The country’s geographical position at a crucial hub of Europe’s transport system, Rotterdam ‘the Gateway to Europe’ has by far the biggest port in Europe, and the small size of its domestic market have made the Dutch economy one of the most open and outward looking economies in the world. The Netherlands proves to be one of the best places to conduct business and scores particularly high on the field of its open policy towards foreign investment, its liberal foreign trade and exchange regime and the availability of finance. Last but not least the favourable tax climate also plays an important role in the decision making process to start up a business in The Netherlands.
The Netherlands is one of the founding members of the European Union.
The main purpose of this article is to guide you in headlines through the legal and tax environment in The Netherlands. Please do not hesitate to contact us if you are interested in more detailed information.
Start up a business
It is possible to start a business with our without a legal entity.
Non-legal entities
The sole trader is liable to Dutch individual income tax on a worldwide basis out of its operating business. A natural person who derives income from business activities qualifies for tax allowances for entrepreneurs under certain circumstances. The tax allowances for entrepreneurs are amongst others Research and development allowance, self-employed allowance, allowance on investments and an allowance as to retirement. Partnerships are not legal entities separate from the individuals who compose them. Taxation on the income of the partnership is at the level of these individuals.
Foreign investors tend to use either subsidiary companies incorporated in the Netherlands or branches in order to do business in the Netherlands. Branches are considered to be extensions of the foreign company. A branch is not a legal entity; the foreign company if which the branch forms a part is fully liable for all the obligations of the branch. A branch can be a factory, office, shop, building site etc.
Legal entities
The vast majority of business organisations in the Netherlands are limited companies because of its several advantages as to (international) tax planning. Dutch law distinguishes two types of limited liability companies:
- private limited liability company - 'Besloten Vennootschap' (BV);
- public limited liability company - 'Naamloze Vennootschap' (NV).
The minimum issued and paid up authorized capital of a NV is € 45,000 while for a BV the minimum (registered) share capital must be at least € 1. Payment for shares can be in cash or in kind. Payments in kind are contributions of property which can be objectively appraised.
A BV or NV is incorporated pursuant to the execution of a notarial deed of incorporation before a public civil-law notary.
As long as the BV is in the process of incorporation business may be conducted on its behalf provided that it adds to its name the abbreviation ‘i.o.’ (i.e. in incorporation) Persons acting on behalf of the “BV i.o.” are personally liable until the formalities have been completed and the BV has ratified the actions performed. A similar liability arises for the persons (director, board of directors) responsible if the BV fails to fulfil its obligations under the ratified actions and the responsible persons knew that the BV would not be able to do so. In the event of bankruptcy within one year of incorporation the burden of proof lies with the persons responsible.
The management of a BV consists of a board of directors and the general meeting of shareholders. Under certain conditions the BV will have a supervisory board. Every year at least one shareholders’ meeting should be held. Shareholders resolutions are usually adopted by a majority of votes, unless the articles of association provide otherwise. The board of directors is responsible for managing the BV. The members of the board of directors are appointed and dismissed by the shareholders.
Cooperative
The Dutch coop is a separate legal entity, incorporated by a notarial deed, under Dutch law having its own rights and obligations with the capacity to legally own assets and conclude agreements. The Dutch cooperative may act as holding and finance vehicle. Upon incorporation the Dutch cooperative must have at least two members. After incorporation the cooperative can have one member. The cooperative can make profit distributions to its members. The co-operative has no minimum capital. The main governing bodies of a cooperative are the Managing Board and the General Meeting of Members.
When there is complied with certain conditions no dividend withholding tax is withheld on profit distributions to the members. Therefore Dutch cooperatives are often used as international holding company.
The Netherlands corporate income tax system
Corporate income tax is imposed in The Netherlands on the worldwide profits of Dutch tax resident entities and on income derived from certain specific sources within The Netherlands of non-resident entities but with provisions to prevent double taxation of business profits. Subject to Dutch corporate income tax in The Netherlands are NV, BV, companies with a capital that is, wholly or partly divided into shares; ‘open’ limited partnerships, cooperatives and amongst others associations and foundations to the extent that they are engaged in a trade or business.
Whether an entity is Dutch tax resident is determined by reference to all relevant facts and circumstances such as the place of seat of the board of directors, the residence of the directors, the location of the head office and the place where the general annual meeting of shareholders is held. Entities incorporated under Dutch civil law are deemed to be resident in The Netherlands for Dutch corporate income tax purposes.
Corporate income tax is levied on the taxable profits made by a company in a given year less deductible losses. Profit is defined as ‘the total income derived from a business, in whatever form and under whatever name.’ This profit is then allocated to the appropriate financial years by reference to sound business practice and consistent accounting conduct. The concept of sound business practice is predominantly developed in case law. The broad definition of profit allows all expenses to be deducted, unless the expenses do not qualify as business expenses (because the expense was mainly triggered by the shareholders’ relationship) or a special provision disallowed deduction.
Corporate income tax is levied at a rate of 20% up to € 200,000 and 25% for profits which exceeds € 200,000 (2013) Enjoyed income out of profit distributions or capital gains may be exempted when there is complied with the conditions of the participation exemption.
