Audit Magazine Summer 2005

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Informations

• Publié par: Pheyn
• Nombre de lectures: 14
• Langue: English

Extrait

The influence of the Dutch group financing rules in the corporation tax act
on intellectual property tax planning via the Dutch Antilles

The from a tax viewpoint desirable transfer of potentially highly profitable business activities,
for instance the exploitation of a group’s intellectual property rights (hereinafter: IPR), by
Dutch multinationals to low taxed Dutch Antilles subsidiaries, has for a long time been
viewed as problematic. After all, a Supreme Court case in 1987 held that an Antilles
subsidiary (reinsurance company) of a major Dutch shipping group, was taxable for
corporation tax in the Netherlands for the bulk of its profits, despite the fact that the entity had
several local employees in the Antilles. The Antilles entity was deemed to operate a
permanent establishment in the Netherlands at the location of the group’s head office (‘’place
of management’’).

However, in 2003, the Tax Court of Amsterdam has seen several new cases concerning the
Antilles route and has shown in its verdicts that better planning at the end of the taxpayer may
greatly influence the outcome. The Court held amongst other things that in case the activities
undertaken by the Antilles entity are relatively restricted by their nature, and if the
management of the Antilles entity has sufficient knowledge and expertise to perform its
management tasks without undue support from the Dutch group head office, no taxation of an
Antilles entity in the Netherlands may take place, because in that case the entity does not
operate a Dutch PE in the form of a place of management.

When trying to put revived old tax planning techniques to new use, one needs to be careful
however. Below we will demonstrate that the introduction of a new article in the Dutch
participation exemption rules, which at first sight has nothing to do with Antilles tax
planning, may on second sight (still) block the use of the Antilles for the exploitation of
intellectual property rights. In order to understand this ‘’unexpected side effect’’ one must
familiarise oneself with the tax subjects of ‘’royalties’’ and ‘’withholding taxes’’ and with the
new Dutch rules for interest and royalty conduit companies which will ultimately come into
force per 1/1/2006. This article intends to give auditors some practical insight into these
matters so the are able to better judge the (in)validity of certain Antilles IPR tax planning
undertaken by their clients, which may greatly influence the tax line in the annual accounts
they are auditing.

Anyone seeking to transfer IPR to a tax friendly location must count with the fact that such
rights (e.g. patents; copyrights; trademarks; know-how, etc) give rise to income which is
usually classified as the payment of royalties in the country of the payor. And royalty
payments to tax friendly locations are generally seen as a form of tax evasion, subject to anti-
abuse provisions. As a rule:
a) royalty payments to tax havens are non-tax deductible for the payor;
b) and are subject to a withholding tax (‘’royalty tax’’) of some 25%.

In the past, both issues could generally be resolved by simply interposing a Dutch legal entity
in the money flow, thereby splitting the transaction in two halves if it were: the Antilles entity
gave an exploitation license to the Dutch group entity, which in its turn gave user licenses to
the ultimate users of the technology or the trade mark. According to published Dutch
‘’advance tax ruling’’ standards, the Dutch entity had to report a relatively minor margin on
its flowthrough activities for Dutch tax purposes, but the bulk of the licensing profits could be
repatriated to the Antilles, free from any further Dutch taxation. And under the participation
exemption, provided this element of the tax planning was also in order and the PE issue
described above was avoided, the Antilles profits could subsequently be repatriated to the
Netherlands taxfree as well. In this type of set-up, profits which were potentially taxable at
35% could effectively be taxed at no more than 5%, which explains why Antilles tax planning
is (still) in high demand in the Netherlands.
The cases seen by the Amsterdam tax court were both from before the time the Netherlands
changed its participation exemption rules to ‘’persuade’’ the larger Dutch multinationals to
bring their group financing activities – usually performed in Belgium or Ireland – back to the
Netherlands. This persuasion had legally taken the form of a ‘’carrot and stick’’ approach, as
follows:
a) the participation exemption would no longer apply to dividends from or capital gains
on foreign subsidiaries involved in group financing activities;
b) the Netherlands offered a special tax regime (an effective 7% corporate income tax
rate) to multinationals for group financing income, generated within the Netherlands.

Under pressure from ‘’Brussels’’, the carrot rule under b) has been withdrawn in the mean
time, but the stick is still in place.

The precise problem we are addressing here is hidden in the legal definition of ‘’group
financing activities’’. This definition, on the special request of the Dutch Parliament, was
widened to amongst other things, group licensing activities. In order to persuade more
multinationals to bring back their financial group activities to the Netherlands, the idea was
born to include more group treasury functions than mere group financing in the definition, in
order to let these benefit from the new 7% effective tax rate as well. However, an Antilles
subsidiary which will grant user licenses to third parties by granting an exploitation license to
a Dutch group company, voluntarily brings itself under the broader definition of ‘’group
financing company’’, thereby disconnecting itself from the very tax incentive it was built on:
the participation exemption!

One could of course argue that granting licenses to third parties via a Dutch group company
has nothing to do with ‘’group licensing’’ and therefore with ‘’group financing’’ at all and
should not be treated as such. That in fact, the intermediate step of putting a Dutch group
company in between the ‘’real licensor’’ and the third party licensees should be ignored for
the application of the group financing rules. However, such a stance would be very
problematic and not just because it conflicts with the literal wording of the legal provisions in
place: in fact one would be arguing that the Dutch intermediate entity plays no own role in the
process of collecting the Antilles entity’s royalties so it should be ignored. Such a viewpoint
would clearly be in conflict with the new Dutch rules for conduit companies, enacted per
1/1/2002, with transition provisions till 31/112/2005. If a Dutch intermediate entity which
collects interest or royalties for a third party adds no value to the collection process and is a
mere ‘’service company’’ to the group, it is not entitled to the reduction of foreign
withholding taxes on interest and royalties, foreseen in the Dutch tax treaties. The entity,
under the new Dutch approach for conduit companies, is not the beneficial owner of the
income stream and the Dutch revenue service has taken it upon themselves to actively inform
the foreign tax authorities in the countries of the royalty or interest paying entities thereof.

New Antilles IPR tax planning, based on the recent favorable news from the Amsterdam tax
court, may therefore be extremely dangerous and could lead to outright disaster. Younger tax
advisers may not always realize themselves that playing with dynamite (turning a35% tax
rate into a 5% one) is a dangerous game: the thing may explode in your face!

Jos Peters, MBA
March 30, 2005