Today we will take a closer look at one of our options for optimising taxes: setting up a holding company in the Netherlands. We will also have a quick look at the most important concepts when it comes to international tax optimisation.
As you may remember, we talked about how to avoid withholding taxes on dividends and where to set up a holding company a while ago. You may want to have a look back at this article as well.
Many countries around the world have established Tax Treaties with each other in order to avoid double taxation of income. Equally, in many borderline cases, these agreements give the countries clear instructions on how to apply tax law and, in the event of double taxation, regulate the extent to which income is to be deducted.
On the other hand, double taxation agreements play an important role regarding the required business substance for companies whose owner resides in a foreign country. If you are a resident in a country with a high tax burden, it is much easier to have an active company, with an office and employees, in a country that has an agreement to avoid double taxation, than in one that does not.
To better understand these agreements, we should introduce the concept of withholding tax. Broadly speaking, withholding tax is a tax that is applied and paid at the source of the money transfer. Withholding taxes apply to both outbound and inbound payments.
Many people are already familiar with withholding tax, from their broker, for example, who automatically pays their client’s capital gains tax. Withholding tax varies greatly from one country to another, ranging from 0% to over 40%. Switzerland and the United States are known for imposing very high withholding taxes of 35% and 30% respectively. This is where double taxation agreements come into play, which can reduce the withholding tax between two contracting countries.
According to the agreements between Venezuela and Spain with the United States, the withholding tax in the US for distributing profits is reduced from 35% to 15% (with Mexico it would be 10%), which is also factored into the tax burden in the country of residence.
In practice, if you are a partner in a US company and you live in Spain or in Venezuela, you will pay 15% tax in the US (10% in Mexico) and the remainder in your country of residence.
Evidently, this matter is much more complicated in reality, and is subject to various legal changes, especially in the field of investment.
Today we will be focusing on the issue of distributing profits or dividends from private limited companies. In all countries with withholding tax, private limited companies must retain the tax at source when they pay dividends to their shareholders and then later transfer the tax to the corresponding tax authorities.
Withholding tax for private limited companies ranges from zero in tax havens such as Cyprus, England and Malta, going up to 5% (Bulgaria and Romania), to well over 15% in most countries, and in the case of Switzerland, it can be as high as 35%.
If a Spanish limited company belonged to a parent company in Cyprus, the double taxation agreement between Cyprus and Spain would result in a 0% withholding tax on dividend distribution.
Fortunately, the EU directive on parent companies and their subsidiaries allows dividends to be transferred to parent companies free of withholding tax, as long as the parent company holds a certain amount of shares and satisfies the minimum holding period. This means that all profits can flow tax-free from a Spanish limited company to a holding company in Cyprus.
Cyprus does not have any withholding tax. This means that if you have shares in a Cypriot company and you live in a country without tax (or even with a non-dom status in Cyprus itself), you will not pay tax on any dividends you receive.
Germany was the only EU country to have cleverly managed to introduce an exception, by imposing a 5% tax reserve on income transferred under the parent-subsidiary directive. This means that 5% of transferred dividends will be taxed through tax equalisation, which equates to an effective tax rate of 1.3%.
In all other EU countries, dividends can, in principle, be transferred tax-free if the parent company meets the minimum shareholding requirement.
Unfortunately, Cyprus and Malta have rather bad reputations, they are considered low-tax countries, and geographically speaking, they are not always ideally located. Moreover, they have fewer double taxation agreements to reduce withholding tax.
Therefore, depending on the situation, it may make more sense to take a look at the central European country of the Netherlands.
Of course, this does not mean that a holding company in Cyprus or in Malta is not worthwhile. On the contrary, in 90% of cases, they will be preferable to the Dutch option, especially if you are going to leave your high-tax country.
Why the Netherlands? A European tax haven
On paper, the Netherlands doesn’t necessarily look like a tax haven. Corporate tax is up to 25% and income tax can be considerably higher. But this is an advantage in itself for European businessmen, since in Europe, owning a Dutch company is not considered to be a low-tax venture, as you would have to actively pay more than 20% in taxes.
Not being considered a low-tax country greatly reduces any business substance requirements if it is set up with residence in another country with a high tax burden. If you live in a country close to the Netherlands, you simply need a small office close to the border, which you can visit from time to time.
Particularly for holding companies, whose purpose is to manage companies and assets, the substance requirements are even lower than for active companies. Seeing as holding companies often do not involve a lot of work, it is probably sufficient to just visit the office once or twice a month.
