issued to this business.

No VAT is due when all or an independent part of a company’s business is transferred and the transferred business continues as before (also known as transfer of a business as going concern). These transactions are out of scope for VAT purposes. This relief also applies to legal mergers but not to the sale of single assets or trading stock (e.g. inventory).

Where the buyer in a merger or share acquisition transaction wishes to reclaim VAT on the transaction costs, the buyer should always ensure it has activities subject to VAT or provides VAT-exempt financial services to non-EU parties. The post-deal VAT recovery position depends largely on the facts and circumstances of the proposed structure.

Transfer taxes

A real estate transfer tax at the rate of 6 percent (2 percent on residential real estate) of the real estate value (which must equal at least the purchase price) is due on all transfers of titles to Dutch real estate. This tax also applies to shares in Dutch real estate companies, provided the buyer holds at least one-third of the economic interest in the real estate company. A company is considered as a real estate company if the assets (at fair market value) consist of more than 50 percent real estate. Real estate located outside the Netherlands is included, provided the assets consist of at least 30 percent real estate located in the Netherlands (asset test). If the asset test is met, then the actual activities must be assessed to determine whether at least 70 percent of these activities involve the exploitation of this real estate (e.g. investment).

The transferee is liable for the tax, but the contract may stipulate that the transferor will bear the expense.

Purchase of shares

Shares in a company generally are acquired through a purchase or exchange of shares. In principle, the acquisition of shares is capitalized in the acquiring company’s financial statements.

In practice, shares that are held as a shareholding qualifying for the participation exemption (discussed later) are carried at cost for tax purposes; this is only relevant for specific purposes, given that a disposal of such a shareholding is tax-exempt. Costs directly related to such acquisitions are generally not deductible. Costs related to obtaining debt- financing may be deducted if and to the extent that interest on acquisition loans is tax-deductible.

Shares held as a portfolio investment are generally carried at cost or market value, whichever is lower. Specific regulations apply to a participation of 25 percent or more in a low-taxed investment company (i.e. generally, 90 percent or more of its assets comprise passive investments and are subject to tax at a rate lower than 10 percent).

Where shares in a Dutch target are acquired in exchange for new shares issued by a Dutch company, as in a share-for- share exchange, the new shares are only treated as paid-up to the same extent that the target’s shares were paid-up. In effect, the potential dividend WHT that would have been due on profit distributions by the target is shifted to the acquiring company, as and when it distributes profits. To mitigate the impact of this rule, concessionary treatment applies when a Dutch company acquires a foreign target.

In certain circumstances, a change in ownership of shares in a Dutch company may result in the company losing its right to carry forward losses (discussed later).

Where the price the buyer pays for the shares is higher than the book value of the underlying assets of the acquired company, the basis of the company’s underlying assets may not be stepped up to the price paid for the shares and the excess cannot be treated as payment for amortizable goodwill. Goodwill paid on a share acquisition is not tax-deductible for the buyer or the target (on the basis of purchase price accounting).

The acquisition or transfer of shares is exempt from VAT. An important issue is often the extent to which a business is entitled to reclaim the Dutch VAT levied on its transaction costs for the sale of shares of a subsidiary (generally not taxed for VAT purposes) to an EU-based buyer. VAT levied on costs attributable to an asset transaction and a statutory merger generally can be recovered by the seller on a pro rata basis.

Under a special decree for majority shareholdings, the VAT on costs attributable to their sale is generally fully reclaimable The transfer of shares in a company owning real estate may be subject to transfer tax at a rate of 6 percent. A company is considered to be a real estate company where its assets (at fair market value) consist of more than 50 percent real estate. Real estate located outside the Netherlands is included, provided that the assets consist of at least 30 percent real estate located in the Netherlands (asset test). Where the asset test is met, then the actual activities must be assessed to determine whether at least 70 percent of these activities involve the exploitation of this real estate (e.g. investment).

The acquisition of shares is not subject to capital contribution tax, other indirect taxes or local or state taxes. The sale of a shareholding that qualifies for the participation exemption (as described later) is exempt from tax. A loss is accordingly non-deductible. Costs directly relating to the sale of a qualifying participation are also non-deductible. There is no minimum holding period.