The participation exemption regime fully (100%) exempts income such as dividends and other profit distributions, currency gains (losses) and capital gains (losses), realized with respect to a qualifying participation held by a taxpayer. The participation exemption also applies to profit shares owned by a taxpayer in certain debt (so-called hybrid loans) issued by a qualifying participation that is treated as equity.
Dutch tax resident entities and non-resident entities with a permanent establishment in The Netherlands may benefit from the participation exemption regime with respect to qualifying interests in a subsidiary. To qualify for the participation exemption the parent company must comply with two conditions:
- The taxpayer is required to hold as owner at least 5% of the nominal paid-up share capital of a company with a capital divided into shares. Under certain conditions there is an exception when the capital test can be replaced by a voting rights test if the subsidiary is established in an EU member state with which The Netherlands has concluded a tax treaty that provides for a voting rights test for the reduction of dividend withholding tax. There is no minimum requirement as to the term for which an interest in a subsidiary must be held by the Dutch shareholder in order to qualify for the participation exemption.
- An interest in a subsidiary may not be held as a portfolio investment. This so-called ‘motive test’ is generally satisfied if the shares in the subsidiary are not held primarily for a return that may be expected from normal asset management. If this motive test is not met the participation exemption nevertheless applies if either the assets of the subsidiary on an aggregated basis consists for less than half out of low taxed passive assets or if the subsidiary which is directly held is subject to a profit tax that results in a reasonable levy of profit tax in accordance with Dutch standards
If a Dutch holding company holds at least 10% of a subsidiary which is tax resident in another EU member state and the company is incorporated in one of the legal forms listed in the EU Parent-Subsidiary Directive, the intragroup cross-border payments of dividends must be exempted from withholding tax by the member state of the subsidiary.
Transfer pricing rules; as of January 1, 2002 the arm’s length principle is codified following the OECD Transfer pricing Guidelines. This principle ensures that related-party transactions must be agreed on the same terms and conditions as third-party transactions. For involved taxpayers it is mandatory to document intercompany transactions.
As a consequence of this principle any payment or benefit made or paid (in)directly to a person in his or her capacity as shareholder or made or paid to related persons under conditions that are not at arm’s length, will be construed as distributions of profit in full or in part to the shareholder. However such a distribution is not deductible and dividend withholding tax may be due.
With effect from the year 2012 a special allowance for research and development work has been included in the Dutch corporate income tax act: Research & Development Allowance. This allowance aims to make it even more attractive for companies to carry out research and development activities. For the year 2013 the allowance amounts to 54% of the costs and expenditures incurred by R & D activities. There is already an allowance for wage costs for R & D, the so-called S & O allowance via the reduced contribution for research and development activities in The Netherlands or within the EU.
At last The Netherlands has the attractive innovation box regime. Net income out of intangible assets (IP) like granted patents will be liable to tax at an effective rate of 5% if there is complied with some conditions. Since January 1, 2013 the (small) tax payer has the option for a simplified innovation box regime. This method allows for a deduction of 25% of taxable profit which is maximized at an amount of € 25,000. This option is possible during three years. Companies for which innovation / research and development is a core business will opt for the ‘normal’ innovation box regime because of its tax attractiveness. Further on this website you can learn more about this innovation box tax regime.
Dividend withholding tax
Companies often pay out profits to the shareholders in the form of dividends. The company that pays out the dividend is liable for withholding the tax and has to pay this dividend withholding tax to the Dutch tax authorities.
In domestic situations dividends are exempt from withholding tax if the participation exemption applies or for corporate income tax purposes a fiscal unity exists between the dividend payer and the recipient. In cross-border situations, if a Dutch company pays out dividends to a company established in an EU member state and the company holds at least a 5% share of the Dutch company.
The Dutch dividend withholding tax rate is 15% but this rate is very often reduced under an applicable tax treaty. The Netherlands has concluded more than 95 tax treaties with other countries to avoid double taxation.
Wage withholding (pay roll) tax
Certain employees who are posted to a foreign country or who are recruited from abroad by an employer in the Netherlands are eligible for a special wage tax ruling known as the 30% allowance regulation. Under this regulation, the employer is allowed to pay the employee up to 30% of his/her total remuneration income tax free as a reimbursement for “extraterritorial costs”, i.e. costs related to working cross border regardless of whether these costs are actually incurred. If the employee is granted a tax-free allowance of 30% of gross salary, this means that only 70% of gross salary is subject to Dutch income tax. This results in an effective tax rate of approximately 36%.
The maximum duration of the 30% allowance regulation is 8 years. Earlier stays in The Netherlands will be deducted from this period.
The 30% ruling becomes effective retroactively if the application is submitted within 4 months after the start of the employment contract. If the application is submitted after 4 months, it will become effective as of the first day of the month following the application month.
