WorldTrade Executive, Inc.

Practical European www.wtexec.com/tax.html The International Business Information Tax Strategies Source™ REPoRT ON TAX PLANNING FOR INTERNATIONAL COMPANIES OPERATING IN EUROPE

May 2008 Volume 10, Number 5

Articles

Planning Perspective International Tax Structuring Using Dutch Cooperatives: Absence of Withholding Tax Makes Structure Attractive as a Holding Company By Joseph B. Darby III, Thomas van der Vliet (Greenberg Traurig LLP) and Shane Kiggen (Ernst & Young) p. 2

EU--EU Cross-Border Loss Relief-No Big Surprise: Comments to the Judgment in the "Lidl Belgium" Case By Dr. Ingmar Doerr (Lovells LLP) p. 3

Commission Challenges Taxation of Dividends in Four Member States By Geert Dierickx (McDermott Will & Emery/Stanbrook LLP) p. 7

8elgium--VAT on the Supply of Land By Samir Haouari and Veerle cousse« (KPMG) p. 4

France.-Eurozone Rejects French Proposals to Cut Fuel Tax By Daniel Kelly (McDermott Will & Emery/Stanbrook LLP) .. p. 9

Fe Germany-Draft German Tax Act 2009 By Klaus Eicker (Ernst & Young) p. 5

Netherlands-Dutch Holding Company Not "Merely a Conduit," Says Canadian Court By John Wonfor (BOO Dunwoody LLP) p. 6

www.wtexec.com/ets.html NETHERLANDS

Planning Perspective

International Tax Structuring Using Dutch Cooperatives Absence of Withholding Tax Makes Structure Attractive as a Holding Company

By Joseph B. Darby III, Thomas van der Vliet (Greenberg Traurig LLP) and Shane Kiggen (Ernst & Young)

Introduction from Dutch withholding tax. There is a famous Dutch proverb that states, "The This article will begin with an overview of the key art is not in making money, but in keeping it." To help legal and tax attributes of Dutch cooperatives. The article achieve this laudable goal, the Dutch have thoughtfully will then describe how the cooperative holding company provided a Dutch cooperative holding structure that al- structure can provide greater tax efficiency than its lows multinational enterprises and private equity funds predecessor, the BV holding company structure. Finally, to keep a significantly greater after-tax share of the money the article will review some of the advantageous uses to they make. Cooperatives have been a business form used in The Netherlands has both a the Netherlands for well over a century,' However, only recently have tax lawyers fully begun to exploit this famously favorable tax regime and a distinctive vehicle in international tax planning. What vast treaty network. makes a cooperative exciting to tax planners is its unique treatment under the Dutch dividend withholding tax. Unlike its close relatives, the Dutch private or public which Dutch holding companies have traditionally been company (BV/ NV),2 a cooperative is not subject to the put, and describe how these uses may be achieved using 15 percent withholding tax on dividend distributions," the Dutch cooperative holding company structure. The absence of a levy of dividend withholding tax makes the cooperative a logical choice as a holding company. Legal Attributes of a Dutch Cooperative-Not Your In conjunction with the Netherlands' extensive treaty Father's BV network, a cooperative holding structure generally permits The Dutch cooperative has a unique and interesting foreign members of a cooperative to repatriate profits free heritage. However, its legal attributes are, in most respects, fairly prosaic. Like a Dutch limited liability company Joseph B. "Jay" Darby III ([email protected]) is a (BV/NV), a cooperative is incorporated under notarial Shareholder at the Boston office of Greenberg Traurig LLP, deed. However, unlike a Dutch limited liability company, concentrating his practice in the areas of tax law, corporate a statement of no objections' need not be obtained from transactions and intellectual property. He is a lecturer at the Ministry of Justice before the deed can be executed. law in the Graduate Tax Program at Boston University The notarial deed contains the cooperative's articles Law School and an adjunct professor at Bentley College of association, which include a clause stating that the in the Masters in Taxation Program, teaching courses at object of the cooperative is to provide for certain material both schools that include Taxation of Intellectual Property needs of its members pursuant to agreements concluded and Tax Aspects of Buying and Selling a Business. He is between and among them. At least two members are a member of Tax Strategies' Advisory Board, and winner required to incorporate a cooperative; thereafter, however, of the "Tax Writer of the Year-2007" Award. Thomas van a cooperative can continue to validly exist with just one der Vliet ([email protected]) is an Associate in the member. Amsterdam and New York offices of Greenberg Traurig. Once created, a cooperative has "legal personality," His practice is focused on international tax planning, meaning it has an identity separate from that of its including tax minimization of cross-border M&A projects members. As such, it can conclude contracts, and sue and and corporate restructurings. Shane Kiggen will be starting be sued in its own name. There are no restrictions on how with the New York office of Ernst & Young as a Senior the cooperative chooses to address the issue of member Associate in September, where he will focus on tax aspects liability; member liability can be unlimited, limited, or of mergers and acquisitions. He is a recent graduate from excluded, provided that the name of the cooperative Boston University's LLM program in International Tax. Dutch Cooperatives, continued on page 10