In principle, the participation exemption applies to shareholdings in Dutch or non-Dutch companies of at least 5 percent unless the subsidiary can be considered to be held as a passive investment (motive test). A subsidiary is considered to be held as a passive investment if the taxpayer’s objective is to generate a return that may be expected from normal active asset management. Where more than 50 percent of the subsidiary’s assets comprise shareholdings in companies representing an interest of less than 5 percent or where the subsidiary’s main function is to provide group financing, such subsidiary is also considered to be held as a passive investment.

A subsidiary that is considered as a passive investment may still qualify for the participation exemption where one of two conditions are met:

  • Less than 50 percent of the fair market value of the assets (on a special consolidated basis) comprise non- business-related, low-taxed investments (asset test).
  • The company is taxed at a reasonable tax rate (10 percent or more) based on Dutch tax principles (subject to tax test).

Generally, assets held by subsidiaries are taken into account for the asset test. The relevant entity’s activities determine whether an asset qualifies as a non-business-related investment, which is an investment that cannot reasonably be considered necessary for the business operations of the entity holding these investments. The question of whether investments qualify as non-business-related should be answered case by-case. If the participation exemption applies, WHT on any received dividends cannot be credited.

As a result of changes to the EU Parent-Subsidiary Directive, the Dutch participation exemption does not apply to payments received from or made by the participation insofar as the participation can deduct these for profit tax purposes (a hybrid mismatch). The participation exemption therefore no longer applies if a shareholder, for example, receives a dividend and this dividend is deductible by the participation. Benefits derived from the disposal of the participation and foreign exchange results remain exempt in principle, given that they are non deductible at the level of the participation.

Complex temporal ring-fencing rules deal with situations where the participation exemption does not apply to the entire period that the shareholding has been held. In the past, Supreme Court case law on temporal ring fencing dealt with situations where the participation exemption became applicable or no longer applied to an existing shareholding (exemption transition) as a result of a change in the facts.

In short, case law on temporal ring-fencing meant that the tax treatment of capital gains realized after such a change was determined on the basis of the tax regime applicable during the shareholding period to which the benefit could be attributed.

According to the legislation, temporal ring-fencing must take place either when there is a transition in qualification for the participation exemption as a result of a change in the facts or when legislation is amended, both in relation to dividends and capital gains. The bill will replace existing Supreme Court case law and applies to all types of exemption transitions in respect of a shareholding. The legislation has substantialretroactive effect as benefits of the participation exemption received in the distant past may as yet be reclaimed.

Tax indemnities and warranties

In a share acquisition, the buyer takes over the target company together with all related liabilities, including contingent liabilities. Therefore, the buyer normally requires more extensive indemnities and warranties than in the case of an asset acquisition.

Tax losses

Generally, tax losses may be carried forward for 9 years-and carried back for 1 year within the same company or fiscal unity. However, the carryover may be restricted or denied in circumstances involving a change of 30 percent or more in the ownership of the company where the company has primarily held passive investments during the years concerned or its business activities have significantly (70 percent or more) decreased. The carry forward of prior-year losses by a holding and finance company may also be restricted, as may the carry back of losses.

According to legislation, a company is a holding and finance company where 90 percent or more of its activities, for 90 percent or more of the financial year, comprise holding participations and/or the financing of affiliated companies. The losses incurred by such companies may only be set off against profits where the company also qualifies as a holding and finance company in the profitable year and where the net amount of affiliated loan receivables is not greater in the profitable year or if the net amount is greater, then this was not primarily done to take advantage of the loss set-off.

The existing rules for setting off losses within a fiscal unity are extensive, but the normal time limits for such set-off still apply. Generally, pre-fiscal unity losses can be set off only where the fiscal unity as a whole has a profit for tax purposes after setting off the results of the various fiscal unity companies. Thereafter, the total result of the fiscal unity is divided into the parts attributable to the participating companies in the fiscal unity. If the individual participating company still shows a profit, only the pre-fiscal unity losses of that company may be set off against that profit.

The same procedure is followed for carrying back the loss incurred by a fiscal unity company to be set off against its pre- fiscal unity profits. Other specific rules apply to the treatment of losses and foreign tax credits after a fiscal unity is dissolved or when a company leaves a fiscal unity.

Crystallization of tax charges

A tax charge does not arise on a share transfer if the transfer qualifies as a share-for-share merger. This essentially involves an exchange of shares in the target company for shares in the acquiring company. The relief consists of an exemption from tax for the transferor and a rollover of the transferor’s existing tax basis in the target shares into consideration shares in the acquiring company, effectively deferring any gain.

