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Advisers expect some American companies to take their assets out of the Netherlands |
The Netherlands, a gateway for American business to enter the EU market, faces tough tax competition as a result of the US tax reform. But the US changes may have made things more difficult for the EU as a whole.
The Tax Cuts and Jobs Act, pushed through at the end of 2017, established new corporate rates, including 21% for C corporations and a marginal tax rate of 29.6% for S corporations. This puts the standard corporate tax rate of 21% just below the OECD average.
The US has also adopted a territorial system for US tax, but what concerns the Netherlands is the new rates for repatriated funds, ranging from 8% to 15.5% for cash – Citigroup estimates that US companies have $2.5 trillion in capital held overseas. Previously, repatriation would have incurred tax at a rate of 35%.
"The big picture is pretty simple. The reform will lead to a large pull back of cash and assets out of foreign jurisdictions into the US," Wilbert Kannekens, head of tax at KPMG in the Netherlands, told International Tax Review.
Although taxpayers will take some time in deciding where to put their cash, Dutch tax advisers expect to see some American corporations take their assets out of the Netherlands.
"We expect that Dutch companies owned by US parent companies will redistribute a significant amount of excess cash back to the US," said Heico Reinoud, partner and co-head of tax at Dentons Boekel in Amsterdam. "Non-US IP may be transferred from offshore to local companies that use the IP in their local business, rather than paying royalties to the US."
Even though the dust hasn't settled from the enactment of the US legislation, Dutch tax professionals are confident that the system will retain its appeal for US investors. But there is still the question of how the Netherlands should respond to US tax reform.
The Dutch strategy
Just before the US tax bill was brought before Congress, the Dutch government updated their tax rules and cut the corporate rate thereby keeping up with the worldwide trend of lower taxes. This was great timing, but it was a coincidence.
"The Dutch government has not specifically responded to the US tax reform as such, but it did recently announce a reduction of the headline tax rate from 25% to 21% and the abolishment of Dutch dividend withholding tax," Reinoud said.
There may be an equal playing field in terms of corporate rates, but some analysts believe it's unlikely this rate will fall further despite the Netherlands facing stiff competition from the US and within the EU. For example, one of the other major sites of US investment is Ireland, where the corporate rate is 12.5%. The UK is expected to reduce its rate to 17% in 2020. But the prize for the lowest corporate tax goes to Hungary, which has just slashed its rate to 9%.
Arguably, US tax reform adds to the downward pressure on corporate tax rates around the world. "The 'race to the bottom' within the EU – in other words the reduction of the headline tax rate and expansion of the taxable base – will simply continue," Reinoud said. "This is especially true for the smaller open economies such as the Netherlands, which heavily rely on foreign investment."
Nevertheless, the Dutch government doesn't want to give potential foreign investors the perception that a low tax rate is the only reason to move assets to the country.
"The Netherlands is striving to remain attractive through a full participation exemption on dividend and capital gains, a branch exemption, a 7% effective tax rate for the IP patent box, as well as an extensive and beneficial tax treaty network," Reinoud said.
"I expect to see measures that enable the free flow of capital and people, creating greater access to funding and by maintaining a stable and reliable tax jurisdiction for investors," Kannekens said.
The IP risks
Although the Dutch tax system is likely to maintain its international competitive edge, the issue of intellectual property (IP) assets is where there might be more changes in terms of tax planning, and American companies will be weighing up their options. This is an area where the Dutch government may need to examine their ability to retain investment.
"There is an incentive to repatriate the IP to the US, however, there is still an incentive to keep the IP outside the US. Many taxpayers are weighing up the advantages and disadvantages of both options," Vincent van der Lans, international tax partner at Loyens & Loeff in New York, told ITR.
US multinationals have long organised their foreign holdings and IP through central holding companies – typically a CV-BV structure in the Netherlands or the equivalent in Ireland and Luxembourg. But this is another area where change is coming.
"Next to US tax reform, the EU's Anti-Tax Avoidance Directive [ATAD] will lead to the clean-up of many structures, such as CV-BV structures, within the next few years," said Pieter Frolichs, senior associate at Atlas Tax Lawyers.
Taxpayers now have to consider their entire business operations. It's not just a question of where the IP is based, but where the headquarters are located and how much of a presence the company has in the country.
"If you have your European headquarters in the Netherlands and your relevant functions there, then it makes perfect sense to retain the IP in the Netherlands and retain the central holding company there," van der Lans said.
"It still makes sense to have a regional headquarters based here and it is still beneficial from a tax perspective provided you have the functions in place," he added. "The days of the empty holding company are numbered."
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The US route into the EU could change if US tax reforms hurt the Netherlands |
EU tax disagreements could hurt Dutch foreign investments
While the Dutch government tackles its domestic tax policies to counter the US changes and remain attractive to US investors, it faces external risks from the EU as member states try to address their differences on tax matters. After all, US investors have traditionally seen the Netherlands as one of the best gateways into the EU market.
Dutch tax advisers are concerned that the EU may not be as attractive as it once was, especially since the Trump tax plan came into effect. One of the most important questions will be how the EU responds to US tax reform given its own efforts to build a common fiscal policy.
"It's not that the EU is less attractive than the US now. It's that the US was more unattractive for investors under the old system," van der Lans said. "It was easier to make deductions under the old system, but the corporate tax rate was much higher."
"If you zoom out and take US tax reform with the EU's Anti-Tax Avoidance Directive and the OECD's BEPS project, you see that US tax reform has resolved some of the underlying issues of the ATAD and the BEPS project," van der Lans said. "You cannot hold IP in a jurisdiction without the corresponding functions, for instance."
"The EU's ATAD was partly aimed at taxing foreign profits of US multinationals which were not effectively taxed under the old US tax system. Under the ATAD, the CFC rules may apply to CFCs held by an EU holding company in a US multinational group. But the income of those CFCs will already be picked up by the US under the new US tax system, specifically the GILTI rules. If the EU doesn't take this into account, you run the risk of making the EU unattractive to US investors. If the EU does not adapt, it will affect US investment in Europe", van der Lans added.
Kannekens said that the US tax cuts may lead to greater tax competition in Europe "if the EU does not get its act together". However, Kannekens expects the EU to pursue "more harmonisation, further unification" and a "centralised fiscal policy".
"The European Central Bank is concerned by outflows to the US and wants to ensure that the EU remains competitive," van der Lans added. "In other words, the EU can't just focus on anti-abuse measures."
Although the global tax landscape is about to undergo a major shift, Kannekens doesn't think it will hit the Netherlands harder than the rest of Europe, partly because the Netherlands has committed to the BEPS project and the ATAD.
As the Netherlands adjusts to the challenge of greater US tax competition, domestic change may not be enough. The real question may be what course the EU will take as it tries to move towards a common tax strategy.