2 Practical European Tax Strategies@ May 2008 NETHERLANDS

only if the portfolio investment company is subject to (from page 2) Dutch Cooperatives tax at a rate of 10 percent or more on a taxable base that resembles the base applicable to resident companies or if includes the appropriate suffix indicating the nature of its the portfolio investment company owns real estate that limitations on liability" Furthermore, there are generally equals or exceeds in (fair market) value 90 percent of its no restrictions concerning the nature of activities that a total asset value. cooperative can undertake. For instance, like a limited liability company, a cooperative is permitted to act as Withholding Taxes a finance company or an intellectual property conduit The Netherlands does not impose withholding tax on company;" either inbound or outbound royalty or interest payments. Cooperatives are not designed to have volatile Both limited liability companies and cooperatives have memberships. Technically, a member in a cooperative exploited this important tax rule to their advantage. usually may not transfer his or her interest to another The Netherlands does, however, impose withholding party. However, unless the Articles provide otherwise, tax on dividend distributions. Article 1, section 1 of the there are no restrictions on the ability of current members Netherlands' Dividend Withholding Tax Act of 1965 to surrender their membership interest or on the ability of provides that a dividend withholding tax shall apply to third parties to become members. Typically, each member any company whose capital is wholly or partially divided has the right to cast one vote. However, the articles of into shares. Under Dutch law, a limited liability company association may grant greater voting power to certain is both a "company" and has capital divided into shares. members. Generally, there are no restrictions as to the type Therefore, it is required to withhold tax from dividend of entities that may become members in a cooperative. distributions to its shareholders at the current withholding Unlike other popular Dutch business entities, such as tax rate of 15 percent. However, since a cooperative is neither classified as a "company" nor classified as an entity with its capital In conjunction with the Netherlands' divided into shares, profit distributions from a cooperative extensive treaty network, a cooperative to its members are not subject to the Dutch dividends withholding tax.10 As discussed below, the absence of holding structure generally permits withholding on dividends makes the Dutch cooperative foreign members of a cooperative a valuable tool in variety of tax-planning structures. to repatriate profits free from Dutch Taxation of Foreign Members withholding tax. A foreign person is subject to Dutch income tax to the extent that person receives income from a Dutch source. As a general rule, foreign members of a Dutch cooperative the limited liability company, there are no minimum capital are considered to have income from a Dutch source in requirements. Importantly, a cooperative does not have the event that their interest constitutes a "substantial capital divided into shares. Instead, "contributions" are interest,'?' Dutch tax law provides that a member's interest credited to the contributing member's account. Profits are in a cooperative is "substantial" if that member either is shared in accordance with the balance of each member's entitled to 5 percent of the cooperative's profits or to 5 account at the end of the fiscal year. percent of the cooperative's liquidation distributions or enjoys a right to exercise at least 5 percent of the votes in Tax Attributes of a Dutch Cooperative the general meeting of the cooperative's members. Corporate Income Tax On the surface, these "substantial interest" rules For corporate income tax purposes, a cooperative is appear to make a Dutch cooperative an unattractive vehicle taxed much like a Dutch limited liability company (BV / for foreign ownership interests that exceed the 5 percent NY). Both are subject to Dutch corporate income tax at threshold. However, both treaty law and Dutch domestic the current rate of 25.5 percent/ and the income base on law may provide a foreign member of a Dutch cooperative which the tax is imposed is roughly similan" Furthermore, with relief from these rules. The Netherlands has concluded like the limited liability company, a cooperative is eligible more than 80 tax treaties, many of which reserve the right to partake in the all-important "participation exemption" to tax a person in that person's country of residence. regime. This favorable aspect of the Dutch tax code Therefore, so long as the cooperative member resides in a exempts from tax dividends and capital gains received country with which the Netherlands has concluded a tax from shares of certain "subsidiary" business entities. treaty, that member will generally not be subject to Dutch To qualify for the exemption, a taxpayer generally must tax by virtue of the "substantial interest" rules. own 5percent or more of the subsidiary company's share If treaty protection is unavailable, foreign members of capital," However, if the taxpayer holds an interest in a a Dutch cooperative may seek refuge from the "substantial portfolio investment company, the exemption is available Dutch Cooperatives, continued on page 11