This relief is available where:

- A company resident in the Netherlands:

  • acquires, in exchange for the issue of shares in its own capital (or profit rights), shares in another company resident in the Netherlands
  • can exercise more than 50 percent of the voting rights in the latter company after the acquisition.

- A qualifying company resident in an EU member state:

  • acquires, in exchange for the issue of shares in its own capital (or profit rights), shares in a qualifying company resident in another EU member state
  • can exercise more than 50 percent of the voting rights in the latter company after the acquisition.

- A company resident in the Netherlands:

  • acquires, in exchange for the issue of shares in its own capital (or profit rights), shares in a company resident outside the EU
  • can exercise at least 90 percent of the voting rights in the latter company after the acquisition.

A cash payment of up to 10 percent of the nominal value of the shares issued under the share-for-share merger is permitted for rounding purposes (but the relief is limited to the share based element).

Relief is not available where the transaction is primarily aimed at avoiding or deferring taxation. Unless the taxpayer can demonstrate otherwise, this motive is presumed where the transaction does not take place for sound business reasons, such as a restructuring or rationalization of the activities of the companies involved. Before carrying out the transaction, the taxpayer can request confirmation from the Dutch tax authorities that it will not deny relief on these grounds.

For corporate taxpayers, the importance of the share merger facility is limited by the broad scope of the participation exemption. Moreover, although the share-for-share merger facility also applies for personal income tax purposes where Dutch individual shareholders are involved, the importance of the facility generally is limited to those owning at least 5 percent of the target (i.e. holders of substantial interests), as gains on smaller shareholdings are not usually taxable.

The disposal outside a fiscal unity (see ‘Group relief/ consolidation’) of a subsidiary that has been involved in the transfer of assets within the fiscal unity in the preceding 6 years may give rise to a tax liability from the previously transferred assets. Under certain conditions, this period may be limited to 3 years. The transferred assets are revalued at market value prior to the fiscal unity being terminated. An exception is made where the transfer of the assets is part of the normal businesses of both companies.

Once a company has left a fiscal unity, it remains jointly and severally liable for taxes payable by the parent company of the fiscal unity (both corporate income tax and VAT fiscal unity) and allocable to the tax periods in which the company was included in the fiscal unity. This liability arises pursuant to the Dutch Tax Collection Act and should be addressed in the sale- purchase agreement.

Pre-sale dividend

The participation exemption applies to a pre-sale dividend, provided it meets the applicable conditions and the seller is a Dutch resident. Where the seller is non-resident, the relevant treaty or the applicable domestic type of relief determines whether the Netherlands will withhold tax on the paid dividend.

Transfer taxes

A 6 percent real estate transfer tax is due on all share transfers in Dutch real estate companies. A company is considered to be a real estate company if its assets (at fair market value) consist of more than 50 percent real estate. Real estate located outside the Netherlands is included, provided that the assets consist of at least 30 percent real estate located in the Netherlands (asset test). If the asset test is met, then the actual activities should be assessed to determine whether at least 70 percent of the activities involve the exploitation of this real estate (e.g. investment).

Tax clearances

See ‘Crystallization of tax charges’ earlier in this report.

Choice of acquisition vehicle

Several potential acquisition vehicles are available to a foreign buyer for acquiring the shares or assets of a Dutch target. Tax factors often influence the choice of vehicle.

Local holding company

Dutch tax law and the Dutch Civil Code contain no specific rules on holding companies. In principle, all resident companies can benefit from the participation exemption if they satisfy the relevant conditions (see purchase of shares). Under the participation exemption, capital gains and dividends from qualifying shareholdings are exempt from corporate income tax. However, legislation limits the possibility of setting off losses that are incurred by holding and finance companies against profits (again, see the section purchase of shares).

In principle, therefore, a buyer already active in the Netherlands through a subsidiary or branch could have that entity make a qualifying share acquisition. In practice, a special-purpose company is often incorporated in the Netherlands for the purposes of such acquisitions. The main types of Dutch corporate entities are the BV, the NV and the Dutch cooperative.

For Dutch tax purposes, there are no material differences between the types of entities. Dividend distributions made by cooperatives are not subject to dividend WHT, unless the entity qualifies as a ‘holding cooperative, defined as a cooperative whose actual activity in the preceding year generally consisted primarily (70 percent or more) of holding participations or directly or indirectly financing related entities or individuals.