To be eligible for the 30% allowance regulation, the following conditions must be met:
- The employer must be liable to withhold Dutch wage tax on the employee's salary;
- Employer and employee must agree in writing that the 30% allowance regulation is applicable to the employment contract they have concluded;
- The employee's taxable gross salary (excluded from the tax free allowance) must be at least € 35,770 (2013) per annum. For Masters graduates or employees below the age of 30, a gross salary norm applies of € 27,190 (2013) For scientific researchers, employees working in scientific education or doctors in training, no minimum salary is required.
- The employee has not lived within a radius of 150 kilometers from the Dutch border during at least 16 out of 24 months preceding the start of employment in the Netherlands. This condition might be incompatible with the EU freedom of workers. Court cases are currently pending with regard to this issue.
- The employee must have expertise and skills which are not readily available in the Netherlands. These skills are determined by several factors such as salary, age, employment history, education and level of employment. None of these are conclusive but the combination of all these aspects determines your specific skills. If the employee complies with the gross salary conditions mentioned above, in principle he/she has the skills and expertise required to apply for the 30% allowance regulation.
If the employee changes employer, the employee may reapply for the 30% allowance regulation provided that the employee still meets the conditions regarding specific skills and provided that the start of the new employment is within 3 months of the termination of the previous employment.
In addition, the 30% ruling also allows the employee to opt for partial non-residency status for Dutch income tax purposes. With partial non-residency status, the employee qualifies for income from a substantial shareholding or for income from property for Dutch income tax purposes as a non-resident taxpayer. This means that, except for ownership of Dutch real estate, the employee is exempted from filing private property and associated debt for income tax purposes.
US nationals with partial non-residency status can also claim a deduction for employment income allocated to non-Dutch workdays.
Value Added Tax (VAT)
Based on the Dutch VAT legislation each person/company who independently carries on a business is considered to be an entrepreneur for VAT purposes. The Dutch VAT system is based on the EU Directive concerning tax on added value. VAT is charged at each and every stage of the production chain and in the distribution of goods and services. Businesses charge one another VAT for goods and services provided. The company that charges the VAT is required to pay the VAT to the tax authorities unless it is entitled to a refund. If a company is charged VAT by another company, it is entitled to deduct the VAT amount from VAT due on the company’s part. Foreign companies that perform taxed services in The Netherlands are in principle also liable to pay VAT. The VAT entails strict invoicing rules which as of January 1, 2013.
In essence a Dutch BV holding company is subject to the normal Dutch VAT regime. The Dutch VAT rules do however in practice only apply to holding companies which are either actively involved with the management of the subsidiaries or which conduct other activities as well. In general a passive holding company will not qualify for VAT registration which implies that this holding company is not eligible for VAT relief.
The general VAT rate is 21%. The reduced rate of 6% applies to the supply, import and intra-Community acquisition of goods and services listed in Table I of the 1968 Turnover Tax Act. The reduced rate is largely applicable to foods and medicines. Other goods and services subject to the lower rate include water, art, books, newspapers and magazines, devices for the visually handicapped, artificial limbs, certain goods and services for agricultural use, passenger transport, sports, hotel accommodation, some labour-intensive services and entrance fees for stage performances, museums, cinemas, sports events, amusement parks, zoos and circuses. The zero rate is intended primarily for goods exported from the EU, sea-going vessels and aircraft used for international transport, gold destined for central banks, and all activities that take place in certain types of bonded warehouse.
There is also a zero rate for goods transported to other EU Member States. VAT is levied in the Member State to which the goods are transported, because this is a case of intra-Community acquisition in that Member State.
Imports are taken to mean goods brought into free circulation within the Netherlands from countries outside the EU. The rates applied are the same as those applicable when supplying goods in the Netherlands. VAT can be levied in two ways. In the customs procedure the tax payable must be paid by the agent when he submits an import declaration He may also provide a guarantee (security) for this purpose.
In the second situation ‘import transfer’ applies. For certain allocated goods, the transfer regulations apply automatically. For other goods the inspector can issue a licence on request. The tax due is collected from the company for which the goods are destined (customer). The time of payment is then deferred until the moment at which the business is required to file a periodic domestic VAT return. In this case the time of payment coincides with the right to deduct the same tax. In sum, VAT does not have to be pre-financed.
In practise it turns out that companies which have applied for this license experience that in comparison with neighbouring countries The Netherlands has the most favourable arrangement for avoiding the actual payment of import VAT.
Dutch customs is highly efficient and transparent.
An additional factor, the importance of which should not be underestimated, is the difference in the interaction with the various tax and customs administrations amongst the EU. Some tax and customs administrations take a very formal approach, whereas other administrations are very much open to dialogue. The tax and customs authorities in Netherlands belong to the latter group; they are well-known for their pro-active approach and high service level. They are also receptive to confirm certain arrangements in writing, which guarantees certainty (up front) for taxable entities. This is seen as a very valuable incentive and is often a reason, besides the favourable VAT treatment at import, for companies to select The Netherlands as their gateway to Europe.
Nijmegen, May 15, 2013
Please do not hesitate to contact us in case you have questions about doing business in The Netherlands.
We are happy to help you.
Innovative Tax
Erik Jansen
(+31) 24 7600.136