10 Practical European Tax Strategies@ May 2008 NETHERLANDS

have also moved aggressively to attract international (from page 10) Dutch Cooperatives business. However, even though there are more viable choices than ever before, the Netherlands remains one of interest" rules under the "enterprise exception," a statutory the world's most popular jurisdictions. exception under Dutch domestic law. Under this provision, Generally, there are three broad reasons that explain the if the foreign member operates an "enterprise" to which continued popularity of the Netherlands as a jurisdiction. its cooperative membership can be attributed, the foreign First, the Netherlands has a famously favorable tax regime. member is deemed not to have Dutch source income, and Features such as the participation exemption, the absence hence will not be liable to tax in the Netherlands by virtue of withholding on royalty and interest payments, and of the cooperative membership on its income from that beneficial group financing rules make the Netherlands an membership. Generally, the "enterprise" requirement is ideal jurisdiction in which to set up a holding company. satisfied if that member exercises an "active influence" Second, the Netherlands has a vast treaty network, which on the management of the operating company held by the enables subsidiaries and/ or intra-group debtors and cooperative. The "active influence" requirement may be licensees to benefit from a favorable regime of withholding satisfied if the member or its officers sit on the operating taxes, thereby facilitating a tax-efficient repatriation company's Board of Directors and have actual and active of earnings from foreign enterprises to the ultimate involvement and responsibilities in that board. Moreover, shareholders. Importantly, many of the Dutch bilateral under case law, the "enterprise" requirement may be treaties provide for the elimination of withholding tax on satisfied when the member accepted high risks and its qualifying dividends. (The potential to obtain zero percent investment research and monitoring costs were substantial withholding on dividends distinguishes the Netherlands in comparison to the size of its investments." from other jurisdictions, such as Luxembourg, where one Importantly, since there is little guidance concerning needs to effect a partial liquidation of the holding company the application of the "enterprise exception," it is wise in order to repatriate dividends free from withholding.) to seek an advance tax ruling from the Dutch authorities Third, various non-tax economic and business factors- to confirm that the exception applies to a particular such as the stability of the Netherlands' political system, transaction. the quality of its infrastructure, and easy access from basically anywhere through the seaports of Rotterdam Tax Planning Opportunities and Amsterdam as well as Amsterdam Schiphol Airport, Using Dutch Holding Company Structures to Repatriate the attractive tax regime for logistic activities and the Profits in a Tax-Efficient Manner quality of life, its strong legal and financial services, and Perhaps the most basic international tax-planning its geographic location at the heart of the EU-make the objective is to structure international operations so that the Netherlands a popular choice. ultimate owners can repatriate profits from foreign activities in a tax-efficient manner. Withholding taxes on dividends Dutch Holding Company Structures and capital gains, in particular, have long been a bugbear Historically, the most common Dutch holding of multinational enterprises. Moreover, given the growth Dutch Cooperatives, continued on page 12 in private equity investments worldwide, the demand for BV Holding Company Structure tax-efficient cash repatriation strategies has become even more pressing." Dutch holding company structures offer a US Parent basic, yet effective, solution to this problem. The Dutch were early pioneers in developing tax and corporate laws that made the Netherlands an attractive BV jurisdiction for international holding companies. Today, however, competition for such companies is fierce and ever growing. The Netherlands and Luxembourg have long been popular options/ and in recent OpCo OpCo OpCo years Ireland, Cyprus, Malta and Madeira (among others)

