Use of Dutch Sandwiches or Subsidiary Companies
It is not uncommon for a subsidiary company to pay local tax on its trading revenues, then declare a dividend which is subject to a local withholding tax and then that dividend is taxed (again) on the parent company.
A typical solution might be to interpose a Dutch intermediary company between the parent company and the subsidiary, hence the moniker “Dutch sandwich”. The purpose of such an arrangement is to enable dividends to be paid to Holland with lower or no local withholding taxes due to Holland’s extensive double tax treaty network and thus allow more of the dividend to be received by the parent company.
Until now Holland was relatively happy with this arrangement. It didn’t collect much tax from the intermediary company but the people staffing the company would all be employed and paying taxes in Holland. However, this position changed on 28th December 2018 when the Dutch Ministry of Finance published a “blacklist” of low tax jurisdictions in order to combat tax avoidance. This list includes “low tax jurisdictions”, countries that choose not to levy corporate income tax or apply a statutory corporate income tax rate of less than 9% and “non-cooperative jurisdictions”. Why 9% you ask? This is because Hungary, a fellow EU member, has a corporate income tax rate of 9%. The prohibited list includes Guernsey, Jersey, Isle of Man, British Virgin Islands, Cayman Islands and Bermuda and the full list can be accessed here
The Dutch Ministry of Finance has also proposed the following anti-tax-avoidance measures:
1) Controlled Foreign Company (“CFC”) rules
With effect from 1 January 2019 CFC rules will apply where a Dutch entity holds a direct or indirect interest of more than 50% in the nominal share capital, voting rights or entitlement to profits of a subsidiary company or a branch established in a blacklisted jurisdiction. This rule is designed to catch Dutch companies who have set up moveable businesses in low tax jurisdictions to save Dutch taxes.
Where the CFC rules apply the non-distributed “tainted” income (including dividends, interest and royalties) of the CFC can be imputed on the Dutch parent company. The CFC rules do not apply where the CFC carries on genuine economic activity in the blacklisted jurisdiction.
2) Revised tax-ruling practice
From 1st July 2019 the Dutch tax authorities will no longer allow tax agreements with respect to transactions concluded with companies situated in blacklisted jurisdictions.
3) New Dutch withholding tax on interest and royalties
From 1st January 2021, a conditional withholding tax of 20.5% may be applied to intergroup payments to companies situated in blacklisted jurisdictions. Arrangements will be put in place to set aside artificial arrangements designed to avoid the conditional withholding tax.
In addition, the Dutch Ministry of Finance has announced its intention to revise Dutch withholding taxes on dividends paid by Dutch companies to parent companies situated in blacklisted jurisdictions in the future. This will affect the typical “Dutch sandwich” structure where often there is a parent company in a low tax jurisdiction and a Dutch intermediate holding company with a trading subsidiary beneath.
How can international groups respond to these measures?
Firstly, there is the option to impose an EU company or non-blacklisted company between the blacklisted parent company and the Dutch entity. This means that distributions are not subject to Dutch withholding taxes.
Secondly, there is the option to place another intermediate holding company in an appropriate jurisdiction between the blacklisted parent and the Dutch intermediate holding company and then liquidate the Dutch company. So you have a blacklisted parent company, then beneath that a new intermediate holding company and beneath that the trading subsidiary.
The UK Solution
Finally, there is an option to migrate the blacklisted parent company to a new non-blacklisted jurisdiction, so that payments from the Dutch intermediate holding company are going to a non-blacklisted jurisdiction.
In all cases sufficient economic substance will be needed.
In some cases, the use of an intermediate company tax resident in the UK may produce a favourable outcome.
The UK’s tax rules allow a parent company to become UK tax resident by either incorporating in the UK or moving the “management and control” of the company to the UK. If it applies, the UK has a low rate of corporation tax, currently 19%, but due to come down to 18% for the year starting 1st April 2020. In many cases dividend income from subsidiaries and the gains on disposal of trading subsidiaries are free from corporation tax. In addition, the UK has an extensive double tax treaty network with more than 130 countries, which means that dividends and interest can be paid to the UK with reduced local withholding tax. The UK does not apply any withholding tax to dividends paid out of the UK.
I hope you find this article useful. If you have any issues regarding the matters raised, or wish to set up a UK company, please contact the author.
I am indebted to Ruben van Aarle and Tom Wagemakers at Andersen Tax & Legal in the Netherlands who have contributed to this article.
Mark Davies is the Chief Executive Officer at Mark Davies & Associates Ltd www.mdaviesassociates.com, a tax boutique focussed on international clients. Mark Davies & Associates is collaborating with Andersen Global in the UK.