United States-Netherlands Tax Treaty

The Netherland’s International Tax Compliance Rules

Quick Summary.  The Netherlands is comprised of 12 provinces with a capital at Amsterdam.  Following the dissolution of The Netherlands Antilles in 2010, the Caribbean Netherlands officially became part of The Netherlands. The Netherlands is a member of the North Atlantic Treaty Organization (NATO) and the European Union (EU).  

Its corporate tax system provides for a full participation exemption on certain participations and several preferential tax regimes, including with respect to certain income derived from intellectual property.  The Netherlands introduced a special tax regime to encourage research and development, known as an innovation box, providing corporate income tax credits for certain profits derived from preferential innovations.  

The Netherlands has a general anti-abuse rule (GAAR) under its longstanding fraus legis doctrine.  In 2019, the European Union Anti-Tax Avoidance Directive (EU ATAD 1) entered into effect in The Netherlands.  As part of its implementation, The Netherlands adopted a controlled foreign corporation (CFC) regime, as well as earnings stripping rules.  Effective in 2020, the Netherlands also adopted EU directive ‘ATAD II’, providing for hybrid mismatch rules.  

U.S-Netherlands Tax Treaty

In a major corporate tax development, the Dutch anti-abuse provisions were amended as of 2020, and may apply in circumstances where Dutch substance requirements are nonetheless satisfied.  

Treaty.

• Convention Between the Government of the United States of America and the Government of the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
• Technical Explanation of the Protocol signed at Washington on March 8, 2004 (the “Protocol”), amending the Convention between the United States of America and the Kingdom of the Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on December 18, 1992
• PROTOCOL AMENDING THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE KINGDOM OF THE NETHERLANDS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

Currency.

• Euro (EUR)

Common Legal Entities.

• General Partnership (Vennootschap Onder Firma, VOF)
• Limited Partnership (Commanditaire Vennootschap, CV)
• Private Limited Liability Company (Besloten Vennootschap, BV)
• Public Company (Naamloze Vennootschap, NV)
• Branch of Foreign Company
• Cooperative (Coöperatie)

Tax Authorities. 

• Belastingdienst (Tax revenue)

Tax Treaties.

• The Netherlands has concluded more than 100 tax treaties.
• The Netherlands signed the OECD MLI on June 7, 2017.

Corporate Income Tax Rate.  

• The corporate tax rates for 2019 are 19% on the first EUR 200,000 of taxable profits, and 25% on taxable profits exceeding EUR 200,00.

Individual Tax Rate. 

• Box 1 income is subject to progressive rates of 36.65% up to 51.75%, with a 14% base deduction for entrepreneurs.
• Box 2 income is taxed at a rate of 25%.
• Box 3, a fixed presumed gain (of the market value of the Box 3 assets minus debt) is taxed at a flat rate of 30%. The fixed presumed gain in Box 3 is based on the average distribution of the Box 3 assets on savings and investments (the capital mix). The calculation of the actual presumed gains for each year are based on past market returns realized.

Corporate Capital Gains Tax Rate.

• Capital gains derived from the sale of a participation are exempt if the participation exemption applies. Other capital gains are taxed at the normal corporate rate of 19%.

Individual Capital Gains Tax Rate. 

• In principle, capital gains are taxed at progressive rates in Box 1 (see individual tax rate).
• If the gains are related to a substantial interest, a 25% rate apples in Box 2.
• If the gain relates to an investment, the gains are not taxed as such in Box 3 (see individual tax rate).
• There is no capital gains tax on gains from the sale of a dwelling.

Residence.  

• Corporations – companies that have their management in the Netherlands and, in principle, all companies incorporated according to Dutch civil law, are regarded as resident.
• Individuals – based on factors such as employment, family circumstances, etc.

Withholding Tax.

            Dividends.

• A 15% withholding tax generally is levied on dividends to resident or nonresident shareholders, unless the rate is reduced under applicable tax treaty or participation qualifies for an exemption under the EU parent-subsidiary directive or domestic law.
• In domestic relations, dividends are exempt from withholding tax if the participation exemption applies or if a fiscal unity for corporate income tax purposes exists between the dividend payer and the recipient.
• Exemption exists on dividends paid to EU/EEA parent companies under the same conditions as for distributions to a Dutch parent. Exemption from withholding tax also applies to dividends paid to a parent company in a third country that has concluded a tax treaty with the Netherlands that contains “qualifying provisions” relating to dividend withholding tax.
• Tax withheld on dividends paid to nonresident individuals and companies may be refunded, provided the recipient is a resident of another EU/EEA member state and is the beneficial owner of the dividends. The refund amount is equal to the amount of tax withheld that exceeds the income tax that would have been due had the recipient been a Dutch resident.

 Interest.