May 2008 Practical European Tax Strategies@ 11 NETHERLANDS

fund). In many cases, the dividends may be repatriated free Dutch Cooperatives (from page 11) of withholding tax under either the EU Parent-Subsidiary Directive or a tax treaty. For example, the U.S.-Netherlands company structure has been a three-tier structure in tax treaty under very specific circumstances provides for which a Dutch BV holding company is interposed the elimination of withholding tax on certain dividends between a parent compan~ which is typically located in paid by the Dutch companies to their U.S. shareholders. the European Union (EU) or a country with which the Despite its popularity the BVholding company struc- Netherlands has concluded a beneficial tax trea~ and ture is not without its drawbacks. The principal shortcom- one or more operating companies, which may be located ing stems from the fact that dividend distributions from the in the EU, a treaty country, or a non-treaty country. BV to its shareholders are subject to dividend withholding The structure diagrammed on page 11 can generate significant tax efficiencies. Example: First, the OpCos generate income (including, Most Netherlands tax treaties merely potentially capital gains and! or liquidation proceeds) from reduce the dividend withholding tax their operations. This income is potentially subject to tax in the source country but it can be reduced through the rather than eliminate It In full. implementation of a tax-efficient financing arrangement.P Next, income from the OpCos is distributed in the form of a dividend to the Dutch BV.If the dividends are paid by a taxes. Foreign investors may be able to mitigate the harsh- subsidiary resident in an EU member state, the dividend ness of this tax by invoking treaty protection. Nearly all of will be tax free pursuant to the EU Parent-Subsidiary the tax treaties concluded by the Netherlands substantially Directive, provided that the BV owns at least 15 percent reduce the withholding tax rate on outbound dividend of OpCO.1SEven if the dividend is not paid by a subsidiary payments. For instance, the United States-Netherlands tax company resident in the EU, the dividend may still escape treaty reduces the withholding tax rate on outbound divi- withholding if the subsidiary is resident in a country dend payments to 5 percent where the beneficial owner of with which the Netherlands has a tax treaty, and that the dividend holds at least 10 percent of the voting power treaty exempts dividends from withholding." Income, of the dividend payor. Furthermore, the Netherlands has including capital gains, derived from OpCo is exempt from even concluded a handful of treaties that provide for the Dutch corporate income tax pursuant to the participation full-fledged elimination of dividend withholding taxes. The exemption. Income is then distributed by the Dutch BV to U.S.-Netherlands trea~ for example, exempts intercompany its shareholders (e.g., a U.S. multinational or private equity dividends from withholding taxes provided certain (rela- tively stringent) conditions are met," Dutch Cooperative Holding Company Structure However, relying on a tax treaty has its drawbacks. First, most Netherlands tax treaties merely reduce the dividend withholding tax rather than eliminate it in full. Second, relief US Parent from dividend withholding taxes is only available to foreign investors resident in countries with which the Netherlands has concluded a tax treaty. While the Netherlands tax treaty network is broad, it certainly does not Coop extend to all jurisdictions. Importantly it does not include Bermuda, the VIrgin Islands, or the Cayman Islands, all three of which are home to a significant number of private equity funds and BV hedge funds. Thus, for this important class of investors, the dividend withholding taxes substantially reduce the usefulness of the Dutch BVholding company structure. In addition, reliance on a opeo opeo opeo Netherlands tax treaty can be cumbersome when the BV's Dutch Cooperatives, continued on page 13

