Advantage Holland!

It is also an increasingly important base for Indian companies investing in Europe and beyond

he Netherlands is home to a large number of Indian knowledge migrants and Indian companies often use Dutch cities as a gateway to the European Union (EU). Large Indian corporates such as Cognizant, Infosys, Kirloskar, Larsen & Toubro, NIIT, ONGC Nile Ganga, Ranbaxy, Reliance Globalcom, Suzlon Energy, Tata Steel, TCS and Wipro have a presence in the Netherlands and have been followed by a number of smaller Indian companies. According to the Netherlands Foreign Investment Agency, in early 2012 there were over 160 establishments of Indian companies in the Netherlands.

Structuring via Holland-Going Dutch to go abroad

Historically, due to its taxation rules, the Netherlands has been a preferred location for the establishment of holding and financing structures. Thousands of multinationals currently use Dutch intermediate holding companies in their corporate structures (i.e., whereby a Dutch holding company owns shares in operating companies in various jurisdictions) to protect their investments in a profitable and tax-efficient manner. Dutch companies are relatively easy to incorporate and maintain and can also offer extra layers of protection to non-residents, both for new and existing investments. Routing investments through offshore tax havens like Mauritius can have downsides and risks, as demonstrated by publicity in recent years.

The simplest way of creating a Dutch holding company structure is to set up a Dutch private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid or "BV") or a Dutch co-operative association. The use of a Dutch holding company can reduce risks associated with many outbound investments without adversely influencing the commercial aspects of such investments. Many Indian companies have incorporated Dutch private limited liability companies or co-operatives as holding companies to use when structuring their outbound overseas investments (e.g., Africa, South America, Central Asia), financings, international corporate groups, M&A activities, asset/business acquisitions, licensing or as a way to hold IP rights.

The Netherlands is also often used for financing and licensing (back-to-back) structures. When attracting financing to a Dutch company or contributing capital from a Dutch company, there are numerous possibilities to create interest deduction in group companies without taxable pick-up in the Netherlands (double dips). When an Indian or international group of companies owns or acquires IP, there are also ways to register this IP in a beneficial jurisdiction and sublicense the IP through a Dutch holding company.

A Dutch public limited liability company (naamloze vennootschap or "NV") is commonly selected as the entity of choice for IPOs on European stock markets. This is mostly done through conversions of existing Dutch private limited companies that are part of a group for the purpose of tax structuring. Non-Dutch companies investing in India are also making use of intermediate Dutch entities-as far as Indian inbound investment is concerned, Netherlands' incorporated companies has been the fourth to fifth largest investor group in India and the second largest European country with regard to FDI.

Investment protection framework-BIT by BIT

Bilateral investment treaties (BITs) make it less easy for states to unilaterally change or terminate their obligations towards foreign investors. Companies incorporated in the Netherlands can benefit from the protections provided by these treaties. The rules are directly enforceable by the Dutch investing entities and cover protections such as fair compensation (in case of improper annulment of a contract or expropriation) and providing for an effective legal remedy.

Therefore, if a Dutch incorporated intermediate company invests on behalf of its Indian parent in any country, with which the Netherlands has a BIT (currently almost 100), the full range of possibilities and protection is likely to be available to the Dutch company in the event of a dispute. On the inbound side, it is becoming increasingly common for investors in India to invoke the Netherlands–India BIT if disputes arise.

Tax regime-Not too taxing

The Dutch tax regime is a balanced and transparent system of benefits with sufficient realistic requirements and anti-avoidance provisions. Sophisticated, efficient and pragmatic, it continues to be generally very attractive for Indian and foreign investors. Key benefits include the possibility of tax-free dividend income distributed from foreign subsidiaries and the absence of withholding tax on interest and royalties. Advance tax rulings and pricing agreements can be obtained from the Dutch tax authority. This advance consultation practice has been in existence in the Netherlands for decades and has proved to be a very reliable tool for prospective tax planning. Such advance rulings can be obtained in a matter of weeks and at relatively low cost. As there is a possibility to file consolidated tax returns and apply for a functional currency, the compliance burden is further reduced. Therefore, a combination of operation, holding and financing activities can result in a strong set up, which can further be protected by advance rulings.

The current Dutch corporate income tax (CIT) rate of 20-25% is below the EU average. Companies qualifying for the "Dutch innovation box" benefit from an effective CIT rate of 5%, which includes all net income (capital gains) from eligible innovative developments including income from patents, R&D innovations, software etc. There is no withholding tax on interest, royalty payments or fees for technical services and generally no stamp duties or capital taxes. The applicable dividend tax is most often reduced, even to 0% in various cases: the dividend withholding tax rates are 15% (general), 0% (EU subsidiaries of Dutch company) and, importantly for foreign-controlled holdings, 0%-10% under the various tax treaties (as to which see below). The Dutch co-operative association mentioned above is not subject to dividend withholding tax, provided that economic substance is present at the level of the owner of the membership rights of the co-operative.