In principle, funding costs, such as interest incurred by a local holding company, can be deducted from the taxable profit of the acquiring company. Restrictions apply for the deduction of interest from the taxable profit of the target if a fiscal unity is formed. See the section on choice of acquisition funding earlier in this report.

Foreign parent company

The foreign buyer may choose to make the acquisition itself. As a non-resident without a Dutch permanent establishment, the foreign buyer is not normally exposed to Dutch taxation in respect of the shareholding, except for possible WHT on dividends, or if the non-resident taxation rules would apply. Dutch WHT on dividends is 15 percent unless reduced by a treaty or a domestic exemption applies. Dividends to foreign EU based corporate shareholders holding at least 5 percent of the shares normally qualify for an exemption from WHT. See ‘Recent developments’ for discussion of a recent extension of the WHT exemption.

Non-resident intermediate holding company

Due to the Netherlands’ extensive network of tax treaties, there is often no benefit to interposing a treaty country intermediary. However, where the buyer is resident in a non-treaty country, the dividend WHT may be reduced by interposing a Dutch cooperative (if not considered as a holding cooperative) or a foreign holding company resident in a treaty country between the buyer and the target company. Consideration should be given to the new Dutch domestic anti-abuse provisions and the MLI (see ‘Recent developments’).

Local branch

A branch of a foreign company is subject to Dutch corporate income tax in the same way as a domestic company. In principle, non-resident entities that have Dutch permanent establishments to which qualifying shareholdings can be attributed can benefit from the participation exemption. In principle, funding costs, such as interest incurred by a local branch, can be deducted in computing the taxable profits of the target if a fiscal unity can be formed after the acquisition (see ‘Group relief/consolidation’ later in this report). No WHT is levied on distributions to the foreign head office, which can be an advantage when acquiring a Dutch target’s assets. If the deal is properly structured, using a branch to acquire shares in a Dutch target also offers the possibility of distributing profits free from WHT. A negative commercial aspect of using a branch is that the branch may not be considered a separate legal entity, fully exposing the head office to the branch’s liabilities. Additionally, the Dutch tax authorities generally deny a deduction for interest charged by the head office unless the deduction relates to external loans.

Joint venture

Joint ventures can be either incorporated (with the joint venture partners holding shares in a Dutch company) or unincorporated (usually a limited partnership). A partnership may be considered transparent for Dutch tax purposes, if certain conditions are met. In this case, the partnership’s losses can be offset against the partners’ profits. However, selling the business may lead to taxable profit at the level of the partners. Due to the participation exemption, where the conditions are met, the profit or loss on the sale of the shares of a tax transparent partnership do not lead to taxable profit.

Choice of acquisition funding

Debt

Interest expenses on both third-party and related-party debt are generally deductible on an accruals basis for Dutch corporate income tax purposes. This also applies to interest qualifying for the participation exemption, regardless of whether the shareholding is in a resident or non-resident company, unless a specific restriction on the deductibility of interest applies.

Deductibility of interest

Specific restrictions on deducting interest expenses (including costs and foreign exchange results) apply for interest paid to affiliated companies and individuals where the loan is used for the acquisition of shares in companies that, after the acquisition, become affiliated with the buyer as a consequence of such acquisition. Certain guarantees by affiliated companies and individuals may qualify a third-party loan as a loan by these affiliated companies or individuals.

These restrictions do not apply where the taxpayer shows that both the transaction and the related debt were predominately motivated by sound business reasons (double business motivation test) or where the recipient of the interest (or, for a conduit company, the ultimate recipient) is subject to effective taxation at a rate that is considered reasonable according to Dutch standards (generally, 10 percent or more, computed under Dutch corporate income tax principles). In the latter case, the restrictions still apply where the Dutch tax authorities can show that the transaction and the related debt were not both predominately motivated by sound business reasons.

Interest on a loan between affiliated entities that has no defined term or a term exceeding 10 years and carries a return of less than 70 percent of an arm’s length return is not deductible. The second main interest deduction limitation rule applies to excessive deduction of interest related to the financing of participations (participation debt). The non-deductible amount of interest is calculated by dividing the excessive amount of participation debt by the total amount of debt and multiplying this by the total amount of interest paid. The excessive participation debt is calculated as the value of the participations for tax purposes (historic cost price and capital contributions) less the total amount of equity for tax purposes. An exemption is provided for expansion investments, that is, investments in participations that expand a group’s operating activities. The acquisition price of these participations does not have to be taken into account in calculating disallowed interest. The exemption does not apply where, for example, a double dip structure or a hybrid entity/ instrument was used to finance these participations.