12 Practical European Tax Strategies@ May 2008 NETHERLANDS

enacted, Dutch cooperatives would be eligible to take Dutch Cooperatives (from page 12) advantage of the interest box regime on the same terms as BVs.18 shareholders are of diverse residence. Consider the (not The standard financing arrangement is as follows: uncommon) situation in which a fairly large group of investors, each resident in a different country, structure Standard Financing Arrangement various European holdings through a BVholding company. In order to obtain the desired zero percent withholding rate on dividends, each investor must qualify under a treaty concluded between the Netherlands and the country in US Parent which that investor resides. Some investors may not reside in a country with which the Netherlands has concluded a Laan~ tint erest tax treaty, or, even if they do, the investors may be unable, I for whatever reason, to obtain the benefits of that treaty. Fortunately, the advent of the Dutch cooperative Coop holding structure has largely solved these problems. In the Dutch cooperative holding structure, a two-tier structure consisting of a cooperative and a BVis interposed Laan ~ I tint erest between the parent company and its subsidiary operating companies. OpCO As the diagram on page 12 illustrates, the BV is typically retained in the Dutch cooperative structure. The reason for this is mostly pragmatic: although both the cooperative and the BV are included in the EU parent Example: First, the U.S. Parent makes a loan to the subsidiary directive, the BV is simply a legal entity that Coop. Next, the Coop makes a loan to OpCo. The terms third parties are much more used to dealing with compared of the loans are similar, except that the Coop (as head of to the cooperative. the Dutch fiscal unity) must earn a small "spread" (i.e., Mechanically, the Dutch cooperative holding structure the net of interest income over interest expense) reflecting is identical to the BV holding company structure, except its functions performed and risks assumed in order for the financing arrangement to be respected. OpCo pays Coop interest on the loan, which would be deductible The Netherlands does not Impose from OpCo's taxable income, thereby reducing source- state taxation. Since the Netherlands does not impose withholding tax on either Inbound or withholding tax on outbound interest payments, the outbound royalty or interest payments. interest will not be subject to withholding tax in the Netherlands. Under the new "interest box" regime, the difference between intercompany interest income and that all dividend distributions will escape withholding tax, intercompany interest expense would be subject to tax at whether the beneficiary qualifies for treaty benefits or not. a special statutory rate of 5 percent. After-tax profits of the The dividend distribution by the BVto the cooperative Coop may then be distributed without incurring a further is also not subject to dividend withholding tax. Dutch withholding tax. Importantly, the level of comfort involved in this Advantageous Uses of the Dutch Cooperative Holding structure is high. Dutch tax authorities have made clear that Company Structure the back-to-back financing arrangement described above Importantly, since Dutch law does not impose any will be respected so long as the Dutch companies comply restrictions on the business activities that a cooperative with the Advance Price Agreement (APA)/ Advance Tax may carry out, the Dutch cooperative holding company Ruling (ATR)regime. These rules provide that a transaction structure may be used in all the same tax planning will be respected provided that there is both "sufficient structures as a BY. substance" in the Netherlands and the company runs an 1. Tax-EfficientFinancing Arrangements "economic risk" with regard to the relevant activities. The Netherlands is famous in the tax-planning The "substance" requirement is considered to be community for its favorable financing rules, most notably satisfied if the following are conditions are met: the absence of withholding tax on outbound interest • at least half of the Board of Directors are resident in the payments. These rules may even become more favorable Netherlands and are capable of fulfilling their duties with the possible introduction of an "interest box" regime. and responsibilities as directors within the framework Under this regime, both intercompany interest expenses of the international group's involvement; and income would be taxed in a separate taxation box, leading to an effective tax rate of roughly 5 percent. If Dutch Cooperatives, continued on page 14

May 2008 Practical European Tax Strategies@ 13 NETHERLANDS

Royalty Conduit Company Structure Dutch Cooperatives (from page 13)

