On 1 January 2021 the Withholding Tax Act 2021 entered into force. This new law contains a withholding tax obligation for royalty and interest payments made to related companies in low-tax jurisdictions or in abusive situations
Executive summary
Making the effort to combat tax avoidance and profit shifting, the Netherlands has introduced a conditional withholding tax on interest and royalties as per 1 January 2021. This tax at the rate of 25% (2021) is due on royalty and interest payments made to related companies in low-tax jurisdictions or in certain abusive situations.
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Background
Traditionally the Netherlands did not levy any withholding tax on royalties and interest. In combination with the strong tax treaty network, this was one of the reasons for using Dutch companies in financing and licensing structures. Like in most other countries the Dutch government is putting a lot of effort in combatting tax avoidance and abuse. One of the focus points was to terminate the position of the Netherlands as the gateway to low-tax jurisdictions.
Therefore, as from 2021 interest and royalty payments to related companies in certain low-tax jurisdictions will become subject to a withholding tax. The same applies to certain abusive situations. The withholding tax will be levied at a rate equal to the highest rate of Dutch corporate income tax in the applicable year. For 2021 this rate is 25%. The withholding tax rate may also be reduced by a tax treaty, if applicable. Whether the company paying the royalties or interest has substance in the Netherlands or is conducting real economic activities does not make a difference.
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Related companies
Withholding tax will be levied on qualifying payments between related companies. Under the new rules, companies are considered to be related if the shareholder can directly or indirectly exercise decision-making influence. This is the case when the shareholder owns more than 50% of the voting rights. In addition, the company can be affiliated through a third party and also through a cooperating group.
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Low-tax
jurisdictions
The withholding tax applies to payments made to related companies in certain low-tax jurisdictions. Low-tax jurisdictions are jurisdictions with a statutory corporate tax rate of less than 9% and jurisdictions on the EU list for non-cooperative jurisdictions.
For 2021, the EU list of non-cooperative jurisdictions is as follows: Anguilla, Barbados, British Virgin Islands, Fiji, Guam, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, US Samoa, US Virgin Islands and Vanuatu (EU list of October 2020). This list is updated annually.
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Abuse rule
The withholding tax may also apply in certain situations of tax abuse. Abusive situations are considered present in situations where artificial structures are put in place with the main purpose or one of the main purposes to avoid Dutch withholding tax, e.g. where an interest payment to a country which is on the above-mentioned list is artificially routed via a low-substance financing company in a country that is not on this list.
Accordingly, for each interest and royalty payment to a related company it should be checked if an artificial structure is put in place and the main purpose of the structure should be tested.
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Liability for the
payment of
withholding tax
The new withholding tax will in principle be levied from the company that makes the interest or royalty payment and that is obliged to withhold the withholding tax. However, if the withholding tax has not been applied correctly or not at all, the tax inspector can issue an additional tax assessment to the recipient of the interest or royalty payment.
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Directors liability
Directors of the withholding company may also be held liable for the non-timely or non-payment of the correct amount of withholding tax. However, a director is not liable insofar he can show that it is not his fault that the correct amount of withholding tax was not paid (timely).
