On September 20, 2011 the Dutch government announced a number of changes to its tax laws as part of the ''Budget 2012'' proposals. One measure seems to require immediate attention and perhaps also immediate action from tax payers because existing retained earnings either in the Coop itself or in any of its subsidiaries which per 31/12/2011 are not subject to a 15% Dutch dividend tax claim may become subject to such claim per 01/01/2012 with full retrospective effect!
The Dutch ''Cooperative Association'' (hereinafter: Coop) has substantially gained importance in international tax planning structures involving the Netherlands over the last decade. Whilst initially such Coops were merely used by Dutch farmers and fishermen seeking to unite to have a better base for negotiating with third party vendors, suppliers and customers, this Dutch legal feature has increasingly been used by other businesses mainly from outside the Netherlands, to create an entry into the Netherlands in order to set up a holding structure with the objective of circumventing the Dutch Dividend Tax Act, thereby creating an exit strategy with a 0% dividend tax from the EU. This route created a much sought after tax international planning feature. After all, the Dutch participation exemption is almost legendary because of a number of very helpful changes it underwent per 1/1/2007 resulting in a high demand for it. Two of the favorable changes per 1/1/2007 were:
- Zero taxed subsidiaries of a Dutch entity are no longer excluded from the Dutch participation exemption, provided they run an active trade or business;
- The participation exemption is fully applicable to fixed and variable interest income from qualifying Profit Participating Loans.
However if low-taxed income is then received in a Dutch holding company, and can only be taken out against 15% dividend tax, unless reduced by a treaty or by the EC Parent subsidiary directive if all conditions are satisfied, the appeal of setting up Dutch holding companies to benefit from the revised participation exemption would be sharply reduced. The insertion of a Coop in between the Dutch legal entity (usually a BV, which equals the Anglo-Saxon expression ''LLC'') and its foreign owner has been used as a vehicle to overcome the Dutch dividend tax obstacle, the reason being that Coops, until now, were not mentioned as taxable subjects in the Dutch dividend tax act. Now this is about to change, as further explained hereunder.
A practical benefit of a Dutch Coop has always been that, although it differs legally from a BV entity, from a Dutch corporate tax viewpoint it can in fact be set up very similar to a BV entity. Coops can even be included in a Dutch tax consolidated group, both for corporation tax and for VAT, providing the comfort of filing one tax and vat return instead of filing two separate tax returns.
Dutch dividend tax law will change per 01/01/2012
Unfortunately for many tax planners, the Dutch government has now made an announcement to bring Coops under the workings of the Dutch Dividend Withholding Tax Act (hereinafter the "DWTA"). The good news is that the Bill of Law as published only deals with ''abusive'' Coops, which will in practice mean that not all Coop situations will have to be restructured. On the other hand, the bad news is that the new definition of ''abusive Coop'' is not very clear and may even cover situations which so far have never been considered as abusive. It is our view that this will result in a large number of grey areas where tax payers who think they should be in the clear because their Coop structure has been set up not only for tax savings reasons but also has ''business substance'' should nonetheless take a closer look and decide whether to keep the Coop ''as is'', or to keep it but adjust to the new rules, or to leave.
In this article, Jos Peters of Merlyn International Tax Solutions Group in Rotterdam, the Netherlands (firstname.lastname@example.org) together with messrs. Jonathan Corrieri (email@example.com) and Silvio Cilia (firstname.lastname@example.org) of Corrieri Cilia Legal in Ta' Xbiex, Malta, examine whether or not tax payers who currently rely on a Dutch Coop to avoid Dutch dividend tax should be advised to trade that Coop for a Maltese holding company. After all, Malta is an EU country and dividends between EU countries should be able to benefit from the EU Parent-Subsidiary Directive. The fact that since 2007 Malta itself does not charge corporate income tax on dividends and capital gains anymore due to a change in its corporate income tax system to avoid economic double taxation (i.e. the introduction of a Maltese participation exemption) in combination with the fact that this EU country does not levy any tax on outgoing dividends, regardless of where the shareholders of the Maltese entity are located, could make Malta the perfect alternative to a Dutch Coop to arrive at a ''0% dividend tax exit'' in comparison to a Dutch BV holding company structure.
It should be noted that the Netherlands will start levying dividend tax from distributions of profit by Coops per 1/1/2012, without any transition or grandfathering rule, so all existing retained earnings of a Coop and its underlying subsidiaries may in ''mala fide'' or ''grey area'' situations be hit by the new Dutch dividend tax claim. This claim will therefore have retrospective effect! Consequently, time is of essence and hence there is no time to lose to start thinking about whether your Coop's new Dutch tax qualification is "bone fide" or "mala fide" and start looking for alternatives.