• all major management decisions are made in the Netherlands; IPOwner • the cooperative or company's primary bank account (Tax Haven) is controlled from the Netherlands; • the cooperative or company's financial records are kept Lice nse+ t Royalty in the Netherlands; I • the cooperative or company has complied with Dutch tax laws and paid all taxes due; BV • the cooperative or company has a corporate seat in the Netherlands; Sub-Lice ns4 tRo yalty • the cooperative or company has sufficient equity to I conduct its activities. The "economic risk" requirement may be met either Licensee by complying with a statutory safe harbor or by obtaining a special exemption from Dutch tax authorities. The safe harbor provides that the economic risk requirement is met when the Dutch cooperative or company has equity Example: First, IP Owner licenses its trademark, trade to cover at least 1 percent of the risk involved with those name, and associated goodwill to BV for which it receives activities, or two million euro (lower threshold applies). a royalty payment of, for example, 10 percent of gross Thus, so long as these requirements are met, a Dutch sales of Licensee minus some minor income for the BV. cooperative may be used as an intermediary in a back-to- Since the Netherlands does not impose withholding tax on back financing arrangement. outbound royalty payments, the royalty payment from the In financing structures, Dutch tax laws on anti-base BV to the IP Owner is not subject to Dutch withholding tax. erosion and thin capitalization also obviously play a Moreover, since the intellectual property is located in a tax significant role, but a full analysis of these provisions haven jurisdiction, IP Owner will be able to withdraw the exceeds the purpose of this article. The same applies for profits from the license at low or zero tax rates. In the second the use of hybrid financing instruments, as a result of leg of the transaction, the BV sublicenses the intellectual which the interest income in the Netherlands would not be property to the Licensee for which the BVreceives a royalty considered to constitute taxable interest income but rather of 10 percent of gross sales of the Licensee. H the Licensee (possibly) exempt dividend income. resides in an EU Member State or in a country with which 2. Tax-Efficient Intellectual Property Licensing the Netherlands has concluded a tax treaty, this royalty Arrangements payment may not be subject to any withholding tax that As noted earlier, the Netherlands does not impose might otherwise be imposed on outbound royalties by the withholding tax on outbound royalty payments. Licensee's country as a result of application of the relevant Nevertheless, taxpayers have historically shied away from tax treaty or EU interest and royalty directive. The income "parking" their intellectual property in the Netherlands for the BV ("spread," i.e., the net of royalty income over because doing so would subject any royalty income royalty expense) will be subject to Dutch corporate income derived from licenses of that intellectual property to the tax at a maximum rate of 25.5 percent. Dutch corporate income tax rate, currently at 25.5percent," As was the case with the financing arrangement Instead, taxpayers have found it far more tax-efficient to described in the previous section, the licensing arrangement set up a "royalty conduit company" in the Netherlands, described above will be respected, provided that the Dutch which arrangement, as its name suggests, acts as a conduit BV at the center of the structure complies with the Dutch between an owner or creator of intellectual property, often tax authorities' Advance Pricing Arrangement (APA)/ resident in a low-tax jurisdiction, and a person or entity Advance Tax Ruling (ATR) regime, the substance and the that desires to use the intellectual property in a third economic risk requirements. jurisdiction." A final comment on the IP licensing tax opportunities Traditionally, the licensing arrangement has been would be that Dutch taxable income from IP actually effected through a BY,which acts as the royalty conduit created and owned by a Dutch company would be subject company. Since the Dutch cooperative holding company to roughly 10 percent corporate income taxation, instead structure employs a BY,taxpayers might use this structure of the standard 25.5 percent. as well. However, the principal benefit of a Coop-no 3. Deferral Structures withholding tax on dividends-is not usually a major Thus far, this article has focused on using Dutch feature in a royalty conduit structure. cooperatives to repatriate profits from international Dutch Cooperatives, continued on page 15

14 Practical European Tax Strategies@ May 2008 NETHERLANDS

As was the case in previous examples, this income is Dutch Cooperatives (from page 14) potentially subject to tax in the country in which each OpCo resides, but can be reduced through implementation of a business activities in a tax-efficient manner and using tax-efficient financing arrangement," Income from OpCos cooperatives and/ or BVs for intra-group financing and may be paid or distributed to Dutch BV under beneficial licensing. However, their utility is not strictly confined withholding tax rates under either the EU Directive or a to that area. International tax planning specialists have tax treaty. Income derived from OpCo, including capital recognized that Dutch cooperatives can be used equally gains, would be exempt from Dutch corporate income tax well in U.S. tax deferral structures. Again, the value of under the participation exemption. Distribution by BV to the Dutch cooperative to this structure is based on, in the Coop is neither subject to Dutch dividend withholding tax absence of withholding, dividend distributions from the nor constitutes taxable income for the Coop. Income from cooperative to its members. the Coop can be distributed to the CV without incurring As the diagram below illustrates, in the standard Dutch withholding tax. Taxation of the income in the CV deferral structure, a Dutch hybrid entity (a CV) is can be deferred indefinitely. interposed between the parent company and the Upon implementation of the Protocol to the U.S./ Dutch cooperative holding structure. In this structure, Netherlands tax treaty, January 1, 2005, it seemed that the the Dutch CV is a "reverse hybrid entity," meaning benefits of this structure would no longer apply. However, it is treated as transparent for Dutch tax purposes the Dutch State-Secretary of Finance announced on July and is treated as a corporation for U.S. tax purposes. 6, 2005, that the structure would still be accepted, if the Furthermore, the U.S. parent "checks the box" with CV participates in a Dutch resident entity (e.g., a BV or respect to the Dutch cooperative and the BY. Thus, for cooperative) that performs real and substantial activities U.S. tax purposes, income received by the BV from the in or via the Netherlands. The Dutch tax authorities can OpCos, including interest and royalties, will be deemed be requested to issue up-front certainty with regard to the the active income of the CV. Therefore, the CV will not determination of whether this is the case or not.

