On 28 December 2018, the Dutch Ministry of Finance (MinFin) published a list of 21 jurisdictions which it qualifies as "low-tax jurisdictions" (LTJs). This Dutch Blacklist includes, among others, five out of the six Gulf Corporation Council (GCC) jurisdictions: Bahrain, Kuwait, Qatar, the Kingdom of Saudi Arabia (KSA) and the UAE.
The MinFin's plans directly tie into the 2019 Dutch tax plan published by the government in September 2018. That Dutch tax plan initially proposed to abolish dividend withholding tax in favour of a new 'source tax' which would be due on future dividends, interest and royalties paid to companies established in LTJs. A week later, on 25 September, a draft version of the Dutch Blacklist of LTJs was published for public consultation.
Our firm did not agree with the inclusion of some of the listed LTJs and we therefore formally raised our concerns with the MinFin during the public consultation round initiated by the MinFin. Nevertheless, for the most part, our concerns, as well as the concerns of some major stakeholders, were not acknowledged by the MinFin. Furthermore, it is unclear to which extent these concerns can be addressed in the future or during periodical revisits of the Dutch Blacklist. Below, we describe the impact that the blacklisting may have on cross border business between the Netherlands and the GCC.
Under the finalized Dutch Blacklist, LTJs are defined as jurisdictions that levy no corporate income tax (CIT) or that impose a statutory CIT rate of less than 9 percent. The MinFin envisages to publish an updated Dutch Blacklist every October (t -1) which will apply for that successive tax year (t).
The Dutch Blacklist includes among others the following LTJs: Anguilla, the Bahamas, Bahrain, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Kuwait, Qatar, KSA, the Turks and Caicos Islands, the UAE and Vanuatu.
As such, the Dutch Blacklist is more extensive than the most recent EU list of so-called 'non-cooperative jurisdictions' (EU Blacklist), dated 6 November 2018. The EU Blacklist takes into consideration additional metrics and is currently composed of American Samoa, Guam, Samoa, Trinidad and Tobago, and the US Virgin Islands, which jurisdictions are also included in the Dutch Blacklist. It should be noted however that the previously published EU Blacklist (dated 5 December 2017) did include Bahrain and the UAE. While these two GCC jurisdictions have been taken off the blacklist in early 2018, the EU will most likely revisit their status later this month.
Relevance of Dutch Blacklist
In essence, the Dutch blacklisting can trigger application of the following anti-tax avoidance measures:
- Controlled foreign company (CFC) rules
- Source taxation on interest and royalties, and
- Restriction on issuance of tax rulings
The CFC rules, which entered into force on 1 January 2019, apply if a Dutch corporate taxpayer has a direct or indirect interest of more than 50 per cent in a low-taxed foreign subsidiary or has a low-taxed permanent establishment. These rules are part of a larger anti-tax avoidance directive package (ATAD) which has come into effect throughout the EU per mentioned date. Subsidiaries and permanent establishments located in the blacklisted LTJs will in principle be considered CFCs for the purposes of the new rules. In case of a CFC, the undistributed "tainted" income of the CFC such as dividends, interest and royalties, will be picked up at the level of the Dutch taxpayer and will be subject to Dutch CIT. Accordingly the CFC rules do not apply if the entity performs 'substantial economic activities,' which means that the CFC meets the Dutch minimum substance requirements. These requirements include, but are not limited to, Dutch resident and knowledgeable board members, qualified personnel, Dutch bank accounts, a salary threshold of at least EUR 100k and owned or leased office space for at least 24 months. On 31 December 2018, the MinFin officially confirmed that if all (cumulative) conditions are met, the CFC legislation does not apply.
The MinFin has indicated that the Dutch Blacklist will be used in relation to the application of the (conditional) withholding tax on interest and royalties (per 1 January 2021). This means that companies established in LTJs may have to pay 20,5 percent withholding tax on interest and royalties paid by Dutch company. Essentially, the Dutch Blacklist would be used by the Netherlands to prevent its companies from being used as conduit companies for the benefit of what it perceives as tax havens.
In the explanatory notes to the initial source tax proposal, a three year (t + 3) sunset provision was mentioned for blacklisted jurisdictions which have concluded a tax treaty with the Netherlands. This three year period would be used by the Dutch government to (re)negotiate said tax treaties accordingly. As the Netherlands concluded tax treaties with all blacklisted GCC jurisdictions, the sunset provision would expire at the earliest in 2021 with respect to interest and royalties.
Tax ruling restriction
Thirdly, the MinFin indicated that the Dutch tax authorities are no longer allowed to issue tax rulings with respect to transactions concluded with companies established in LTJs. With tax rulings (e.g., Advance Pricing Agreements and Advance Tax Rulings), a taxpayer would normally obtain certainty in advance from the Dutch tax authorities regarding the tax consequences of a particular (contemplated) transaction. While not detrimental, the restriction on the issuance of tax rulings may deter businesses based in LTJs from investing in/through the Netherlands.
The common misbelief is that jurisdictions in the Middle East, particularly some of the GCC jurisdictions, do not have CIT regimes or have low statutory CIT rates. While there are some caveats to be placed, this belief warrants correction in our view. In our formal reaction to the MinFin on the public consultation last year, we have raised arguments why some of the GCC jurisdictions currently flagged as LTJs should not be included on the Dutch Blacklist. For example, a KSA company which shares are held by a Dutch company would be treated as a CFC established in a LTJ, although such company's non-GCC shareholders make it subject to 20 percent CIT in KSA.
Nonetheless, as it currently stands, all GCC jurisdictions except for Oman are considered LTJs from a Dutch tax perspective. We find it surprising that the Netherlands has chosen its own blacklist at a time when the EU makes progress with its (black)list of non-cooperative jurisdictions. The fact that this particular EU jurisdiction has chosen its unilateral approach towards certain third countries may entail an additional layer of complexity, particularly in relation to tax, for cross border investments involving the Netherlands and the GCC.