PLEASE NOTE: "You may have to get the retained earnings out of your existing Coop, including its subsidiaries, before 01/01/2012. At the same time you may want to set up a Maltese holding company based on our below recommendations and replace the Dutch Coop before 01/01/2012. If so, it would even seem logical to consider combining these two action points rather than treating the possibly required reorganisation as a two step event".
The reason warranting us to write this article is simply that the ''Malta exit'' route, at first sight, does not seem to be entirely problem free, which has led many tax practitioners in the Netherlands to use the Coop route in stead. The authors examine below whether or an old anti-abuse provision in the Dutch / Maltese tax treaty, introduced long before Malta joined the EU, should stop multinational groups from replacing their Coop by a Maltese limited liability company as some tax advisers conclude. We do not share that view for reasons set out below.
It is a well known fact that in the Netherlands, dividends distributed by a Netherlands resident company to its EU non-resident corporate shareholder are, under local Dutch tax law, subject to a 15% dividend withholding tax. This withholding tax can be eliminated under EU Parent- Subsidiary directive or reduced under a tax treaty. Art. 4(2) of the Netherlands DWTA, which implements the EC Parent-Subsidiary Directive, provides for an exemption from withholding tax on dividends paid to a qualifying EU parent company owning at least 5% of the nominal paid-up share capital of a Netherlands (qualifying) company. The exemption is subject to and conditional upon anti-abuse and anti-fraud provisions included in some tax treaties and protocols concluded between the Netherlands and other Member States. An example of such a provision is Art. IV of the protocol to the Netherlands-Malta tax treaty which holds that if a structure involving a Maltese legal entity owning shares in a Dutch legal entity has been set up or is being maintained primarily to enjoy the 5% dividend tax rate of that treaty, the regular Dutch dividend withholding rate will nonetheless apply.
This again is a confusing situation: the EU Parent-Subsidiary rules call for 0% Dutch dividend withholding tax as long as the conditions laid down in the directive are satisfied, whilst non satisfaction of the conditions found in the bilateral Dutch / Maltese treaty could lead to a possible 15% Dutch dividend tax, thereby resulting in a total override of the EU Parent –Subsidiary Directive. The main question of course being: although contemplated in Article 1(2) of the EU Parent –Subsidiary Directive, can agreement based anti abuse provisions negotiated between two EU countries actually override the treaty freedoms found in the EC Treaty? Can the application of the EC Treaty freedoms of establishment and capital movement be subject to domestic anti abuse provisions?, meaning that their application is limited to the confines of what a country considers as abusive without having regard as to the true intentions of the subject person? Does the ECJ in Luxembourg have jurisdiction over this apparent mismatch? Would an investor from outside the EU not have total liberty to choose his entry point into the EU and secondly, why would opting for Malta be abusive in any way? Has the Netherlands itself not always advocated, also officially, that such non-EU investors should use the Netherlands as an EU point of entry? Is the Netherlands now forbidding another EU country from doing what it has done itself for the last 40 years? (in fact the Dutch Corporate Tax Act dates back to 1969).
Malta structures have very often been rejected for advance tax rulings in the Netherlands on the basis of the aforementioned anti-abuse article found in the Dutch-Maltese tax treaty that has been in force since 1993. Such rejections were and are still are being issued notwithstanding the fact that Malta has been a member of the EU since May 2004. One could easily argue that before Malta became an EU member state, the rule was in order but subsequent to Malta joining the EU, the rule has lost all its validity. However, in day to day Dutch advance ruling practice, as from May 1, 2004 onwards, unfortunately, any elements of doubt have been used by the ATR team against the tax payer. This by itself has of course also led to the increased attention which Coop structures have received over the last decade. Water always flows to the lowest point and so do tax obligations. Therefore, due to the inability of many international tax practitioners in obtaining and the reluctance of the Dutch ATR team issuing advance tax rulings on Malta exit structures, Coops were recommended.
A deeper analysis of the anti-abuse provision in the Dutch-Maltese tax treaty would in our view have revealed that Maltese entities are in fact less risky than Coops and should have prevailed, but practice often differs from theory in remarkable, non-logical ways. Now, with Coops out of the window in at least part of the cases (we have not seen many Coop structures which would immediately, under the new Dutch rules, qualify as bona fide, to be honest), it pays to look deeper into ECJ case law to see if the EC Treaty rules might supersede the rules of bilateral tax treaties between EU countries which is what we believe.
