Offshore holding companies in Belgium, Netherlands or Luxembourg?
A holding company is a corporation that for the most part owns shares (stock) in other related (i.e., subsidiaries) and unrelated corporations. When international tax planners talk to offshore holding companies they most often mean companies incorporated in a no or low tax jurisdiction like Panama, Gibraltar, Barbados, Bermuda, the Bahamas or the Cayman Islands where stock holdings in other companies can be sold free of capital gains taxes, and dividends and interests received are free from local incorporate taxation.
Be what it may, a number of high tax countries in Western Europe have adopted corporate tax laws that offer significant tax advantages to holding companies that register within their territorial borders. The Netherlands, Luxembourg and Belgium make excellent domiciles for offshore finance and investment holding companies that invest in other companies domiciled in other high tax jurisdictions such as the U.S., UK, Canada and Germany. In addition to significant tax breaks for dividends and capital gains received on such stock participation, the Netherlands, Luxembourg and Belgium have important bilateral tax treaties with the other industrial countries (including the U.S., Canada, the UK, Germany Australia) that reduce or eliminate withholding taxes on interest, dividends and royalties received by these holding companies.
Dutch "Participation Exemption"
Under the Netherlands tax code, a Dutch "holding company" that owns "at least 5%" of the par value of the paid-in capital in another foreign or domestic company from the beginning of the fiscal year can receive dividend distributions from this "subsidiary" 100% tax free. To qualify for the so called "participation exemption", the "downstream subsidiary" must meet the following conditions:
1. In the case of a foreign subsidiary the company must be subject to a corporate income tax comparable to the Netherlands corporate tax, but the rate and amount of corporate tax paid is immaterial.
2. The "participation" in the foreign subsidiary must be held for a business-related purpose, not as a mere "portfolio" investment. In this respect, if the Dutch parent company has a director on the board, or is actively engaged in the supervision of the subsidiary, than the company will qualify for the participation exemption provided the foreign subsidiary is not directly or indirectly merely an investment company.
Treaty Benefits for Dutch Finance Companies
Combining the Dutch Participation Exemption with the treaty benefits can and does lead to substantial tax savings for Dutch based holding companies. Under the U.S.-Netherlands tax treaty the 30% U.S. interest withholding tax is reduced to 0%. Moreover, under the Dutch tax system no interest withholding taxes on payments made to any nation (even to tax haven companies) are imposed on any Netherlands company because interest withholding taxes are unknown in the Netherlands. Because Holland maintains a net-work of tax treaties with many industrial nations that reduce significantly interest withholding taxes, the Netherlands make a first-rate base for the formation of an international bank, holding company or finance company. Other benefits of the participation exemption include:
1. The willingness of the Netherlands corporate tax inspector to grant special tax rulings in favor of Netherlands based finance companies.
2. Interest payments made to foreigners are fully deductible when computing Dutch corporate income taxes so long as the payment is made at "arms length". Usually the Dutch corporate income tax inspector will "fix" the net taxable income of the company at a certain percentage of the total outstanding debt, or require that a certain "interest spread" between interest received and interest paid-out be used to calculate the tax. A "spread ruling" from the tax inspector of 1/8% or ¼% can usually be "negotiated" by the tax advisor.
3. So called "back-to-back loan arrangements" between a Dutch company and a tax haven entity are common and not looked on unfavorably by the Dutch tax authorities.
It's not surprising that by years-end 1987 the Netherlands with some $48 billion in U.S. investments could claim the second highest direct investments in the U.S., surpassing Japan's $32 billion, Canada's $22 billion, West Germany's $19 billion, and Switzerland $14 billion, and trailing only the United Kingdom's $76 billion investments in the USA.
Belgium's new "Participation Exemption"
Belgian holding companies that hold a participation in other companies can exempt 95% of any dividend received from such companies provided the other company is not located in a country that (1) does not tax corporate income or (2) which has a tax regime, which is substantially more favorable than that in Belgium.
In addition, capital gains from the disposition of participation shares are 100% tax free from the 1992 tax year onward.
Editor's Note: Unlike the participation exemption in the Netherlands, there is no minimum holding period and no minimum participation to qualify for the Belgian participation exemption.