Generally, no disallowed interest should arise on the basis of the excessive participation debt rules where:

  • The amount of equity for tax purposes exceeds the acquisition price of the participations.
  • The Dutch taxpayer has included all its participations in the fiscal unity for corporate income tax purposes (not possible for foreign participations).
  • The participations of the taxpayer were all historically incorporated or acquired as an expansion of a group’s operating activities, no double dip structures or hybrid entity/financing structures were implemented, and the acquisition, expansion and financing were not entered into because of the interest deduction.
  • The excessive amount of ‘participation debt’ is less than EUR15 million (assuming an interest rate of 5 percent), due to a safe harbor amount of EUR750,000. This amount of interest is always deductible under these rules.

The deduction limitation applies to financial years starting on or after 1 January 2013. Transitional rules allow for an optional fixed amount: the taxpayer may disregard 90 percent of the acquisition price (i.e. to the extent considered as an expansion investment), without further proof, where the participation was acquired or expanded or equity was contributed to the participation during a financial year starting on or before 1 January 2006. The taxpayer must prove that, in relation to the old participations to which the 90 percent rule has been applied, no double dip structures or hybrid entity/financing structures were implemented.

The participation interest measure includes a concession for active group financing activities. Under this concession, the test for determining whether there is a participation debt and non-deductible participation interest does not take into account loans and their accompanying interest and costs to the extent that these loans relate to receivables held by the taxpayer in respect of the active group financing activities.

There is an implementation decree for internal reorganizations that is intended to avoid overkill as a result of other statutory restrictions of interest deduction.

A third main interest deduction limitation rule applies to acquisition holding companies that are debt financed where the buyer and the target enter into a fiscal unity for corporate income tax purposes. Under this restriction, acquisition debts exist where the debt is related directly or indirectly, by law or by fact, to the acquisition or expansion of a participation in one or more companies.

Interest expenses on the acquisition debt are deductible up to the amount of the buyer’s own profit before deducting the acquisition interest expenses (own profit). Where the acquisition interest exceeds the own profit and the excess amount is less than EUR1 million (franchise), then the new rule does not limit the interest deduction. Where there is no excess acquisition interest (financing escape), the interest also remains fully deductible (subject to other possible limitations).

The excess acquisition interest equals the interest on the acquisition debt that exceeds a specific part of the acquisition price: 60 percent in the year in which the acquisition was included in the fiscal unity, 55 percent in the following year and so on, until a percentage of 25 percent is reached. In the case of multiple acquisition debts, particularly where they relate to companies included in the fiscal unity in different years, the excess acquisition interest must be determined for each of those years separately. Acquisition debts and acquisition prices regarding acquisitions that are included in a fiscal unity in the same year are combined.

If there is excess acquisition interest as described earlier, the non-deductible interest is limited to the lower of the following two amounts:

  • acquisition interest less positive own profit minus EUR1 million
  • the amount of the excess acquisition interest.

Acquisition interest that is non-deductible in any year is carried over to the following year, where it is again assessed to see if it falls under the interest deduction limitation. For the interest carried forward, the EUR1 million franchise and the financing escape are not taken into account again.

Corresponding measures apply where the target does not join the fiscal unity but a legal merger or a legal division takes place.

Complex transitional rules apply to this third restriction.

As of 1 January 2019, a new earning-stripping rule is expected to take effect. Under this rule, interest is no longer deductible insofar as the balance of payable and received group and third- party interest exceeds 30 percent of EBITDA. A threshold of EUR1 million in interest is applicable.

Some existing specific interest deduction limitations may be repealed after the earning-stripping rule is introduced.

WHT on debt and methods to reduce or eliminate it

WHT of 15 percent is levied on dividend distributions. No WHT is levied on interest (except for interest paid on hybrid loans, as described later), royalty payments or transfers of branch profits to a foreign head office. The new Dutch government has announced that WHT may be abolished as of 2020, except for abusive situations and distributions to low-tax jurisdictions.

In the absence of WHT on interest, it is often advantageous to fund a Dutch company with debt rather than equity. See, however, the restrictions on interest deduction for profit tax purposes discussed in this report’s section on choice of acquisition funding. As described in ‘Recent developments’, the new Dutch government has announced plans to introduce a WHT on interest and royalties as of 2023. (For the dividend WHT implications of share-for-share acquisitions, see ‘Purchase of shares’.

