Netherlands To Introduce Withholding Tax On Royalties And Interest To Tackle 22 Billion Euros Tax Avoidance

The Dutch Amsterdam Research Bureau SEO, commissioned by the Dutch Ministry of Finance, released a report regarding capital flows through the Netherlands. The report revealed that multinationals moved some €22bn in royalties and interest through the Netherlands in 2016 to avoid tax. To tackle such tax avoidance, the State Secretary will introduce a conditional withholding tax on interest and royalties flowing to low-tax jurisdictions as per 2021.

Capital Flow

SEO has mapped the capital flows pushed through the Netherlands via Conduit Company. The mapping shows that in 2016 € 199 billion of dividends, interest and royalties from the Netherlands has flowed out. The vast majority of that capital, € 177 billion, goes via the Netherlands to countries where a 'normal' tax rate applies, such as countries within the European Union and the US. Meanwhile, another €22 billion in royalties and interest transferred by multinational companies through the Netherlands to facilitate Dutch tax law to do tax avoidance. Further, SEO estimates that the Netherlands hosts 15,000 letterbox companies holding €4.5 trillion.

Conditional Withholding Tax on Interest and Royalties

The Netherlands is seeking to repair reputational damage caused by its permissive tax rules that have allowed shell companies to proliferate. As a follow-up, on 6 November, the State Secretary for Finance sent Letter No. 2018-0000185778 on the approach of monitoring tax avoidance and tax evasion (the Letter) to the Lower house of the Parliament. The Letter aims to reiterate the implementation of the tax avoidance and evasion measures that is to prevent the Netherlands from being used as a conduit through which capital flows to tax havens/low-tax jurisdictions. The main points of the Letter are described as follows:

  • The State Secretary announced that, in 2019, a new legislation would be submitted to the Lower House of Parliament that will introduce a conditional withholding tax on interest and royalties flowing to low-tax jurisdictions as per 2021. Low-tax jurisdictions are jurisdictions (i) with a statutory rate of less than 7%, or (ii) included on the EU blacklist.
  • From 2020, the Netherlands will introduce a "principal purpose test" in its tax treaties. This test allows a country to refuse treaty benefits if a company flows through money via the Netherlands purely and solely to avoid tax.=

Source: Rijksoverheid

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