Typically multinationals operate in the Netherlands via a B.V. (subsidiary) or a branch or a permanent establishment (P.E). There could be various factors which ultimately becomes the decisive factor for choosing between the two legal forms. The following article summarizes the key differences in terms of tax consequence between setting up a B.V or a PE in the Netherlands.
Tax consequences of Permanent Establishment (PE):
A permanent establishment is typically a branch, which is essentially an extension of the parent company abroad. According to OECD’s requirements, a permanent establishment is defined as a fixed place of business which is used to fully or partly carry out the business operations of a company. This includes, for example, the location of the management, a branch office or the execution of construction or assembly work as far as the latter is conducted for longer than 12 months. Hence it is not a separate dutch legal entity but operates as a foreign company.
However, there is a possibility of double taxation which may arise in the case of a permanent establishment. Although a PE is considered inseparable from Parent company it is still subject to the separate obligations regarding registration and taxation in the jurisdiction where it is located. If there is a double taxation treaty in place, the taxation of the profits of the permanent establishment falls within the competence of the jurisdiction where the permanent establishment is set up. The Authorised OECD approach (AOA) has to be undertaken for the determination of profits of a PE, under the arm’s length principle. But there is ambiguity in the application of AOA approach which leads to issues in tax determination of the PE.
Tax consequences of B.V. in the Netherlands:
In the Netherlands, a B.V. tends to be a preferred form of business in many fields. Usually, the key advantage of a Dutch subsidiary is the shareholder’s limited liability, to the extent of their capital contribution. Also, there are no start-up capital requirements.
For tax purposes, a B.V. is usually considered a separate, legally independent company. This helps in achieving a strict separation of the levels of taxation (company, shareholders). During this process, the amount of the taxation of the B.V. is made in accordance with the corporate tax rate in the country of the B.V. This helps in avoiding any ambiguities in determination of the tax, unlike in case of PE.
Distributed profits from the B.V. are usually subject to withholding tax. However, a double tax treaty limits the withholding tax to 15 percent for natural persons and 0, 5 or 10 percent for legal entities as shareholders of the B.V. Even without any Double tax treaty in place the parent-subsidiary directive (within the EU) provides for a reduction in withholding tax amount to 0 percent. That is subject to meeting certain conditions (including minimum participation to the amount of 10 percent, minimum holding period of 12 months).
In general, before starting any business operations, a careful planning process must take place. Only after careful planning and consideration of the tax merit, one must choose the preferable form of business model. Hence, after performing the careful planning and consideration of the tax merits between a B.V. and a PE it can be concluded that there are numerous tax benefits of setting up a B.V. It ultimately qualifies the B.V. as the optimal form of business entity, as against a PE.
If you need more information to set up a Dutch BV, please feel free to contact us