Checklist for debt funding

  • The deduction of interest may be restricted, especially where the acquisition of shares is financed with an intercompany loan.
  • If the target owns subsidiaries (which are not part of the same fiscal unity), the deduction of interest may be restricted in case of excessive deduction of interest related to the financing of participations.
  • If the level of the buyer’s profits is not sufficient, an effective deductibility of the interest could be achieved by forming a fiscal unity within the limitations provided by the rules on acquisition holding companies described earlier.

Equity

A buyer may use equity to fund its acquisition, possibly by issuing shares to the seller in satisfaction of the consideration (share merger). Contributions to the capital of a Dutch company are not subject to capital contribution tax.

Hybrids

According to Dutch case law, a loan may be re-qualified as equity for corporate income tax purposes in the following situations:

  • The parties actually intended equity to be provided (rather than a loan).
  • The conditions of the loan are such that the lender effectively participates in the business of the borrowing company.
  • The loan was granted under such circumstances (e.g. relating to the debtor’s financial position) that, at the time the loan was granted, neither full nor partial repayment of the loan could be expected.

Pursuant to Dutch case law, loans referred to under the second bullet point above may be re-characterized as equity where:

  • The term of the loan is at least 50 years.
  • The debt is subordinated to all ordinary creditors.
  • The remuneration is almost fully dependent on the profit.

Where a loan is re-characterized as equity under the above conditions, interest payments are non-deductible and may be deemed to be a dividend distribution, triggering 15 percent WHT (unless reduced by treaty or domestic relief).

Discounted securities

Where securities are issued at a discount, because the interest rate is below the market rate of interest, in principle, the issuer may be able to obtain a tax deduction for the discount accruing over the life of the security.

Deferred settlement

Payments pursuant to earn-out clauses that result in additional payments or refunds of the purchase price are covered by the participation exemption applicable to the relevant participations.

Similarly, the participation exemption covers payments related to indemnities or warranties to the extent that they are to be qualified as an adjustment of the purchase price.

Where settlement of a purchase price is deferred, part of the purchase price may be re-characterized as interest for tax purposes, depending on the agreed terms and the parties’ intent.

Deferred settlement

Payments pursuant to earn-out clauses that result in additional payments or refunds of the purchase price are covered by the participation exemption applicable to the relevant participations.

Similarly, the participation exemption covers payments related to indemnities or warranties to the extent that they are to be qualified as an adjustment of the purchase price.

Where settlement of a purchase price is deferred, part of the purchase price may be re-characterized as interest for tax purposes, depending on the agreed terms and the parties’ intent.

Other considerations

The seller’s concerns

No corporate income tax is due on share transfers, provided the conditions of the participation exemption are met. Relief from corporate income tax may be granted on a share-for- share merger, asset merger, legal merger and demerger.

Where available, relief generally takes the form of an exemption for the transferor and a rollover, such that the acquired assets and liabilities retain the same tax basis they had when owned by the transferor. Certain conditions for this rollover must be met. For example, where the shares are sold within a certain period after an asset merger, the granted exemption can be revoked.

The disposal outside a fiscal unity of a subsidiary that has been involved in the transfer of assets within the fiscal unity in the preceding 6 years may give rise to a tax liability with respect to the previously transferred assets. The transferred assets are revalued at market value prior to the fiscal unity being terminated. An exception is made where the transfer of the assets is part of the normal businesses of both companies.

Company law and accounting

Under Dutch law, a company may operate in the Netherlands through an incorporated or unincorporated entity or a branch. All legal entities have to register their business with the trade registry (Handelsregister) at the local Chamber of Commerce (Kamer van Koophandel).

The most common forms of incorporated companies under Dutch commercial law are the BV and the NV. Both are legal entities and have capital stock divided into shares. As of October 2012, it is possible to issue shares without voting rights or profit entitlement. Shares of a BV are not freely transferable, which makes this type of company generally preferred as the vehicle for privately held companies. Generally, shares in an NV are freely transferable.

Foreign investment in a Dutch company does not normally require government consent. However, certain laws and regulatory rules may apply to mergers or acquisitions. In a stock merger, the shareholders of the target company either exchange their shares for those of the acquiring company or sell them to the acquiring company. The transfer of title to registered shares is made by a deed of transfer executed before a Dutch civil-law notary.

