Directives and regulations counter tax avoidance in Netherlands
The Netherlands is known worldwide as a very stable country economically, with a healthy fiscal and political climate. A few mentionable reasons that have led to this image are the fairly modest tax rates when compared to neighboring countries. Furthermore, clear and efficient administrative processes and the innovative use of IT and technology in order to facilitate tax compliance also contributed to this end. Compared to the rest or the European Union (EU), the Netherlands has a very competitive corporate income tax rate, which is 25% for yearly profits exceeding 245,000 euros and 15% for profits below that amount.
This year (2021) the corporate tax rates will be further reduced to and 15% instead of 16,5%. The tax system in the Netherlands has many attractive features and benefits, which especially attracts foreign companies and investors. Nonetheless, this doesn’t mean that nothing dubious ever happens. The country has experienced some difficulties in the area of tax avoidance, both by national as well as international companies, which is mainly due to the beneficial taxation system.
The Netherlands has a competitive fiscal climate
The Netherlands is a major hub for foreign multinationals, investors and entrepreneurs. This didn’t happen without a reason; the Dutch tax regulations and ruling practice have been around for more than 30 years and thus, provide international company owners with proper clarity when they decide to branch out to the Netherlands. The stable government also attracts many multinationals due to the stability it provides. The Dutch Tax Authorities are considered to be both cooperative and accessible, which makes foreign business owners feel safe and secure. Unfortunately, like with all good things, there are also investors and companies that use the profitable system to avoid certain financial obligations.
Fraud is still prevalent in all layers of society
Some people are not familiar with the extraordinarily large amount that is invested in the Netherlands by foreign companies and investors. During 2017, for example, the total amount of foreign investment totaled 4,3 trillion euros. The shocking fact is though, that the majority of this money wasn’t invested in the Dutch economy at all, only 688 billion euros of the original 4,3 trillion. That is only 16% of all total foreign investments. The other 84% went into subsidiaries or so-called shell companies, which are basically only set up to avoid paying taxes elsewhere.
Looking at these enormous amounts, it becomes clear immediately that this is not done by small players to hide some illegal profits from taxation. Only the largest multinationals and richest individuals in the global economy can pull such vast amounts off. This includes Dutch companies like Royal Dutch Shell, but also many foreign multinationals such as IBM and Google. These companies have established branch offices, headquarters or other operations in the Netherlands so the payable amount of tax in their country of origin is reduced. Some well known brands and companies are technically Dutch, as they established their headquarters in the country for the sole purpose of tax avoidance.
In order to visualize this, here is an example. The Netherlands is a very small country with a relatively small number of inhabitants, compared to the rest of the world. And yet, in 2016 16% of all foreign profits claimed by US companies were accountable to the Netherlands. This would seem as if the Dutch order a huge amount of goods and/or services from the US, but reality is a bit more shady. The companies in essence parked the money in their Dutch subsidiaries in order to avoid taxation, or they moved the money via so-called letterbox entities, which transfer the profits to other suitable tax havens. This way, they can funnel it to locations with a 0% corporate tax rate and avoid taxation altogether. It’s a clever trick that has been going on for quite some time, but the government is finally doing something about it.
The EU and the Dutch government are both taking action
The Dutch State Secretary of Finance has proposed to put forward a new tax policy agenda, which the government has agreed to adopt in order to put an end to such practices. The first priority of this agenda is thus tackling the evasion and avoidance of taxes. The other priorities are the reduction of the tax burden in the labor sector, the promotion of a competitive Dutch tax climate, making the tax system green and also more workable. This agenda is aimed towards a better and more resilient tax system, in which loopholes such as the current tax evasion are not possible to construct anymore. The Secretary aims for a simpler, more comprehensible, more workable and also fairer tax system.
A withholding tax to counter tax avoidance
During this year (2021) a new system of withholding taxes will be introduced, that focuses on interest and royalty flows to jurisdictions and countries with low or 0% tax rates. Suspicion of abusive tax arrangements is also included in this system. This is to prevent foreign investors and company owners from using the Netherlands as a funnel to other tax havens. Unfortunately, due to the evasion and avoidance of taxes this way the country has been in a somewhat negative spotlight recently. The Secretary wants to improve the situation by tacking tax evasion and avoidance head-on, in order to make a swift end to this negative image.
EU directives on tax avoidance
The Netherlands is not the only EU country that has been taking measures to eliminate tax fraud, as the EU adopted Directive 2016/1164 already during 2016. This directive lays down multiple rules against tax evasion and avoidance practices, which inevitably negatively affect the internal market. The rules are also accompanies by several measures to tackle tax avoidance. These measures are focused on interest deductibility, exit taxation, anti-abuse measures and Controlled Foreign Companies.
The Netherlands has chosen to implement both the first and the second EU anti-tax avoidance directives (ATAD1 and ATAD2), although the Dutch will implement even stricter standards than the standards required in the EU directives. Some examples include the absence of so-called grandfathering rules applying to existing loans, the lowering of the threshold from 3 to 1 million euros and the exclusion of the group exemption in the earnings stripping rule. Next to that, banks and insurance companies will be confronted with a minimum capital rule in order to ensure a more equal situation concerning debt and equity throughout all sectors. This will lead to a healthier economy and more stable companies.
The importance of transparency
One of the main factors that contribute to a healthy and viable tax system is transparency. This is particularly true when the need arises to tackle difficult problems such as tax evasion and avoidance. For example; fines that can be attributed to culpable negligence shall be made public, which in turn will also push accountants and tax advisors to execute their tasks with more diligence and honesty. If you want to establish a company or branch office in the Netherlands, we advise to choose a stable partner that knows all the necessary rules and regulations. Intercompany Solutions can assist you with the entire registration process, furthermore we can also help you along the way with accountancy services. You can contact us anytime for more information and friendly advice.