Below we provide a general outline of the Dutch tax system and highlight the most relevant rules from an international perspective.
Corporate income tax ("CIT")
As of 1 July 1994 corporations resident in the Netherlands are taxed at 40% on the first Dfl. 100,000 (approximately $ 57,000) of worldwide taxable income. Any excess is taxed at only 35%. Non-resident corporations are subject to the same rates of tax but only on income received from certain domestic sources.
The tax system is based on three principles: flexibility, certainty, and the avoidance of double taxation.
Flexibility - Sound Business Practice ("SBP")
The legislation provides an extremely flexible rule to determine taxable business income: "Business profits must be computed consistently and in accordance with sound business practice". Although this rule may come across as vague, it has proven in the past to efficiently and accurately meet the needs of the business community, due to the fact that both taxpayers and tax authorities benefit from a system based on "common sense". The definition forces tax advisors and tax authorities to keep an open mind while negotiating a reasonable result and to refrain from taking aggressive positions. Taxpayers who ignore this rule, are the most likely to be called to justice by the courts.
Furthermore, the wording of the legislation and the interpretation of it by the courts, is slightly in favour of the taxpayers. For example, "prudence" is an important element of "sound business practice" and allows losses to be taken before actually realised, whereas profits do not have to be brought into account until realised.
Although, ultimately the burden of proof is assigned by the Courts, the principle of SBP also embodies an initial assumption in favour of the taxpayer being that in the absence of special circumstances, the taxpayer is right unless proven wrong by the tax authorities. However, the Courts will force the burden of proof on the taxpayer, if the taxpayer either:
- b). did not file a return, although he was legally obliged to do so.
Avoidance of double taxation - Participation exemption
Generally speaking all income and capital gains derived by a corporation from its 5% or more ownership in domestic or foreign subsidiaries, is fully exempt. This extremely favourable and straight forward regime, referred to as the participation exemption, has been part of the Dutch tax system for over a century. Its simplicity and correctness inspired many countries to enact similar provisions, and convinced the European Commission to recommend its implementation to other EU Member States.
The fact that the participation exemption also applies to foreign subsidiaries (even if they are located in a low tax jurisdiction) is the main reason for the establishment of many international holding companies in the Netherlands.
Certainty - Ruling Practice - APA procedure
The Dutch ruling practice, aimed at resolving potential transfer pricing issues up front, was established decades ago. At the present time "standard" rulings are available to assure certainty regarding the tax consequences of holding, financing, licensing, and other similar activities. Advance price rulings are also available for auxiliary activities where taxable profits are frequently established based on a cost-plus basis.
In order to accommodate cross-border rulings ("Advanced Pricing Agreements") the Ministry of Finance has recently also published guidelines for the appropriate procedures.
General and Special Investment Incentives
Rulings for Substantial Inward Investments
If a substantial amount of foreign investment is likely to create additional employment opportunities in the Netherlands, it is possible to obtain a special ruling. With such a ruling, a wide variety of tax issues may be dealt with, all aimed at creating certainty about the favourable Dutch fiscal investment climate.
Investment Deduction Scheme
A general Investment Deduction Scheme ("IDS") was introduced for fiscal years beginning on January 1, 1990, or thereafter. Under this scheme additional deductions (over and above the general depreciation deduction) are granted to entrepreneurs making investments in a wide range of qualifying business assets.
The investment deduction varies between 2 and 18 percent of the amount invested and is phased out in the case of investments that are in excess of Dfl. 502,000 (1994).
Research and Development Facility
As of January 1, 1994, a R&D incentive is available to all Netherlands enterprises with employees conducting R&D activities. The incentive provides for a reduction of the wage tax payable, based on the annual amount of wages paid to employees involved in R&D activities. [QQ] The reduction amounts are as follows:
- 25% over the combined annual wages up to Dfl. 100,000
- 12,5% over the remainder
The maximum deduction is Dfl. 10 million per year per withholding agent.
The attractiveness of this investment incentive can be demonstrated by the fact that approximately 5,000 taxpayers have applied for the application of this special rule since its implementation.
Flexible Depreciation Facility
As of August 19, 1994, a new law has taken effect allowing a so-called flexible depreciation deduction for investments in qualifying (e.g. environmentally friendly) business assets.
Individual Income Tax ("IIT")
A progressive IIT is levied by the State on both resident and non-resident individuals. No IIT is levied by lower bodies of government such as municipalities. Similar to the CIT residents are taxed on worldwide income, including self employment income, professional income, employment income, income from capital, and deemed income from home ownership. Non-residents are only taxed on income derived from domestic sources linked to the Dutch territory. Although capital gains do not fall within any of the forementioned categories of "income derived FROM" (and thus are generally exempt) it should be noted that capital gains arising from the sale of shares representing a substantial shareholding (1/3 or more), are taxed at a special rate of 20%.
Tax rates
The basic exclusion of capital gains from taxable income, as well as tax efficient employment remuneration schemes, are frequently used to mitigate the effects of the relatively high marginal tax rates of up to 60%. If should be noted that marginal tax rates include social security contributions.
The rates of tax applicable to non-resident and resident taxpayers are the same. However, if a non-resident expatriate is not subject to Dutch national insurance tax (because he pays social security premiums in another country) and not more than 90% of his total worldwide income is taxable in the Netherlands, a special tax rate of 25% in the first tax bracket (of to Dfl. 43,267) is applicable.
