Guest Article: International Tax Planning – Australian Investor establishing Holding Company in EU Tax Jurisdiction (Case Treatment)

INTERNATIONAL TAX

Introduction – Holding Companies

A Holding Company is a company that does not carry out operations, activities, or any other form of active business. Instead, it owns – ‘holds’  assets. These assets can be in the form of:

  • Shares of stock in Other Corporations;
  • Limited Liability Companies;
  • Limited Partnerships;
  • Private Equity Funds;
  • Hedge Funds;
  • Publicly Traded Stocks;
  • Bonds;
  • Real Estate;
  • Song Rights;
  • Brand Names;
  • Patents;
  • Trademarks;
  • Copyrights; and/or
  • virtually anything else that has Value.

Generally, in the shoes of a foreign investor, fundamental considerations when determining the ‘host country’ when establishing a Holding Company are the Tax implications on all intra / inter-jurisdictional payments, inter alia:

  • Tax implications for payments to host country
  • Tax implications for payments to home country
  • Quantum of Tax for payments to home / host country
  • Double Taxation Treaties / Agreements between home – host countries
  • Holding rules, Tax Consolidation rules, and any other applicable Tax-related rules
  • Tax avoidance rules / measures

CASE TREATMENT

Criterion:

  1. Australian Investor
  2. Holding Company to be based in an EU Jurisdiction, i.e. a European Country.

Australia – The Netherlands Double-Tax Treaty v. Luxembourg

The Netherlands has acceded to a Double Tax Treaty with Australia. This is of much significance as although Luxembourg may exhibit a more promising Tax regime, this Australia-The Netherlands Double-Tax Agreement has considerable benefits to reap. Further, Netherlands has entered into Double-Tax Agreements with another 85 countries. This will incur many benefits to the investor in future expansion internationally, where there will be a wide selection of such countries to expand into, because the effect of Double-Tax Treaties is essentially to exempt the imposition of Tax twice upon the same profit, where such Tax has already been paid to one country. Effectively, there will be more remaining profit.

The Netherlands’ Residence Rules v. Ireland

The Netherlands’ Residence Rules are more conducive for company incorporation. These rules are simple, straightforward and benefits readily reap-able – A company incorporated under Dutch Law will be considered to be resident in The Netherlands and enjoy similar benefits on the applicable Tax rates, exemption rules and Double-Tax Agreements with the local entities of the Country.

In Ireland, the company will be considered as a resident only if ‘central management and control’ is exercised in Ireland: which effectively makes it harder to be recognized to be recognized as a resident company as compared to The Netherlands.

The Netherlands’ Corporate Income Tax

‘Progressive Taxation System’

  • First  € 40,000 = 20%
  • Next € 160,000 = 23%
  • Excess from which =25.5%

The Netherlands’ Progressive Taxation System is designed to subject business will larger incomes to a higher percentage of income tax whereby lowering the Tax burden shouldered by those with lower incomes. The effect is that companies with lower profits enjoy lower income Tax rates whereas companies with higher profits attract higher income Tax rates. This Income Taxation system aids small businesses to compete with bigger companies by allowing the former to retain more of its monies.

The Netherlands’ Withholding Tax Rate v. Ireland’s

The Netherlands’ Withholding Tax rate for dividends paid by Dutch companies is 15% and may be reduced even to 0%. There are also exemptions for payments to parent companies. Therefore, the company will be liable to paying less Withholding Tax or no Withholding Tax at all for dividends paid out from the The Netherlands’ Holding Company to the parent company if the company is recognized as a Dutch company

Irish paid-out dividends are taxed at 20% and the exemptions are available only for Irish recipient companies, EU parent companies, treaty residents and companies controlled by treaty residents – more limited than that of The Netherlands.

Moreover, distributions to a domestic parent holding more than 5% of shares will be exempt, pursuant to The Netherlands’ implementation of the European Union Parent – Subsidiary Directive.

The Netherlands’ Tax Losses Rules

The Netherlands’ Tax regime allows the company to carry its Tax losses 9 years forward and 1 year backward. This essentially means that:

  • the Company is allowed to be in loss for 9 years consecutively
  • deductions of Taxes payable based on a years profit is permissible by the previous year’s losses (1 year)

The Netherlands’ Tax Consolidation Rules v. Ireland’s

The Netherlands’ Tax Consolidation rules stipulate that Parent Companies, together with their 95% subsidiaries may apply for ‘fiscal unity’ to enable it to file what is in effect a consolidated tax return. By comparison, Ireland has no such provision.

The Netherlands’ Real Estate Transfer Tax

The transfer of Real Estate and Real Estate Companies incur a 6% Real Estate Transfer Tax. Some exemptions may apply.

The Netherlands’ Controlled Foreign Companies Rules (“CFC”) – Absence Of

The Netherlands does not have rules equivalent to ‘Controlled Foreign Companies’ rules in other jurisdictions. The CFC rules are to prevent erosion of the domestic Tax base and to discourage residents from shifting income to jurisdictions that do not impose tax or that impose tax at low rates. Typical conditions  that attract application of such regimes are such as:

  • a domestic taxpayer “controls” the foreign company;
  • the foreign company is located in a ‘low Tax’ jurisdiction or a jurisdiction that imposes a lower tax rate c.f. that of the shareholder’s country.

Thus, as The Netherlands has no CFC rules, no country will be able to impose tax on nationally derived income.

Conclusion

Where seeking a Country to establish a Holding Company with:

  • no or low withholding taxes on dividends from subsidiaries to the Holding Company;
  • no or low Income Tax
  • low inter-jurisdictional Taxes on incoming dividends; and
  • no or low withholding Taxes on dividends paid from the Holding Company to the shareholder:

The Netherlands is the Tax jurisdiction of choice for the establishment of a Holding Company in the European Union for an Australian investor.

Many thanks to Guest Author Ms. Chompoonoot Naknagred for your interesting, helpful contribution.

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For more information on the foregoing, please contact the author JOEL LOO SEAN EE, the Bangkok-based Senior Regional Counsel at Kelvin Chia Thailand and a member of Kelvin Chia Partnership’s Regional Practice Group at Joel.Loo@KCPartnership.com.

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This article is published to provide general information only and is not offered as specific advice on any particular matter – This information is to be taken subject to proper consultation with a lawyer.

All written material on BANGKOK LEGAL BLOG (BLB) including this post are the Copyright of Joel Loo Sean Ee. Any attempt to plagiarise or reproduce these materials in whole or in part, in verbatim or in paraphrase, or in any other form that it can be conceivable that such attempt is being made is an offense in law and will be an invitation by offenders to face charges and prosecution in a Court of Law.
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