The
Netherlands is an extremely attractive jurisdiction
in which to locate a royalty conduit companies. A Netherlands
royalty conduit company is a company which intercedes
between the owner of intellectual property rights (e.g.
a patent owner) and the final user of those rights (i.e.
licensee of the patent) with a view to realizing fiscal
advantages. The advantages of using a Netherlands royalty
conduit company are best illustrated using an example.
X, a German
company and the owner of a patent, gives Y, a Dutch
company, the right to license that patent to any licensees
based in Japan. Y grants a license to Z, a Japanese
company, to use the patent for 5 years subject to a
royalty fee. The fiscal consequences of this transaction
are as follows:
- Royalty
payments made by the Netherlands company to the German
company for the right to sub-lease the patent to the
Japanese company at a fee are free of withholding
taxes since in Holland no withholding taxes are levied
on royalty payments.
- Because
of the provisions of double taxation treaties payment
of royalties by a Japanese company to a Dutch company
for the right to use the patent in Japan may be either
free of or subject to a very low rate of withholding
taxes.
- The
Dutch company will only pay tax on the difference
between the royalties paid by the Dutch company to
the German company and the royalties received by the
Dutch company from the Japanese company. The taxable
profits of the Dutch intermediary will be considerably
less than the withholding taxes that might have been
deducted had a different route had been used for the
leasing of the patents. Advance tax rulings are available
to determine whether or not the royalty differential
margin is an acceptable margin for tax purposes.
After
2001 the Dutch began to substitute fixed differentials
as above (which were still accepted for existing companies
until 2005) with Advance Pricing Agreements and Advance
Tax Rulings.
Under the amended policy, structures that do not have
real substance in The Netherlands, such a pure flow-through
royalty structure, are in essence no longer eligible
for a ruling, unless they agree in advance to certain
exchange of information procedures with other countries.
Rulings can however still be obtained for royalty companies
provided that the Dutch company meets substance requirements
of both an operational and economical nature.
As
from the tax year 2004 the EU Directive for interest
and royalties entered into force. Under the Directive
a 0% withholding tax rate applies for qualifying royalty
payments (or interest payments) between qualifying associated
corporations established in the EU. A corporation is
considered associated if it has cross holdings of at
least 25% or a third corporation has a direct minimum
holding of 25% in two other EU corporations.
The
conditions to be met for this EU exemption are:
- The
beneficial owner of the royalties is a qualifying
corporation of another EU Member State or is a EU
permanent establishment of such a corporation;
-
Is considered to be a resident in that Member State
(and thus not outside the EU); and
- Is,
without exemptions, subject to tax in that Member
State.
The
Corporate Income Tax regime which came into force in
January 2007 introduced some improvements to the taxation
of derived from intellectual property, including royalties.
Known as the 'patent box,' the new law provides for
a 10% tax rate on income derived from intellectual from
intellectual property developed by a company. The 10%
rate only apples, however, to a maximum of four times
the production costs of the intangible assets used in
the patent box. In January 2008, the patent box scheme
was extended to include companies which had not been
granted a patent, but which had incurred qualified research
and development costs. This new provision was designed
primarily to benefit small- and medium-sized companies.
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