GT Alert

Opportunities for International License and Finance Activities

November 2005

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The Dutch tax authorities have recently provided further guidance on the policy of Dutch financial services companies, in particular back-to-back licensing companies.

Following a period of uncertainty, it is again possible to obtain a new favorable tax ruling (APA) for Dutch companies involved in licensing activities. For finance companies, the APA process has already been functioning successfully for a number of years. The new guidance further fine-tunes the policy and decreases its administrative burden.

Given the extensive Dutch tax treaty network, an APA can facilitate withholding tax planning in international structures, mitigating the withholding tax burden on royalty and interest payments.

The new guidelines provide an opportunity going forward for new international licensing and financing activities in the Netherlands. However, existing structures that already use a Dutch back-to-back licensing or finance company should also be re-assessed, since the new guidelines will apply to all financial services companies as of January 1, 2006.

Greenberg Traurig’s Amsterdam office was the first firm in the Netherlands to file a ruling request for a licensing company based on the new guidelines.

Background

Given its extensive tax treaty network, the Netherlands has historically been a popular jurisdiction in which to locate a financial services company, in order to facilitate royalty and interest withholding tax planning in international structures. Under application of the former ruling practice, Dutch financial services companies could report a fixed spread in the Netherlands, which for licensing companies was based on a sliding scale.

As part of the introduction of new rules in 2001 and a reform of the ruling policy into an APA/ATR practice, operational substance and economic risk requirements were introduced. In addition, the remuneration of a Dutch financial services company should, as of that date, be determined in line with the OECD transfer pricing guidelines. These requirements needed to be met in order to obtain an APA, while existing rulings were grandfathered until year end 2005.

Licensing companies

Until now, it has been unclear how the economic risk requirement of a licensing company should be met and how its remuneration (transfer pricing) should be determined. This has resulted in a setback in the number of rulings that has been issued over the past several years.

Recently, Greenberg Traurig’s Amsterdam office agreed with the Dutch tax authorities on an acceptable transfer pricing method for a US client, which provides guidance on the economic risk requirement. As a result, the remuneration of a Dutch licensing company should take into account the following elements:

1) A fixed return on a minimum equity, including a market risk remuneration, and;

2) A handling fee.

The calculation methods are further fine-tuned by taking into account the volume of the royalty flow, distinguishing small, medium and large licensing companies.

As a result, it again becomes possible to obtain a favorable APA in the Netherlands for licensing activities. In fact, based on our findings, the taxable spread to be reported in the Netherlands is expected to be substantially lower, as compared to the old ruling regime. In addition, the clear transfer pricing guidelines mitigate the transfer pricing documentation requirements. Greenberg Traurig’s Amsterdam office has already filed a ruling request based on the new guidelines and therefore has in-depth knowledge of the acceptable transfer pricing methods and documentation requirements.

Finance companies

As of the introduction of the real risk requirement, there has been clear guidance in Dutch tax law on how the economic risk of a finance company could be determined. As such, the APA practice for finance companies has already been functioning successfully for several years.

In this respect, the recent guidance from the tax authorities further improves and fine-tunes the APA practice for finance companies, in particular with respect to the acceptable transfer pricing methods and the transfer pricing documentation requirements, also distinguishing small and large finance companies.

The new guidelines will be applicable to all financial services companies as of January 1, 2006. Given the track record of the Dutch ruling practice, there are still a large number of ‘old’ Dutch financial services companies in place in international corporate structures. In light of recent developments, it should be assessed whether the current compliance and local substance of these companies is in line with the new guidelines and whether obtaining a new ruling would be favorable.

This Alert was written by Pie Geelen and Thomas van der Vliet in the Amsterdam office. Please contact Mr. Geelen at + 31 20 30 17 307 or Mr. van der Vliet at +31 20 30 17 387 or your Greenberg Traurig liaison, if you have any questions regarding the subject matter of this Alert.

© 2005 Greenberg Traurig

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