Avoidance of double taxation - tax treaties
In order to protect resident taxpayers from being taxed twice on the same income, the Dutch tax authorities have concluded a large number of double taxation treaties. If no treaty applies, double tax relief may be obtained on the basis of the Unilateral Decree. In both situations two methods of double tax relief are available: a) the tax credit method for passive investment income; and b) the pro-rata exemption method for most other income.
None of these provisions, however, addresses the issue of "double taxation" arising from the strict (but sometimes disputable) separation of individuals from their legal entities. As a result of such deemed independence, income taxed at the corporate level will always be taxed again if distributed to the individual-shareholder. The individual-shareholder receiving dividends is not entitled to any relief from corporate tax already paid; (the so-called "classical system of taxation").
35% ruling
The Netherlands has a special tax regime for employees who are temporarily resident in the Netherlands (expatriates). This regime is referred to as the 35% ruling practice. The ruling has been recently changed and as of September 1, 1992, the following rules apply.
According to the 35% ruling an employer may pay an employee a tax-free allowance up to 35% of his total remuneration. Furthermore, the employer may reimburse school fees tax free to an employee for his children to attend an international school.
Although the ruling is granted for a period of 96 months, after 48 months the tax authorities will again review the ruling application and consider whether or not the employee still meets the conditions for the 35% ruling.
In order to qualify for the 35% ruling, employees must have, amongst others:
- specific expertise which is scarce or not available on the Dutch labour market;
- the intention to stay in the Netherlands temporarily; and
- been recruited from abroad.
If a qualifying employee is a resident of the Netherlands, he can, however, elect to be treated as a 'deemed' non-resident taxpayer for wage tax, individual income tax and wealth tax purposes, for the first 48 months of his total period of the 35% ruling. As a result of such election his protection under Dutch tax treaties will be limited, but at the same time the relevant Dutch tax will only be imposed on Dutch sourced income. He remains, however, taxable on his worldwide employment income.
Social Security
According to the EU directive 1408/71, an EU national who has ben assigned to the Netherlands may remain covered in his home country and avoid the relatively high Dutch social security taxes.
Nationals of non EU countries, may also remain subject to the home social security scheme based on a social security treaty (or totalisation agreement). The Netherlands has a social security agreement with more than 10 countries (including Australia, Canada, and the United States).
Tax efficient forms of employment remuneration
The following items can be provided or reimbursed to an employee in a tax efficient way:
- Telephone cost reimbursement
- Interest free loans
- Special savings schemes
- Profit sharing scheme
- Share option scheme
- Company car
Indirect taxes - VAT
Since January 1, 1993, the fiscal frontiers within the EU have been abolished. This event has had a tremendous impact on all indirect taxes, i.e. Value Added Tax and customs duties. In contrast with the rules for VAT, the harmonisation efforts within the EU have already led to genuine unification in the field of customs law (which covers import duties) agricultural levies, and anti-dumping duties. Most of the relevant legal rules are laid down in regulations with direct binding force in all Member-States. As a result, these duties are in principle levied in the same way throughout the EU.
Value Added Tax ("VAT")
In general, VAT is levied in respect of goods transferred and services performed within the Netherlands. The importation of goods is also subject to VAT. VAT is generally charged (at 17.5, 6, or 0 percent) of the sales price, depending on the type of good or service.
Although the Dutch VAT is levied at various economic trading levels. it does not have a cumulative effect. This is due to the fact that a credit is granted for tax paid in the previous stages, i.e. every entrepreneur/taxpayer is liable to VAT on his turnover but receives a credit for the VAT which has been charged to him by other entrepreneur/taxpayers.
As Dutch VAT is only levied on the consumption of goods and services within the Netherlands, export to other EU countries, as well as to third countries, is effectively not taxed.
International implications
A non-resident entrepreneur should keep in mind that he is subject to tax if he performs taxable transactions in the Netherlands even if he does not maintain a permanent establishment in the Netherlands. However, special provisions apply to such entrepreneurs.
On the other hand, VAT normally due may be avoided by using special "warehouses" (discussed in the next section).
Indirect taxes - import duties
Import duties are levied on the importation of goods and are generally calculated by applying a certain percentage to the customs value. A separate rate of tax is applicable for different types of goods.
Since the territories of all EU Member States jointly make up the so-called customs territory of the EU, goods may circulate freely, (i.e. without being subject to customs duties) in the EU. Import duties are exclusively levied at the external borders of the EU, however, there is one exception. Goods arriving in a Member State from outside the EU can be declared "for transit" to another Member State. In this case no import duties or other indirect taxes (e.g. VAT) are initially due on the imported goods. In order to avoid these duties, a community transit declaration must be produced in the country of introduction.
In addition, EU "warehousing rules" provide for a deferment of payment of duty until the goods are released into free circulation within the EU. The EU legislation provides for six different kinds of "warehouses", which are indicated by the letters "A" through "F". The warehouses differ in the extent that there is physical control by the customs authority over the goods and in the extent that the goods are accessible to the distributor.
Unlike most other EU Member States the most flexible of these warehouses ("E-type") are well established in the Netherlands. An E-type warehouse is a fictitious warehouse which is not subject to direct customs supervision and not restricted to a special building or even to the premises of the company. This implies that the company can store its goods throughout the Netherlands without payment of VAT or customs duties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For additional information contact Mr Alfred G M Groenen on 31 20 656 1656.
© Mondaq Ltd 1995 Tel +44 171 820 7733.