In a business merger, an enterprise is transferred to the acquiring company for cash and/or shares in the company. Such a transfer requires that all assets and liabilities be transferred separately.

In a statutory/legal merger, shareholders generally exchange their shares in the target company for those of the other (acquiring) company (or a new company); the target company is then dissolved. In addition to this basic form of statutory/ legal merger, a number of variations exist, such as a merger between a parent and a subsidiary and a triangular merger under which a member of the acquiring company’s group may issue the consideration shares.

Legislation on divisions and demergers/split-offs has been in force since 1998. Participants in mergers must adhere to the requirements of the Dutch takeover and merger code (SER Fusiegedragsregels), which protects the interests of shareholders and employees, and the Works Councils Act (Wet op de Ondernemingsraden), which protects the interests of employees and requires notification of mergers. Mergers of large companies that qualify as concentrations within the meaning of the Dutch Competition act must be notified to the Dutch authority for Consumers & Markets in advance.

Legislation for financial reporting is laid down in Part 9 of Book 2 of the Dutch Civil Code. Further, the Council of Annual Reporting (CAR — Raad voor de Jaarverslaggeving) publishes Guidelines for Annual Reporting (GAR), which is largely based on International Financial Reporting Standards (IFRS).

The financial reporting rules contain requirements about the content, analysis, classification, recognition and valuation of items in the financial statements. The statutory management of a NV or BV must prepare the financial statements within a period of 5 months. This period can be extended for up to 5 more months, with approval from the shareholders and when special circumstances apply.

Group relief/consolidation

A fiscal unity can be formed between a parent company and any companies in which it owns 95 percent of the legal and economic ownership of the nominal share capital. This 95 percent interest should represent at least 95 percent of the voting rights and should be entitled to at least 95 percent of the profits.

Firstly, a parent and the subsidiaries can be formed under Dutch law (usually as BVs, NVs or cooperatives); if they are formed under foreign law, their legal form must be comparable to a BV, NV or a cooperative.

Secondly, a company does not actually have to be resident in the Netherlands. Where the company is not a Dutch resident, it should have a permanent establishment in the Netherlands and be resident in either an EU member state or a country with a tax treaty with the Netherlands that prohibits discrimination against such a company. If the Dutch permanent establishment is the parent company of a fiscal unity, the shares in the respective subsidiaries should be attributable to the permanent establishment.

Thirdly, a fiscal unity of Dutch sister companies of an EU/EEA-resident parent company is possible, as well as between a Dutch parent company and Dutch sub-subsidiaries held through one or more EU/EEA-resident intermediate holding companies. Further, Dutch permanent establishments of EU/EEA-resident companies can be included in a fiscal unity even where the permanent establishment functions as a parent company and the shares held in its Dutch subsidiary/subsidiaries are not attributable to the permanent establishment.

A number of conditions need to be fulfilled, including identical financial years for both parent and subsidiaries. For newly incorporated companies, the start of the first financial year may deviate. A fiscal unity may be deemed to have been formed on the date requested, but the formation date cannot be more than 3 months before the date of the request.

Inclusion in a fiscal unity means that, for tax purposes, the assets and activities of the subsidiaries are attributed to the parent company. The main advantage of a fiscal unity is that the losses of one company can be set off against the profits of another in the year they arise. However, interest expense incurred in relation to the acquired company is only deductible from the profit of the parent company where the rules on acquisition holding companies described earlier permit (see also ‘Choice of acquisition funding’).

In addition, assets and liabilities generally can be transferred from one company to another without giving rise to tax consequences. Specific rules apply to combat the abuse of fiscal unities. In particular, the disposal outside a fiscal unity of a subsidiary that has been engaged in the transfer of assets within the fiscal unity in the preceding 6 years may give rise to a tax liability with respect to the previously transferred assets.

To ensure proper assessment and collection of tax, the Ministry of Finance has laid down a number of special conditions, in particular, extensive rules restricting a taxpayer’s ability to carry forward pre-fiscal unity losses to be set off against post-fiscal unity profits and to carry back post- fiscal unity losses to be set off against pre-fiscal unity profits.