Deferral Structure Conclusion With its favorable tax regime, extensive treaty network, and first- class infrastructure, the Netherlands US Parent has long been a popular jurisdiction through which to structure ownership of international enterprises. Today, thanks to the unique characteristics of the Dutch cooperative, the Netherlands may soon become even more popular. The absence of withholding tax on dividend distributions makes the cooperative Coop holding structure a much more tax- efficient structure than its already successful predecessor, the BVstructure. Moreover, it is capable of being used in BV all the same tax structures concerning financing, intellectual property and U.S. tax deferral that made the BV holding company a mainstay in international transactions.

OpCo OpCo OpCO lSee Koen Franken and Gerben van der Steege, "The Evolution of the Dutch Dairy Industry and the Rise of Cooperatives," August 14,2006. URL: http://econ.geo.uu.nl/peeg/peeg0608. be subject to either PFIC rules or the CFC anti-deferral pdf (March 25, 2008). The origin of cooperatives in the Netherlands regime. can be traced to the industrialization of the dairy industry in the late nineteenth century. At this time, sweeping improvements in milk As the following example shows, this structure permits production technology increased the scale of milk production, spurring U.S. taxpayers to defer income derived from their foreign many dairy farmers to transporttheir dairy products to nearby factories operations indefinitely: for processing. However, given the high transportation costs, farmers Example: OpCos earn income from their operations. Dutch Cooperatives, continued on page 16