• The Netherlands does not levy withholding tax on interest. Interest on a hybrid loan can qualify as a dividend for tax purposes, in which case the rules for dividends apply.

            Royalties.

• The Netherlands does not levy a tax on royalties.

Transfer Pricing.

• Intracompany pricing for goods and services must be at arm’s length, and documentation must be maintained on intragroup transactions. Acceptable transfer pricing methods include the comparable uncontrolled price, resale price, cost plus, profit split and transactional net margin methods, with transaction-based methods preferred over profit-based methods.

CFC Rules.

• CFC rules apply for entities in which a Dutch taxpayer holds a shareholding of more than 50% and that are established in low-tax or noncooperative jurisdictions (“blacklisted jurisdictions”). A low-tax jurisdiction is defined as one where a noncooperative jurisdiction is one on the EU list of noncooperative jurisdictions. The Dutch government has issued a list of blacklisted jurisdictions for tax purposes. Certain categories of undistributed (passive income) of such CFCs will be allocated to the taxpayer/parent company. An exception applies to CFCs carrying out a “substantial economic activity.”

Inheritance/estate tax. 

• Inheritance tax is due on inheritances received from Dutch residents. Dutch nationals who emigrate from the Netherlands still are considered residents during a 10-year period. Rates vary between 10% and 40%.

Overview

The Netherlands imposes individual income tax under the Income Tax Act of 2001 and corporate tax under the Companies Tax Act of 1969. Netherlands tax law uses a ‘source of income’ model. Only income derived from a ‘source’ is subject to taxation. Source income arises only in cases where a taxpayer undertakes an economic activity with the intent of deriving a benefit that can objectively be expected to materialize.

Individuals

Individuals resident in the Netherlands are taxed on their worldwide income. The income tax takes into account the origin of the income and distinguishes between three categories known as “boxes.” The income in each of the boxes is taxed at a different rate. The sum of the tax owed in each of the three boxes is the total income tax payable.

Box 1 includes taxable income from wages, profits, social security benefits, and pensions. 

Box 2 includes substantial business interests, the income from which is subject to a flat tax.

Box 3 includes income from savings and investment and is taxed at a flat rate.

Corporations

Entities resident in the Netherlands are subject to corporate income tax on their worldwide income. All income earned by companies is deemed to be business income. Losses may be carried forward and deducted from profits in a subsequent year. Profits distributed to shareholders are not deductible from taxable profits for purposes of the corporate income tax. A company distributing dividends is required to withhold tax. The tax withheld is creditable against the dividend recipient’s individual income tax liability (usually classified as capital income in Box 3).

The Companies Income Tax Act provides for a participation exemption, which is applicable to both domestic and foreign shareholdings. Corporate tax need not be paid on the profits generated by the participation. The exemption allows for the avoidance of double taxation when the profits of a subsidiary are distributed to its parent company. A participation exists if the taxpayer (1) holds at least five percent of the nominal paid-up capital of a company, or (2) holds less than five percent, but ownership of the shares is necessary for the conduct of normal business, or the acquisition of the shares serves a general interest. All profits gained from shareholdings are exempt from taxation unless shares in a foreign corporation are held as an investment or the foreign company in which the shares are held is not subject to tax on its profits in the foreign country. A withholding tax is imposed on dividends from corporations resident in the Netherlands, unless the participation exemption applies. Dividends received from a qualifying subsidiary company are exempt from tax in the hands of the parent company. Similarly, capital gains realized on the disposition of shares of such a subsidiary company are exempt.

Under certain conditions, a parent corporation may be taxed as a group together with one or more of its subsidiaries. Group taxation allows losses of one company to be set off against profits of another company, and fixed assets may be transferred tax-free from one company to another. 

Other Taxes

Inheritance, Gift, and Transfer Taxes

Inheritance tax is levied on assets (less any exemptions) acquired from the estate of an individual whose last place of residence was situated in the Netherlands. Tax rates depend upon the identity of the heir and the value of the property acquired. Gift tax is levied on the value of anything received by way of gift (less exemptions) from an individual resident in the Netherlands. A transfer tax is payable when certain domestic assets, such as real estate, pass by way of a gift from persons whose last place of residence was outside the Netherlands. There are no exemptions for the transfer tax. The rate structure for the gift tax and transfer tax parallels that of the inheritance tax.

Indirect Taxes

The Netherlands imposes a value-added tax, known as BTW in the Netherlands, which is a general consumption tax levied on all private spending and included in the price consumers pay for goods and services. There are exemptions and special rates for certain goods and services. Excise duties are also levied on certain consumer goods. Taxes are also levied on legal transactions, which include the acquisition of real estate, the procurement of insurance, and the raising of capital by domestic companies. Environmental taxes are levied on water, waste, fuel, and energy.

Tax Treaty Network – International Tax Attorneys

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