Protect Your Corporate Assets Against Political Exposure

Offshore tax structures are off the corporate agenda. The Netherlands offers an attractive safe haven alternative with realistic tax rates and a real economy for optimizing corporate tax planning policies without being tainted by a tax haven status that some traditional choices such as Luxembourg, Ireland, Cyprus and Malta have.

The benefits for Dutch optimization structures relate to reducing tax leakage based on an extensive double taxation treaty network entered into with over 90 countries with the following key features:

• Out of the 90+ tax treaties, more than 40 tax treaties provide for a full exemption of withholding taxes on dividends (under certain conditions). In addition thereto, the Netherlands, as an EU member state, also benefits from the EU Parent – Subsidiary directive, based on which no dividend tax should be withheld on dividend payments between EU resident companies. The EU recently has welcomed its 28^th member state;

• More than 50 tax treaties provide for a full exemption of local withholding tax on interest. Also in this respect, the Netherlands benefits from an EU directive. Based on the EU Interest and Royalty directive no tax can be withheld on interest payment between EU resident companies (under certain conditions). Under domestic laws, the Netherlands does not levy interest withholding tax; and

• More than 35 tax treaties also provide for a full exemption of local withholding tax on royalties. The aforementioned EU Interest and Royalty directive is also applicable to royalties. Under domestic laws, the Netherlands also does not levy royalty withholding tax.

In addition, it is possible to reduce exposure by obtaining an advance tax ruling from the Dutch Tax Authorities. In the Netherlands capital gains with respect to overseas subsidiaries are, generally, not subject to capital gains tax.

An often overlooked feature equally important to the vast double taxation treaty network of the Netherlands is the equally impressive bilateral investment treaties (BITS) network with more than 90 treaties with various countries.

The treaty network offers protection of Foreign Direct Investment for their investors. Foreign Direct Investment has increased significantly on a worldwide basis not in the least due to the various BITS that are firmly in place and guarantee a minimum level of protection to investors and their investments against nationalization, discriminatory treatment, often including adverse tax treatment. BITS in essence offer:

(i) access to arbitration against independent states, and

(ii) the possibility of obtaining an award that is enforceable against a state.

BITS are generally negotiated per country and may encompass protection against nationalization of investments and discriminatory treatment (including taxation). A specific assessment should be made to assess whether a specific situation or investment is covered by the scope of the relevant BIT. The existence of a BIT may form a good basis to enter into negotiations with a state for alleged breaches.

It is a well-known fact that, in general, Dutch BITS are a popular choice and offer the best protection to investors because of their broad scope of application which is due to the extensive definitions of “investment” and “investor/national” in these treaties, providing for a strong substantive investor protection. Although not widely publicized due to their confidential nature, arbitration cases resulting from investment disputes covered by Dutch BITS (e.g. involving Bolivia, the Czech Republic and Venezuela) show substantial sums being awarded to plaintiff investors or settlements being reached. Dutch BITS are often referred to as the Dutch Gold Standard. The Netherlands has entered into BITS with more than 90 countries, including:

• Argentina

• China   

• Hong Kong

• Kazakhstan

• South Korea

• Turkey

• Ukraine

• Vietnam

It is essential for management of companies that operate in politically challenging jurisdictions to assess as part of the risk assessment and limitation requirements whether a Dutch structure may mitigate the exposure. Maximum investor and investment protection are desperately needed more than ever in times of economic and financial crisis. The following steps can assist management in identifying mitigating political risk exposure of corporate assets:

• Identify investments held in politically challenging jurisdictions,

• Assess whether  investment falls within the scope of Dutch Gold Standard BITS, and

• Interpose Dutch (intermediate) holding company for the purpose of benefitting from protection offered by specific BIT.