Update: Withholding tax on interest and royalty payments to low-tax countries

What does this mean for your business?

Interest and royalty payments made by Dutch entities resident in the Netherlands are currently not subject to withholding tax in the Netherlands. This will change: as from 2021 onwards, interest and royalty payments to affiliated entities in designated low-tax jurisdictions will become subject to a withholding tax. The same applies to tax abuse situations, e.g. where payments are artificially diverted. The withholding tax will be levied at a rate equal to the highest rate of Dutch Corporate Income Tax in the current year. For 2021 this rate is 25 per cent. The withholding tax rate may also be reduced by a tax treaty, if applicable. 

The Dutch government has confirmed that the purpose of the new withholding tax is to prevent the Netherlands from being used any longer as a gateway for interest and royalty payments to low-tax jurisdictions and in tax abuse situations. For that reason, no exception has been made for companies with a real economic presence.

The withholding tax is levied from the Dutch resident entity that makes interest or royalty payments. E.g. if your company makes 100 worth of interest or royalty payments which are subject to the new withholding tax, your company will pay the amount minus the withholding tax to the recipient. In case the rate is 25 per cent this means you will pay 75 to the recipient and withhold 25. This 25 is paid to the Dutch tax authorities when filing the withholding tax return.

Affiliated companies

The new withholding tax will only be levied on payments between affiliated companies. In Dutch tax law there are several definitions of affiliated companies. For purposes of the new withholding tax, companies are affiliated in a situation in which the shareholder can - directly or indirectly - exercise decision-making influence. This is the case when the shareholder has more than 50 per cent of the voting rights under the articles of association. In addition, the company can be affiliated through a third party and also through a cooperating group.

Designated low-tax jurisdictions

As mentioned, the withholding tax applies to payments made to affiliated companies in designated low-tax jurisdictions. Low-tax jurisdictions are jurisdictions with a statutory corporate tax rate of less than 9 per cent and jurisdictions on the EU list for non-cooperative jurisdictions. These countries are together regarded as low-taxed jurisdictions (‘Listed Countries’).

For 2021, Listed Countries are Anguilla, Bahama’s, Bahrein, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Fiji, Guam, Guernsey, Isle of Man, Jersey, Oman, Samoa, Seychelles, Trinidad and Tobago, Turkmenistan, Turks and Caicos Islands, United Arab Emirates, US Samoa, US Virgin Islands, and Vanuatu.

The Dutch list of low-taxed jurisdictions is updated annually on October 1st, and is applicable to the following year. The EU-list is updated twice a year and the latest update is applicable to the conditional withholding tax in the following year.  

Jurisdictions with a profit tax levied at a statutory rate of less than 9 percent are taken into account rather than jurisdictions with a profit tax levied at an effective rate of less than 9 percent. According to the government, the conditional withholding tax should ideally be in line with the effective rate, but that requires extremely complex legislation. The feasibility and legal certainty therefore call for application of the statutory rate.