May 2008 Practical European Tax Strategies ® 15 NETHERLANDS

authorities almost always asked to provide certainty in advance on Dutch Cooperatives (from page 15) the tax-characterization of the cooperative (i.e., the fact that it is not subject to the Dutch dividend withholding tax). uThis rule is not specific to cooperatives. Foreign persons are also were effectively forced to transport their products to the nearest factory, subject to Dutch tax if they have a "substantial interest" in a Dutch thereby permitting factory owners to set monopoly prices. Unwilling BV/NV. Throughvarlous caselaw and ministerial decrees, membership to pay such prices, dairy farmers responded by forming cooperatives. in a cooperative could be put at par with being a shareholder in a Pooling their resources permitted farmers to exploit the processing Dutch BVINY. technologies offered by the factories at significantly lower transaction 12JJutchSupreme Court, ruling number 35.695, dated October 25, 2000, costs. Over the ensuing years, the use of cooperatives spread to all VIN 2000/49.16. comers of the Dutch agricultural sector, and even into other prominent I3Jn the typical private equity deal, a private equity fund purchases sectors of the Dutch economy, such as banking services. a target company, whips it into shape, and then takes it public-all 2fhe U.S. analog of a BV is an LLC and the U.S. analog of a NY is a within five to seven years of the initial acquisition. Given the quick "C" corporation. Like their U.S. counterparts, the BV and the NY are turnaround, the absence of a tax-efficient exit strategy (i.e., one that taxed similarly. avoids withholding taxes on capital gains) can be fatal to the success 3See Dividend Withholding Tax Act of 1965, Article 1, section 1. of cross-border private equity acquisitions. 4Astatement of no objections will be issued provided that the persons 14geeSection N. seeking to incorporate pass various background investigations. 15fifteen percent is the current threshold percentage dictated by the Ordinarily, the process takes two to three weeks. parent subsidiary directive; this percentage is reduced to 10 percent in 5Jf the cooperative has unlimited liability, meaning its members and 2009. As already indicated, the dividend receipt by the BV would be tax former members (one year) are liable for any deficits in the event of free in the Netherlands if the Dutch participation exemption applies, dissolution. the appropriate suffix is W.A. If the cooperative has limited which among others requires a 5 percent minimum shareholding. liability, meaning its members are liable for deficits up to a specified 16For instance, provided that certain conditions are met, dividends amount in the event of a dissolution. the appropriate suffix is B.A. If paid by a U.S. subsidiary to its parent corporation resident in the the cooperative is excluded from liability, meaning its members are Netherlands are not subject to withholding taxes; Article 10(3) U.S.- not liable for any deficits in the event of a dissolution. the appropriate Dutch tax treaty. suffix is U.A. 17Specifically, the following requirements must be satisfied: First, the 6SeeSection N. beneficial owner must have owned shares representing at least 80 'The latest enactment of "step-up rates," which took effect on January percent of the voting power of the company paying the dividends for 1,2008, provides for a mildly more progressive regime. Under the new at least a 12-month period ending on the date the dividend is declared. rules, corporate income taxpayers are taxed at 20 percent on their first This 12-month holding period requirement effectively requires a U.S. €40,OOOof taxable income and at 23 percent on taxable income above parent company to wait one year before it may withdraw profits £rom €40,OOOand below €200,OOO. its Dutch BV holding company free from withholding tax. In highly "The chief exception is that, whereas distributions from cooperatives leveraged acquisitions, where the profits of the acquired enterprise are to member-individuals are deductible £rom a cooperative's taxable often needed immediately to service the acquiring corporation's debt, income, dividend distributions from a limited liability company to this waiting period can be highly inconvenient. Second, the beneficial shareholder-individuals are not. owner of the dividends must have either (a) owned shares representing With respect to an interest in a Dutch cooperative, no quantitative at least 80 percent of the voting power in the company paying the requirements need be met; membership in a cooperative constitutes a dividends before October 1, 1998 or (b) be a "qualified person" under qualifying participation per se, either of two specific provisions included in the treaty's "Limitation lOJ:tis, however, generally considered possible that very specific on Benefits" clause. With respect to beneficial owners whose interest additions to the cooperative's articles of association may qualify it as antedates October 1, 1998, meeting the criteria for a "qualified person" an entity having a capital divided into shares, and/or that the use of can be quite difficult particularly fornon-listed entities with significant a cooperative as a holding company as such is not acceptable from numbers of foreign members. If the beneficial owner fails to meet either the Dutch tax authorities' perspective. This is why the Dutch tax prong of this second requirement, it is still technically possible to obtain the dividend withholding, i.e., by obtaining a grant of treaty benefits by a competent Subscribe Today to: authority. However, the odds of success are slim and Practical European Tax Strategies the procedure is known to be extremely lengthy and expensive. Q $818 one yearlUS delivery Q $868 one yearlnon-US delivery 1"fhe European Commission is currentlyinvestigating Mail your order to: whether the interest box regime is acceptable from a WorldTrade Executive, Inc., P.O. Box 761, Concord, MA 01742 USA, EU perspective. or place your order by fax at: 978-287-0302, or phone at: 978-287-0301 19Joseph B. Darby ill and Maya Chose, "When Tax Planning Rocks: How the Rolling Stones Went Dutch Credit Card # __ ....,.--__ -::-:-_---:-_-=-::---:---=- _ to Cut Taxes-The Untold Story of a 'World Famous Q VISA Q Mastercard Q American Express Accountant' Named Mick Jagger," Practical U.S.! Expiration Date: _ International Tax Strategies, Vol. 11, No. 12, June 30, Signature _ 2007. HoweveI; it should be noted that an important new regime made it substantially more tax efficient Name _ to own certain types of intellectual property in the Title _ Netherlands. The "patentl royalty box" regime, which Company Name _ took effect January 1, 2007, provides for an effective Address _ 10 percent tax rate on income, including royalties, related to a patent obtained on self-developed City ---:- _ intangible assets. State/Country Zip, _ 2°http://www.somo.nl/html/ paginas I pdf I Telephone _ netherlands_tax_haven_2006_NL.pdf 21SeeSection rv a Fax

16 Practical European Tax Strategies@ May 2008