The conflict between the EU treaty and the Dutch / Maltese bilateral tax treaty; a deeper analysis
The doctrine used in the Netherlands to combat fraud and abuse is a general anti-abuse concept or fraus legis. This doctrine is what the Netherlands will want to apply under the Dutch / Maltese tax treaty, since the treaty itself does not contain any further clues as to what abuse is. Fraus legis is not as such laid down in Netherlands tax law but the doctrine has been developed by the Netherlands Supreme Tax Court, case law and ministerial by-laws. According to these rules, a taxpayer's transaction is considered to be an abuse of tax law (fraus legis) when its sole or main purpose is to frustrate taxation, i.e. tax avoidance is the taxpayer's only or predominant motive, and these actions are, although fully legal by themselves, judged as artificial and are also in conflict with the meaning and purpose of the relevant tax rule, treaty or Directive.
The concept of fraus conventionis, which applies a substance-over-form principle in respect of treaty provisions, should be distinguished from the application of fraus legis. Fraus legis cannot by itself be applied in treaty situations according to a land sliding Dutch supreme tax court case in late 1993. There is in fact only one meaningful corporate income tax related fraus conventionis case in the Netherlands, involving a Dutch corporate tax payer that, after declaring a dividend to its Canadian parent, saw an interposition of a Dutch Antilles entity into the payment loop in order to reduce the Dutch dividend tax rate under the Dutch-Canadian treaty rate to the zero rate applicable in those years to ''intra Netherlands'' dividends. This was seen as clearly abusive by the Dutch Supreme Tax Court and everybody can understand why. There is no other direct relevant Dutch case law on ''fraus conventionis'' than this Canadian case and arguably indirectly the 1993 case known as the ''BNB 1994/259'' which dealt with a re-characterization of income.
Under article 65, par. 1, of the EC Treaty, not only Dutch local transactions but also those involving non-resident shareholders can lead to a denial of an exemption from dividend withholding tax based on a charge of fraud or abuse. This article allows EU member states ''to take all requisite measures to prevent infringements of national law and regulations''. However, this Art. 65 continues to stipulate in paragraph 3 that any anti-abuse measure introduced on these grounds shall not constitute a disguised restriction of the free movement of capital. The ECJ ruled on the incompatibility of any such national arrangements with the free movement of capital in the Amurta case. In Amurta the ECJ found that an EU country which has different requirements for applying the dividend withholding tax exemption in domestic and in EU situations employs rules that are incompatible with the free movement of capital within the EU. It should be noted in this respect that fraus legis has never been used in the Netherlands for dividend payments between Dutch entities other than in the BNB 1994/259 case which involved the conversion and re-characterisation of a dividend subject to dividend withholding tax into a capital gain, not subject to dividend withholding tax (or any other Dutch tax).
The ECJ, in the Commission v. Netherlands case restated the Amurta case holding that dividends distributed by a Netherlands company to its qualifying parent company resident in an European Economic Area country should be exempt from dividend withholding tax under the same conditions that domestic dividends would be exempt. So, clearly, the Dutch national anti-abuse rules have to give way to the EU principles.
In the Avoir fiscal case the ECJ concluded that the rights conferred by Art. 52 of the EC Treaty regarding the freedom of establishment are unconditional and a Member State cannot make those rights subject to the contents of an agreement concluded with another Member State. In both the Fokus Bank case and in the Denkavit Internationaal case reference was made to the Avoir fiscal case. In the Fokus Bank case, the EFTA Court stated that a contracting party cannot make the rights conferred by Art. 40 of the EEA subject to the contents of a bilateral agreement concluded with another contracting party. In Denkavit, the ECJ held that France could not rely on the France-Netherlands tax treaty in order to avoid the obligations imposed on it by the EC Treaty.
EU Member States obviously need to be able to prevent their tax bases from being unduly eroded because of abuse and, according to more recent ECJ case law, in particular Cadbury Schweppes, a national measure restricting the freedom of establishment may be justified on the ground of prevention of abusive practices where it specifically relates to wholly artificial arrangements that do not reflect economic reality with sole aim at circumventing the application of the national legislation of the Member State concerned. This, in particular with a view to escaping the tax normally due on the profits generated by activities carried out by a national of that territory. ''Cadbury Schweppes'' dealt with the question whether the UK CFC legislation (UK taxation of undistributed Irish profits) could be applied to profits generated by an Irish legal entity acting as the treasury center in the group. The ECJ, as a matter of general principle, recognized the validity of domestic anti-avoidance rules like the UK CFC legislation but only in regard to wholly artificial arrangements. In addition, it was established that the mere fact that a resident company establishes a subsidiary in another Member State cannot lead to a general presumption of tax evasion and consequently, cannot justify a measure that compromises the exercise of a fundamental freedom guaranteed by the EC treaty.