In addition, there is a 100% participation exemption, which (if the applicable conditions are met) results in all dividends and capital gains arising from a qualifying (non-passive) shareholding being exempt from Dutch CIT. This makes it possible to sell shares in foreign subsidiaries to third parties with no capital gains tax. There are also tax incentives/additional reductions, eg loss compensation, group relief, R&D activities, energy investment allowance, financing with hybrid loans, asset protection by use of a foundation and a favourable tax regime for foreign skilled expats (30% of income not taxable).

For Indian companies considering European IPOs using a Dutch NV, the following key advantages could be relevant:

• no stamp duty or tax on capital contributions in an issuer.
• no annual subscription tax or net worth tax.
• outbound interest payments not subject to Dutch withholding tax.
• functional currency choice, making it possible to calculate profits in a currency other than Euro.

Other favourable tax regimes such as the Fiscal Investment Institution ("FII") and the Exempt Investment Institution ("EII") regimes are also available.

Taxation treaties-No double trouble

In addition to its BITs, the Netherlands also has 98 taxation treaties, which contain important protections and tax incentives such as avoidance of double taxation and reductions of/exemptions for applicable (Dutch and foreign) withholding taxes on incoming or outgoing dividends, interest and royalties. Indian companies investing or structuring via the Netherlands can therefore benefit not only from the Netherlands-India Tax Treaty but also, upon the incorporation of a Dutch entity, the many other tax treaties with other countries.

The Netherlands-India Tax Treaty applies to companies tax resident in India or the Netherlands, with the "place of effective management" the crucial deciding factor. It provides that intra-group transactions (e.g., transactions between the Indian parent and Dutch subsidiary) are done on an arms' length principle. The rate of withholding tax (based on the MFN clause) on dividends between Netherlands-India and vice versa is 5%. The withholding tax on interest payments and royalties from the Netherlands to India is 0%. Further, Article 24 of the Treaty contains the important principle of non-discrimination.

Some examples of structures

On the basis of the Dutch tax regime and taxation treaties, Indian companies can consider a variety of options to structure their outbound international investments in a tax-efficient way, including an Indian parent company adopting:

• an international holding structure using a Dutch holding company with operating companies in various jurisdictions, such as an EU and US subsidiary.
• a financing structure using a Dutch holding company and Irish FinCo (back-to-back).
• a financing structure only using a Dutch holding company.
• an exit structure using a Dutch holding company and Mauritius company (which would be liquidated after distribution of all dividends from the Netherlands).
• a licensing structure using a Dutch holding company, Luxembourg holding company and Irish IP license company (back-to-back).

European Union and other advantages

The Netherlands also benefits from additional advantages, namely:

• strategic location in Europe;
• stable economy;
• superior logistics, technology and infrastructure;
• conducive innovation environment;
• international business environment;
• well-educated, multilingual workforce;
• attractive quality of life with comparably lower living costs.

"The Netherlands is home to a large number of Indian knowledge migrants and Indian companies often use Dutch cities as a gateway to the European Union"

As an EU member country, companies incorporated in the Netherlands can export goods throughout the EU's 27 countries, without tariffs or barriers. This means that other states cannot impose domestic discriminatory requirements or other provisions that obstruct the free movement of goods, services and persons in the EU.

Developments

There has been some concern as to whether the Indian international structuring market may be influenced by the introduction of regulations which may have implications for Indian multinationals who have foreign holding and financing companies or are planning to establish such companies. In mid-March, the Indian government announced retrospective amendments to the Income Tax Act 1961 (ITA) and the introduction of the GAAR (not yet in force). Although the Netherlands-India Tax Treaty should continue to override the ITA and allow for a sale of shares by a Dutch holding company to be taxable only in the Netherlands (unless the sale is to an Indian resident), a level of uncertainty has been introduced by the GAAR especially if there are no strong/sufficient "commercial reasons" for investing via the Netherlands. Accordingly, the decision of investing through a holding company would also to a large extent depend on the activities that would be carried out by the Netherlands entity and a detailed examination of the overall facts and background of a given transaction including relevant business plans may be needed.

However, Netherlands-based tax practitioners believe that the new measures will mainly attack off-shore jurisdictions and will rather have a positive effect for the Netherlands as the continued preferred location for holding and financing companies for Indian and other foreign companies. Further, the growing demand for "substance" worldwide should also be a positive development as substance requirements are more easily met in the Netherlands.

Disclaimer–"The views expressed in this article are the personal views of the author and are purely informative in nature. The author does not guarantee the accuracy or currency of the data included in this article and accepts no responsibility for any consequences of their use. The author does not purport to give any legal or other advice."