ITR Women in Tax 2018 conference: key messages of Loyens & Loeff on BEPS
Margriet Lukkien, partner and tax adviser, was one of the speakers at the International Tax Review Women in Tax 2018 conference in New York on 1 March 2018. She talked about the challenges and opportunities of the ‘post-BEPS world’.
Key messages on holding companies
- Centralized and robust holding company in Europe
One of the key messages of Margriet focused on holding companies in the post-BEPS world. Her take is that a centralized holding company in Europe having robust substance, combined with various other functions, is becoming more important, in particular for US multinationals. It would in certain circumstances be beneficial for GILTI optimization. It is further an opportunity to optimize the withholding tax burden on repatriation of profits from subsidiaries worldwide to US parents, especially with the EU Parent Subsidiary Directive GAAR and the OECD multilateral instrument.
- No dividend withholding tax in the Netherlands
Worth mentioning is that as of 1 January 2018 the Netherlands introduced a domestic dividend withholding tax exemption for distributions to certain shareholders based in tax treaty countries. So in many cases US shareholders can now get a 0% dividend withholding tax rate on dividends out of a Dutch holding company without the need to rely on the US-NL tax treaty. So, for example, no holding period applies anymore. In addition the Dutch government announced recently that it wants to partly abolish dividend withholding tax as of 2020. This is meant to be beneficial for multinationals and for headquarter entities based in the Netherlands.
- CFC rules and remedies
A key attention point at the moment is handling CFC rules well for the holding companies in the EU. CFC rules will need to be implemented by all 28 EU Member States by 1 January 2019, based on the EU Anti-Tax Avoidance Directive (ATAD). The ATAD aims to tax low-taxed CFCs with passive investment income.
On 23 February 2018, the Dutch Ministry of Finance clarified how it wants to deal with the CFC rules. These rules will in Margriet’s view be well manageable for Dutch holding companies. Implementation of CFC rules means a change to existing participation exemption regimes for low-taxed participations in which the holding company has a direct or indirect interest of more than 50% on a group basis.
Based on the ATAD, the EU Member States have to tax low-taxed CFCs under method A or method B. Method A boils down to a tainted income approach for e.g. interest income, with an escape from CFC taxation in case the CFC has substantive economic activities and an escape for CFCs with less than 33 1/3 % tainted income. Method B boils down to a transactional transfer pricing approach. Income would only be taxed as CFC income if the holding company has the significant people’s functions in respect of the CFCs income.
The Netherlands confirmed that it wishes to introduce CFC rules along the lines of Model A, i.e. the tainted income approach. These rules should only apply to CFCs with a low statutory tax rate or which are based in jurisdictions that are on the EU black list. Further, substantial economic activities at CFC level will be a way out from CFC taxation. From a Dutch tax perspective, the substantial economic activity requirement will be met if the CFC fulfils relevant substance requirements. This is a clear and concrete test, which is well applicable in practice. It entails among others that the CFC should have annual salary costs of at least € 100,000 in relation to its activities and it should have (for at least 24 months) office space at its disposal which is in fact used to carry out its activities. Further, one could say that the Netherlands in fact already applies method B as it already has transfer pricing rules in place.
To conclude the EU CFC rules; many changes are upcoming. Margriet expects and sees that US tax reform with the accompanying repatriation of funds to the US and the BEPS developments with the resulting alignment of business functions with the legal structure, are good remedies against EU CFC taxation. In that context a centralized holding company in among others the Netherlands would be well placed.
Impact on businesses
Margriet advised the in-house counsel and other tax lawyers attending the conference to carefully review their group structures to assess to what extent restructuring would be recommendable in view of optimizing the withholding tax burden on repatriation of profits from subsidiaries worldwide and in view of the upcoming CFC rules.
More info on BEPS
If you would like to receive more information on how to deal with BEPS challenges, please see the summary of the Loyens & Loeff BEPS seminar or contact Margriet Lukkien.