This was also confirmed in a general Communication published by the European Commission on anti-abuse measures in the area of direct taxation, in which it was concluded that, provided that there is no abuse, it is perfectly legitimate to take advantage of a more favourable tax regime in another Member State. In other words, tax reduction motives are, in themselves, legal and tax planning across Europe is a legitimate way to reduce a company's tax burden. Tax reasons are business reasons, after all.
It follows that the Netherlands' anti-abuse concept as applied to the Dutch-Maltese tax treaty does not meet the criteria laid down in ECJ case law and is far too generic to qualify as a provision in terms of the EU Parent-Subsidiary Directive. To put it mildly: the Dutch-Maltese anti-abuse provision lost its meaning when Malta joined the EU in May 2004.
Moreover, the ECJ, in the Halifax case, held that the requirement of legal certainty must be observed, so that those concerned may know precisely the extent of their rights and obligations. Governments are not free to leave a high degree of uncertainty around their (tax) measures. In the Netherlands this is certainly a general tax principle: ''if there is doubt, the case should be won by the tax payer, not by the tax authorities: ''in dubio, contra fiscum!''.
The need for certainty implies that general anti-avoidance principles like the one contained in the Dutch / Maltese tax treaty protocol are not allowed under the EU Treaty; only precise and narrowly defined situations of abuse can be accepted from an ECJ viewpoint and the same has always been true for the views of the Dutch Supreme Tax Court. In this respect, the Communication states that, in order to be lawful, national anti-avoidance rules must be proportionate and serve the specific purpose of preventing wholly artificial arrangements.
Consequently, in our view, Malta is a totally acceptable exit against 0% dividend withholding tax from a Dutch holding company. Tax payers who, upon rethinking their Dutch Coop in the light of the upcoming new Dutch dividend tax rule for such entities come to the conclusion that their Coop is likely to fall under the new provisions of the Dutch Dividend Tax Act, or who do not want to take risk with these new provisions because no-one can predict future case law, should, in our view convert from a Coop structure to a Maltese holding company structure.
The final question then is: how can such a conversion be brought about? Several solutions come to mind and each case will need to be examined on a case by case basis to determine what the best solution for that case is:
- the ''members'' is an existing Dutch Coop could be replaced by Maltese entities; this easy move could well bring the Dutch Coop within the restrictions of a ''bona fide'' Coop structure. After all if the Coop was not interposed, the Maltese entity would directly own the subsidiaries and its entitlement to 0% Dutch or other EU countries' dividend tax would render the Coop non-abusive as the same result would be achieved with and without the Coop. This is due to the fact that the Maltese shareholder would be entitled to a 0% dividend withholding tax on Dutch and other EU dividend payments if the Coop had not be present in the first place. This type of restructuring is of course the easiest but it does imply a need to use two or more Maltese entities because a Coop always has at least two ''members'';
- the Coop could be liquidated and its liquidation proceeds (i.e. its assets and liabilities) could be reinvested by the current members in one new Maltese legal entity which – in part or in whole – drops them down into a new Dutch BV;
- the Coop could sell its subsidiaries to a new Maltese holding company or trade its shares in subsidiaries for shares in a new Maltese holding company, whereafter the Coop is liquidated.
No general advice is available on which of these three possibilities is best. Home country capital gains taxation of the Coop members comes into play also, including the possibility to use some form of ''roll over relief "or step-up. These and other tax ramifications if any, in the jurisdictions of the present Coop members will need to be part of the equation and an important side factor is whether these members run an active trade or business or are merely passive holding companies themselves. In the latter case, an application could perhaps be made to an old, but still relevant Dutch so-called Resolution, BNB 1975/11, which holds that a passive Dutch intermediate holding company may still be regarded as an enterprise if its parent(s) run an active trade or business. In a treaty situation, the non-discrimination article of that treaty could be invoked to also make this work for a passive intermediate holding company in the other Treaty State.
However, we do strongly recommend tax payers who currently use a Dutch Coop in their investment structure, to analyse their situation to the full extent and without delay. In our view it may also be time for a second opinion as to the future of the Coop. Many Dutch tax advisers who have recommended Coops in the past, seem to be comforting their clients that the new Dutch rules are ''manageable'' and that ''likely a new advance ruling may be obtained''. We do not share this view and recommend tax payers who cannot certain about the dividend ax future of their Dutch Coop to opt for the ''better safe than sorry'' approach of changing over to a Maltese holding company structure.
We are stand-by for any analysis and / or second opinions you may require on your current Dutch Coop structure. Needless to say that in case the conclusion will be that Malta should play a role in a reorganization, our physical presences in the Netherlands and in Malta and our considerable experience with corporate reorganizations will allow for the speediest advice on and assistance with the matters involved. We reiterate that any reorganization may well have to be completed by 31/12/2011.
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.