Netherlands: Corporate Non-Resident Taxation

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Whether or not a company is deemed resident for tax purposes has important fiscal consequences. A company is resident in Holland if either:

• Incorporation: The company was incorporated in Holland.

• Central Management & Control: The company was not incorporated in Holland but central management and control is effected from the Netherlands.

A company which is incorporated in Holland is always tax resident in Holland irrespective of whether or not it migrates to a foreign jurisdiction. A company incorporated in a foreign jurisdiction which migrated to Holland but which subsequently re-domiciles to a foreign country can lose its Dutch tax residential status so long as central management and control is no longer exercised from Holland.

Non-resident companies are only assessed on certain sources of income arising in Holland. They are not assessed on the following sources of Dutch income:

• The Profitable Sale of Shares in a Dutch Registered Company: Any capital gains realized by a non-resident corporation on the disposal of its shareholding in a Dutch registered corporation is free of tax unless the non resident company has a "substantial interest" in the Dutch registered corporation. A non-resident corporation is deemed to have a "substantial interest" in a Dutch registered company if for a period of 5 years prior to the disposal, its shareholding exceeds 33% of the nominal issued share capital of the Dutch registered corporation.

• Dividend Income from Shares in a Dutch Registered Company: any dividend income received by a non-resident corporation through its shareholding in a Dutch registered corporation are free of an assessment to corporate income tax unless the non resident company has a "substantial interest" in the Dutch registered corporation. A non-resident corporation is deemed to have a "substantial interest" in a Dutch registered company if for a period of 5 years prior to the disposal, its shareholding exceeds 33% of the nominal issued share capital of the Dutch registered corporation.(N.B. Dividends paid to a non-resident company are subject to a standard withholding tax rate of 15% which rate may be considerably reduced where the non resident corporation is resident in a jurisdiction with which Holland has a double taxation treaty).

• Sale of Dutch Real Estate at a Profit: the non-resident corporation is not subject to any capital gains assessment on the sale of Dutch real estate provided the non- resident corporation does not trade in Holland through a permanent establishment or branch. (N.B. Rental income from Dutch real estate owned by a non-resident corporation is subject to tax in Holland).

• Interest Repayments on Loan Secured on Dutch Real Estate: Loan interest repayments to a non-resident corporation on a mortgage secured on Dutch real estate are free of corporate income tax in the Netherlands. Furthermore there are no withholding taxes in Holland on loan interest payments.

• Administrative or Liaison Office: Whilst the income of a non-resident company permanent establishment or branch in Holland is taxable the activities of an administrative or liaison office which does not trade in the country but simply provides information or administrative services are not.

• Corporation Tax Rate: Corporate income tax rates have been falling since 2006 and for 2010 are 20% on income up to EUR200,000 and 25.5% on income exceeding EUR200,000. From 2011, a three-tier system will be introduced, with the 20% rate applying to income up to EUR40,000, 23% on income above EUR40,000 and not exceeding EUR200,000 and 25.5% above EUR200,000.

In anticipation of confirmation of the Marks & Spencer ruling on cross-border loss relief by the European Court of Justice, the government proposed to allow relief for losses incurred in other EU Member States. In addition, participation rules would be relaxed by eliminating the nonportfolio and "subject to tax" requirements. For "passive" participations, a "sufficient" tax rate test (possibly 10%) would be introduced.

Ruling in December 2005, the ECJ stated that companies could offset losses incurred by foreign subsidiaries as long as there was no "real possibility" that these could be absorbed at the local level at the time the claim was made.

According to the ruling, M&S could therefore claim tax relief for losses outside its home market, with the proviso that loss-making subsidiaries were unable to claim tax relief in their country of establishment.

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