The Belgian participation exemption does not apply if:
1. The dividends are distributed by companies, which are not subject to taxation similar to Belgian corporate income tax. This includes no-tax jurisdictions:
Also excluded from the participation exemption are IBC's in Jamaica, Barbados, Antigua and the British Virgin Islands and exempt companies in Gibraltar, and the Isle of Man. Also included are holding companies in Liechtenstein, Luxembourg and shipping companies based in Cyprus and Malta. In addition, countries that do not tax foreign source income - Panama, Singapore, Hong Kong, Costa Rica, the Cook Islands, Djibouti, Malaysia, Nevis and Oman.
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2. Dividends distributed by a mere investment company.
Interest expenses are fully deductible
The Belgian corporate tax rate is 39%, and companies are taxed on their worldwide income. Since finance charges on loans (mainly interest) incurred to purchase the participation are deductible by the Belgium parent company, tax planning revolves around incurring the least amount of taxable income possible.
Tax treaties & withholding taxes
No Belgian withholding tax is due on (1) interest on commercial debts (including debts evidenced by commercial documents) and (2) interest paid by banks established in Belgium to foreign banks. Dividends paid by a Belgian company to a nonresident individual or corporation is subject to a 25% withholding tax unless reduced by a tax treaty. Under the treaty with the U.S., dividend withholding is reduced to 5% or 15%.
Withholding taxes on dividends paid by a U.S. company to a Belgian company that owns a substantial holding in the U.S. Company is reduced to 5%. Royalties are 100% free from U.S. withholding tax unless they are film and television royalties in which case the full 30% U.S. withholding tax applies. U.S. interest withholding tax is reduced to 15% under the Belgium-U.S. tax treaty.
Luxembourg's Participation Exemption
Luxembourg has been famous as a domicile for holding companies since 1929 when the Grand Duchy of Luxembourg abolished all income taxes and applied only a 0.2% annual subscription tax on share capital and a capital duty of 1% payable on this issue of new shares. However, Luxembourg holding companies that qualify for the above tax exemption do not qualify for any treaty benefit that Luxembourg concluded with other nations. Recently, to increase Luxembourg's attractiveness as a business and financial center, the Luxembourg government passed a law extending Luxembourg's participation exemption, which already existed for dividends, to capital gains if the company, would be subject to Luxembourg's normal corporate tax regime (i.e., companies not exempt from tax under the 1929 Law). For 1991, Luxembourg's national and municipal corporate tax rate is approximately 39%.
The participation exemption exempts cash dividends, dividends-in-kind, hidden profit distributions, capital gains on liquidation distributions, and capital gains on the sale of the qualifying subsidiary.
To qualify for the participation exemption and the tax treaty benefits the following conditions must be met.
(1) The parent company must be a resident and fully taxable in Luxembourg.
(2) For dividends to be exempted, the participation in the foreign subsidiary must equal at least 10% of the subsidiary´s share capital or have an acquisition cost at least LF 50 million.
(3) The participation must be held for an uninterrupted period of 12 month prior to the end of the taxable year in which the dividend is received.
(4) For capital gains to be exempted, the shareholding in the foreign subsidiary must equal at least 25% of the subsidiary´s share capital or have an acquisition cost at least LF 250 million.
(5) To qualify for the participation exemption on dividends and capital gains, the nonresident subsidiary must be subject to corporate tax in its home country at a rate of at least 15%. The exemption covers corporate income and wealth tax as well as municipal and local taxes.
Interest expenses are deductible
Interest paid on a loan to purchase a qualifying participation is deductible to the extent it exceeds the tax-free dividends and gains. Luxembourg does not levy an interest withholding tax on interest paid to a foreign person, and there are no debt/equity ratio rules. Ratios as high as 33:1 are acceptable by the tax authorities. A Luxembourg company may be collapsed without any tax consequences, and there is no capital gains tax on the disposal of shares in a Luxembourg corporation by a foreign person.
Tax Treaties & withholding taxes
Luxembourg has tax treaties with Austria, Belgium the U.S., France, Germany, the Netherlands, Spain, Sweden, Norway and the UK. Under the treaty with the U.S., Luxembourg's dividend withholding tax on portfolio investments paid to a U.S. resident is 7,5%, and reduced to 5% on substantial holdings where the recipient corporation owns at least 25% of the Luxembourg company's voting stock.
The U.S. dividend withholding rate is reduced from 30% to 15% on portfolio investments, and to 5% on substantial holdings. U.S. interest withholding tax is reduced to 0% if the Luxembourg Company is subject to Luxembourg's regular corporate income tax.
(Courtesy of New Providence Press: Tax Havens of the World).