Transfer pricing

In principle, intercompany transactions should be at arm’s length for tax purposes. To provide evidence that transfer prices are at arm’s length, a taxpayer must submit proper transfer pricing documentation to the Dutch tax authorities. If the Dutch tax authorities impose revised assessments, absence of such evidence may shift the burden of proof to the taxpayer (i.e. should the taxpayer wish to argue that a reasonable estimation made by the Dutch tax authoritiesis wrong). Penalties may also be imposed. Transfer pricing adjustments may entail secondary adjustments, such as hidden dividend distributions or capital contributions.

New transfer pricing documentation rules entered into force as of 1 January 2016. Companies that are part of a group with a minimum consolidated turnover of EUR750 million must notify the Dutch tax authorities by 31 December 2016 as to which group company will file a country-by-country (CbyC) report. If the fiscal year of the group starts on 1 January 2016, the group companies will need to have filed their CbyC report by 31 December 2017. Penalties may be imposed in instances of intentional non-compliance or ‘serious misconduct’ of the reporting entity regarding its obligation to file the CbyC report.

Further, all group entities that are tax-resident in the Netherlands and that are part of a group with a minimum consolidated turnover of EUR50 million need to maintain a master file and local file in their administration at the time of filing their tax return. Non-compliance with these documentation requirements would result in a reversal of the burden of proof

Information obligation for service entities

In light of the national and international debate on the taxation of multinationals and developments regarding BEPS, the Cabinet introduced a measure that concerns the information obligation for service entities.

In short, ‘service entities’ are Dutch resident companies whose main activities involve the intragroup receip and payment of foreign interest, royalties and rental or lease payments. A service entity can request the Dutch tax authorities to provide advance certainty on the tax consequences of proposed related-party transactions. The conditions for obtaining advance certainty are laid down in a 2004 decree. In short, these conditions provide for an actual presence in the Netherlands (i.e. substance requirements) and the real risks that must be borne as a result of the functions performed. The substance rules require, for example, that the management and administration be carried out in the Netherlands and that the amount of equity held is appropriate to the company’s functions and risks.

As of 1 January 2014, these substance requirements apply to service entities, regardless of whether advance certainty was requested. They therefore apply to all service entities, which must also confirm, at the latest in their annual corporate income tax return, whether they meet these requirements.

Dual residency

In principle, a company that has been incorporated under Dutch civil law is subject to Dutch tax, regardless of whether it is also resident in another country. In certain circumstances, a Dutch company that is resident under a tax treaty in another country may be deemed non-resident for Dutch tax purposes or it may be denied certain types of relief (such as being able to join a fiscal unity).

Foreign investments of a local target company

In principle, similar rules regarding the availability of the participation exemption apply to both Dutch and non Dutch subsidiaries. However, special rules apply to low-taxed, passive investment companies. See ‘Purchase of shares’.

Comparison of asset and share purchases

Advantages of asset purchases

  • All or part of the purchase price can be depreciated or amortized for tax purposes.
  • A step-up in the cost basis for taxing subsequent gains is obtained.
  • Generally, no previous liabilities of the company are inherited.
  • No acquisition of a tax liability on retained earnings.
  • Permits flexibility to acquire only part of a business.
  • Greater flexibility in funding options.
  • Profitable operations can be absorbed by loss-making companies in the buyer’s group, thereby effectively increasing the ability to use the losses.

Disadvantages of asset purchases

  • Possible need to renegotiate supply, employment and technology agreements.
  • A higher capital outlay is usually involved (unless a business’ debts are also assumed).
  • May be unattractive to the seller, thereby increasing the price.
  • Higher real estate transfer tax.
  • Seller retains the benefit of any losses incurred by the target company.

Advantages of share purchases

  • Lower capital outlay (purchase of net assets only).
  • Likely more attractive to the seller, so the price is likely lower.
  • May benefit from tax losses of target company.
  • Lower real estate transfer tax.
  • May benefit from the seller’s ability to apply the participation exemption.

Disadvantages of share purchases

  • No depreciation of purchase price.
  • No step-up for taxing subsequent capital gains.
  • Liable for any claims against or previous liabilities of the entity.
  • No deduction for purchase price.
  • Buyer inherits a potential dividend WHT liability on retained earnings that are ultimately distributed to shareholders.
  • Less flexibility in funding options.

KPMG in the Netherlands

Arco Verhulst
Meijburg & Co
Weena 654
3012 CN Rotterdam
NL — 3006 AK Rotterdam

T: +31 88 90 92564
E: verhulst.arco@kpmg.com

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