Since January 1 2021, the Netherlands has applied, based on Dutch domestic law, a conditional withholding tax on (deemed) interest payments from Dutch companies to group companies resident in a jurisdiction on a designated list of (low-tax) territories (the Blacklist). Given the applicable tax rate of 25.8%, best practice for companies has been to remain out of scope of this withholding tax.
Dutch conditional withholding tax at a glance
The Netherlands does not have a generally applicable interest withholding tax. In this respect, the first condition is that the conditional interest withholding tax in principle only applies on (deemed) payments to companies part of the same group where there is directly or indirectly – for example, via a shared parent company – decision-making influence. This is generally interpreted as more than 50% of the shares or voting rights.
Furthermore, the conditional withholding tax is only levied on (deemed) interest payments to companies resident in jurisdictions on the Blacklist. This list is updated on an annual basis at the calendar year end and consists of:
Jurisdictions with a generally applicable corporate income tax rate of less than 9%; and
The jurisdictions on the EU list of non-cooperative jurisdictions.
Besides direct payments, the conditional withholding tax may also apply on indirect payments where an artificial structure is put in place with (one of) the main purposes being to avoid the conditional withholding tax. Otherwise interposing a conduit between the Dutch company and the group company in the blacklisted jurisdiction would prevent the withholding tax.
Changes from January 1 2024
The updated Blacklist that entered into force on January 1 2024 no longer includes the United Arab Emirates (UAE). However, Antigua and Barbuda, Belize, Russia, and Seychelles were added.
Jurisdictions that remained on the list are American Samoa, Anguilla, the Bahamas, Bahrain, Barbados, Bermuda, the British Virgin Islands, the Cayman Islands, Fiji, Guam, Guernsey, the Isle of Man, Jersey, Palau, Panama, Samoa, Trinidad and Tobago, Turkmenistan, the Turks and Caicos Islands, the US Virgin Islands, and Vanuatu.
Mitigation of impact for existing loans
In 2023 and prior years, the inclusion of a jurisdiction on the list of low-tax jurisdictions did not always require amending loans payable from a Dutch entity to a group entity located in a blacklisted jurisdiction.
Since tax treaties supersede the application of Dutch domestic tax law, a common example was that interest payments to group companies located in the UAE often still enjoyed a 0% withholding tax rate based on the tax treaty between the Netherlands and the UAE.
Although the UAE has been removed from the Blacklist, this approach could still apply to Bahrain (0% rate in a tax treaty) and Barbados (5% rate in a tax treaty).
A relatively new strategy during 2023 was amending the terms of loan agreements in a way that resulted in a qualification of equity for Dutch tax purposes, while the loan remains a loan for civil law purposes. It remains to be seen whether this is viable for 2024 as well, since the Netherlands implemented a conditional withholding tax on dividends from January 1 2024.
Mitigation through refinancing
In anticipation of changes to the Blacklist, Dutch companies generally repay the outstanding loans payable to group companies in such jurisdictions. This sometimes coincides with other tax planning. In this respect, existing loans often still enjoy a relatively low interest rate due to a lower interest rate environment a few years ago. Refinancing such a loan could create a tax benefit if the effective tax rate in the Netherlands is higher than at the level of the entity receiving the interest income.
A clear trend is that refinancing of loans often takes place via group companies with sufficient substance located in investment hubs such as Hong Kong, Malta, and Singapore. This is not only a trend for loans to Dutch entities, most other jurisdictions also require substance at the level of the recipient of interest payments. Since it was already expected that the UAE would be removed from the Dutch list, some groups with significant Dutch operations started preparation for financing centres in the UAE during 2023.
Some groups opted to not structure new loans to Dutch group companies from group companies, but instead pushed down (existing or new) third-party debt to the level of the Dutch group company. Since the Dutch conditional interest withholding tax only applies in intercompany situations, this solved the withholding tax risk while keeping interest deduction in the Netherlands at the desired level.
Key takeaway
There is still a strong desire in the market to finance Dutch group companies through a mix of debt and equity. The Dutch conditional interest withholding tax resulted in funding flows to group companies located in jurisdictions on the Dutch list of low-tax jurisdictions to dry up, except when tax treaty protection is still available. However, tax-efficient financing structures are, in general, still easy to set up and a refresh of financing could even result in tax savings.
