Robin de Raad of Zirkzee Group participated in The Art of Deal Making: Using External Expertise Effectively
Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Robin de Raad discussed The Art of Deal Making: Using External Expertise Effectively as part of the Tax chapter.
Describe a typically tax-efficient deal structure in your jurisdiction? Any examples.
The Netherlands is often seen as the preferred location for central sales and distribution activities in EMEA and beyond due to its central location in Europe, excellent airport facilities, a sophisticated banking system, highly trained and multilingual employees and sufficient office space. Moreover, The Nether- lands is known for its many tax treaties (more than 90!) with countries across the world. At Zirkzee Group, we apply these treaties to your advantage. Lastly, the Dutch Corporate Income Tax Act has a so-called participation exemption, which avoids double taxation on dividends or capital gains when distributing from the subsidiary to the parent company.
Bilateral tax treaties
When you locate your head office in The Netherlands, you can avoid double taxation when collecting dividends, interest and royalties from subsidiaries and other group companies.
Dutch Participation Exemption
Dutch Corporate Income Tax law provides for an exemption of dividends and capital gains on shares in subsidiaries if they meet the following conditions:
• Ownership of at least 5% of the issued share capital of the subsidiary
• The subsidiary has equity divided into share capital
• The shares in the subsidiary are not held as a portfolio investment.
The participation exemption can also be applied in foreign situ- ations. In that case, the foreign subsidiary should be taxed at a realistic corporate income tax rate. A realistic corporate income tax rate is defined as a tax rate of at least 10%. In addition to this, the tax base in the country where the participation is located should not deviate significantly from the tax base according to Dutch standards.
Essentially, the participation exemption applies to dividends and capital gains. But it is also applicable to currency exchange results, hedging results and interest income on certain catego- ries of profit-participating loans.
If the participation exemption applies, losses from the participa- tion cannot be deducted (participation losses are also covered by the participation exemption). However, if there is a loss due to the liquidation of the participation, this liquidation loss can be – under certain conditions – tax-deductible. Of course, Zirkzee Group can help you make optimal use of the participation exemption.
What elements of a structure or deal could prevent a client from implementing your recommendations? For example, holding companies, trusts, exemptions, withholding tax.
As a result of the extensive database of tax treaties and the par- ticipation exemption, The Netherlands is sometimes referred to as a tax haven. This negative image is not ideal for trade with our country, which is why the Dutch government is keen to get rid of this image. To do so, The Netherlands is working on anti-abuse measures in respect of the participation exemption: in order to prevent abuse of the participation exemption, it was decided to expand the existing information exchange for conduit compa- nies. A further study will follow to come up with regulations by 2022 that provide for the possibility of exchanging information with other countries about dividend flow companies with insuffi- cient substance in the Netherlands.
Additional to these measures, external factors also contribute to a more positive image for the Netherlands. As a result of the USA’s tax reform, it seems that American companies are less eager to use the Netherlands as a transit port for their foreign investments.
Given the expected developments regarding the participation exemption, it is necessary to use the expertise of a local advisor. Zirkzee Group has a great deal of experience with companies from the USA and other parts of the world and is therefore your ideal business partner.
How would you minimise the tax risks on a deal, including historic tax liabilities and ongoing tax optimisation?
In the Netherlands, tax advisers and large companies can conclude a covenant with the Dutch Tax Authorities, called “Horizontaal Toezicht” (Horizontal Monitoring). This agreement offers taxpayers, their tax advisers and the Dutch Tax Authorities the opportunity to make agreements in advance about tax issues and the submission of returns. This results in more certainty for companies about their tax position, improves the quality of tax returns and avoids double work.
The core value of horizontal monitoring is that the Dutch Tax Authorities rely on the work that the affiliated advisor does for the taxpayer. There are agreements in the covenant about the working method and quality requirements that the consultant observes.
The premise for horizontal monitoring is that the advisor wants to submit an acceptable tax return on behalf of the client. For this reason, relevant tax standpoints, which may lead to a difference of opinion, are coordinated by the adviser and the tax authorities before the tax return is submitted (preliminary consultation).
By concluding a Horizontal Monitoring covenant, the Dutch Tax Authorities can quickly provide certainty about the taxation. Also, there is less supervision afterwards and because relevant topics are discussed in advance, tax risks are avoided.
Top Tips – Tax Traps To Be Avoided In Your Jurisdiction
• Contact Zirkzee Group and become part of our community.
• Don’t forget to take advantage of some tax or subsidy benefits in a timely manner. Some benefit plans are available on the basis of a released budget. When the budget is used up, the scheme can no longer be used.
• Tax legislation in the Netherlands is relatively stable. Nevertheless, things change every year so use the up-to-date knowledge of Zirkzee Group to avoid any surprises.
• Apply the tax treaties to avoid double taxation by consulting one of our experts.
• To avoid discussion with the Dutch Tax Authorities afterwards, you can discuss tax positions by preliminary consulting.