This is contribution number one by KPMG Meijburg & Co regarding KPMG comments on the official report issued by the Dutch tax authorities on 17 February 1995 intended to improve the Dutch ruling practice.
This article is most likely to be relevant for the performance of holding-, financing, licensing and cost-plus activities.
On February 17, 1995 the Under Minister of Finance submitted a memorandum to the Lower Chamber of Parliament regarding the extension and liberalisation of the existing tax ruling practice. The announced changes to the ruling practice are intended to result in a more flexible and quicker review of ruling requests, and thereby to increase the attraction of the Netherlands as a place for foreign investments.
Below we shall give an overview of the most significant proposed changes announced in this memorandum.
Ruling Practice To Date:
For many years the Dutch tax authorities have been willing to conclude advance pricing arrangements for various business activities. With respect to five cross-border activities, such rulings could only be issued by the ruling team in Rotterdam. Thus, a certain consistency was established. Since 1986, the Ministry of Finance annually reported to Parliament about new developments in the ruling practice. The activities for which rulings were regularly issued included:
1.holding activities;
2.finance activities;
3.license activities;
4.cost-plus activities; and
5.activities performed by US Foreign Sales Corporations.
In addition, rulings could be agreed upon with the local tax authorities for various other entrepreneurial activities, thus creating advance certainty about their tax consequences.
As of January 1, 1993, this ruling system was extended for foreign investors to include a central information service ("the Information Desk") for potential foreign investments creating major employment opportunities. In principle, this service was available for investments of 10 million guilders or more. The investments could be spread over several years.
The essence of the improvements suggested by the February 17, 1995 memorandum, which primarily have an impact on the Rotterdam ruling practice, is that within the broadly defined frameworks it will now be possible to obtain rulings on more flexible terms, so that such rulings can be tailored to individual circumstances. This liberalisation entails a major turnaround in the developments since 1986. With immediate effect, the Rotterdam ruling team is also instructed to take a favourable stand regarding the issuance of rulings for two new activities: the contribution of informal capital (the informal capital ruling), and marketing or similar activities (the resale-minus ruling, being a variation on the cost-plus ruling).
A certain degree of liberalisation has also been announced with respect to the rulings which may be issued by the Information Desk. In practice, the 10 million guilders limit will be more liberally applied in the sense that the Information Desk will not only take account of the size of the investment(s), but will also focus on the overall importance of the investment(s) for the Dutch economy.
The Broadly Defined Frameworks Of "Standard" Rulings
The rulings presently issued by the Rotterdam ruling team and the frameworks within which they should remain are the following:
1.Holding rulings
In these rulings certainty is provided as to the application of the participation exemption with respect to dividends received from foreign participants and capital gains realised on the sale of shares in foreign participations. If, according to the ruling, the participation exemption applies, the tax authorities will indicate the minimum taxable spread on holding expenses to be reported for the holding activity.
2.Finance rulings
For companies which are involved in borrowing and onlending of funds, the ruling will indicate which minimum net remuneration is acceptable to the tax inspectorate.
For a company incorporated under Netherlands law which uses nearly its entire capital for finance activities performed in another (treaty) country through a permanent establishment in that country, certainty can be obtained regarding the maximum taxable profit which can be allocated to the permanent establishment and will be corporate tax exempt in the Netherlands.
3.Royalty rulings
Under these rulings companies, which own patents and similar intangible rights and transfer such rights under a sublicense agreement to group companies or third parties, are provided with advance certainty as regards the minimum net spread acceptable for tax purposes.
4.Cost-plus rulings
This type of ruling applies to situations involving head office activities, distribution activities, as well as auxiliary and supporting activities. The ruling uses the cost-plus method to determine the minimum net taxable remuneration for such activities performed in the Netherlands which is acceptable for tax purposes.
5.Rulings for Foreign Sales Corporations in the Netherlands
This type of ruling is a variation on the cost-plus ruling and only applies to US Foreign Sales Corporations.
6.Informal capital rulings
These rulings are based on the High Tax Court decision of May 31, 1978, BNB 1978/252. In this decision the High Tax Court ruled that under certain circumstances, an entity liable to Dutch taxation may obtain an interest deduction for deemed interest with respect to funds advanced free of charge, in a related company. Such deemed interest and similar situations may be treated as an informal contribution to capital. The possible interpretation of this vaguely worded framework is yet uncertain.
7.Resale-minus rulings
This type of ruling applies in particular to situations where a group's overall marketing activities are performed in the Netherlands. The resale-minus method is used to create certainty about the minimum taxable net remuneration acceptable for tax purposes.
Although the general duration of rulings does not change (four years, with a possible extension of four years), a certain degree of liberalisation has also been announced for this part of the ruling requirements.
Conclusion
The above changes bring about an important liberalisation of the existing ruling practice. The practical result of the liberalisation is, that a greater range of rulings will be available, while the conditions under which they are issued will be determined with due regard for the specific circumstances.
In particular the informal capital rulings may offer interesting planning opportunities for foreign investors.
24 February 1995, KPMG Meijburg & Co
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Further information can be obtained from Mr Alfred GM Groenen, MCL, KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247.