For an active company, however, it offers almost no savings in comparison to Spain or Germany. However, the low share capital of €900 required to set up a BV – Besloten Venootschap, as Dutch limited companies are known – may be of interest.
There are also certain sectors, such as cannabis, the food supplement industry etc. that can be managed much more easily from the Netherlands because Dutch banks and payment gateways do not have the same concerns that other countries have with these sectors.
But going back to the main focus of our article, the Netherlands also has the advantage of holding companies, which makes it a major tax haven in the EU.
Dutch holding companies benefit from the so-called Holding Company regime. This means that, as a general rule, capital gains acquired by selling subsidiaries are tax-free. Rather than paying corporate tax, the money flows free of tax and withholding tax to the holding company and from there, it can be transferred elsewhere.
As we discussed in our article about how to avoid withholding taxes with a holding company, unlike Cyprus, the Netherlands does impose withholding taxes on dividend distributions. However, these can be significantly reduced by taking advantage of the many double taxation agreements that the Netherlands are part of, which also include many tax havens.
For example, instead of paying the usual 15% tax on dividend distributions, you can take advantage of a rather unusual double taxation agreement and transfer them tax-free to several tax-free countries such as Panama, the United Arab Emirates, Hong Kong, Malaysia or Singapore if certain conditions are met. The rates can also be considerably reduced when transferring to other countries that tax foreign income.
Particularly the former Dutch colonies in the Caribbean, which have low tax burdens, such as Curaçao, offer excellent opportunities. There, companies are taxed at just 3%.
But why are we talking about the Netherlands if Cyprus or Malta are generally better options for a holding company?
In addition to what we have previously mentioned, depending on your situation and your country of residence, the Netherlands may offer even better options than a low-tax country like Cyprus for setting up holding companies that are recognised by the local tax authorities.
Another advantage of Dutch holding companies over Spanish ones, for example, is that Dutch company law is much more flexible, and the tax office is more generous, a factor that should not be overlooked.
In general, it is important to bear in mind that a holding company must be well thought-out and well-structured from the beginning. Making changes to the structure or establishing it once you already have operational companies can only be done through selling shares, which is subject to tax, or through expensive and complicated procedures such as a tax-neutral merger.
If you are planning to emigrate, having a holding company in your country of origin can be a problem. For example, in the case of Chile or Spain, even if you move to a country where dividends are tax-free for individuals, the holding company in these countries would still withhold tax at source. This could be avoided by having the holding company in the other country from the beginning.
What do I need to consider when setting up a Dutch limited company?
The Dutch limited company (BV) is a private limited company. “BV” is short for Besloten vennootschap met beperkte aansprakelijkheid (‘Dutch limited liability company’). A BV is a legal entity, which means that it has independent rights and obligations. The shares of a BV can be owned by any type of shareholder (natural or legal person), there are no restrictions in terms of country and number.
BVs generally have limited liability. However, shareholders may be liable to settle any debts if the BV is been unable to pay, seeing as it previously distributed dividends to the shareholders. There are similar regulations on wilful abuse as in other countries.
The incorporation of a BV requires the involvement of a Dutch notary. An initial capital contribution of €900 is required. The share capital does not necessarily have to be paid into a Dutch account, in principle, other accounts are also permitted.
At the end of each financial year, there must be a closing of the accounts. This deadline can also be extended for six months. There is an obligation to publish the annual closing of the accounts eight days after its approval from the shareholders’ meeting. For smaller limited liability companies, a simplified balance sheet is sufficient, and an auditor is not required. Audits are only required for a balance sheet amount of 6 million, a turnover of 12 million, or if there are more than 50 employees.
Essentially, the Dutch holding company not only offers more favourable tax advantages than other limited liability companies in high-tax countries, but it also greatly simplifies the bureaucracy.
This is precisely why it is always worth looking beyond our borders. The Dutch BV, combined with the EU parent-subsidiary directive and numerous double taxation agreements, can be used as an optimal channel for transferring tax-optimised dividend payments to different countries around the world.
Moreover, it is much cheaper and less problematic to have a holding company in a country with a high tax burden than to have a similar holding in a country like Malta or Cyprus.
If you want to find out more about what other options you may have for setting up your company, you may want to have a look at our Encyclopaedia of Foreign Companies or book a consultation directly with us as Tax Free Today.
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