Proposed legislation on Dutch withholding tax on interest and royalty payments as from 2021
4 december 2019 | Door: Barry Scheer
To prevent the Netherlands from being used any longer as a gateway to low-tax jurisdictions and to reduce the risk of tax avoidance by shifting the (Dutch) tax base to low-tax jurisdictions, the Dutch government proposes a conditional withholding tax on interest and royalty payments by 2021 to low-tax jurisdictions and in abusive situations. For that reason, no exception has been made for companies with a real economic presence.
It is proposed that the withholding tax only apply to interest and royalty payments to affiliated companies. Companies are affiliated if the beneficiary company has a qualifying interest in the company that makes interest or royalty payments. Or if that company has a qualifying interest in the beneficiary company. Companies are also affiliated if a third party has a qualifying interest in both the beneficiary company and the company making the payments or if the beneficiary company, the company making the payments and a third party company belong to a so-called cooperating group.
A low-taxing jurisdiction is defined as a jurisdiction, designated by ministerial regulation, 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.
Tax liability for direct payments
The withholding tax focuses primarily on direct payments to affiliated companies established in a low-tax jurisdiction. This concerns both interest and royalty payments by companies established in the Netherlands and by companies not established in the Netherlands, but where those interest and royalty payments are attributable to a permanent establishment in the Netherlands. In addition, there are a more situations that are comparable to an interest or royalty payment to a company established in a low-tax jurisdiction.
Tax liability in abusive situations
The withholding tax will not only be due on direct payments to low-tax jurisdictions or in comparable situations, but is also payable on artificial structures that are intended to avoid Dutch withholding taxes.
The proposed withholding tax will be calculated on the gross interest and royalty payments. When determining the benefits, the arm's length principle applies.
Interest benefits are considered any reimbursement on the basis of a loan agreement, but also agreements that are comparable with it, such as rental purchase and financial lease. The concept of royalty is based on the OECD Model Convention. Royalties are fees for the use of or the right to use the various forms of works of a literary and artistic nature and forms of intellectual property and fees for information about industrial, commercial or scientific experiences.
Method and rate
The withholding tax is due by the company paying the interest or royalty. The proposed withholding tax rate will be equal to the highest statutory rate in the corporate income tax. Based on current proposals, this is 21.7% as of 2021. Please note that the withholding tax also applies if the payment is not deductible, for example due to an existing interest deduction limitation or the hybrid mismatch measures to be introduced under ATAD2.