The Dutch Sandwich—Now Even Healthier!
The three ingredients for a company to create a “Dutch Sandwich” are a foreign company as the bottom slice of bread, a Dutch company as the filling in the middle, and a Curaçaoan parent company as the top slice. When a Dutch company is interposed between a foreign company and a Curaçaoan company, the taxation of the dividends flowing from the foreign company to its shareholders could substantially be lowered. A company located in another country, for example in Canada or the USA, can take advantage of the Dutch Sandwich to substantially lower its tax rate on dividends created in a country in Asia by taking advantage of a new agreement between Curaçao and the Netherlands.
Because of the extensive network of Dutch tax treaties with approximately 100 countries around the world, typically very low withholding tax rates are applicable on dividends received from a company in one of those foreign countries sent to a Dutch company. Combining this low tax rate between the foreign company and the Dutch company with the benefits of a new tax arrangement between Curaçao and The Netherlands that came into force on January 1, 2016 could lead to a very substantial tax reduction. This tax planning strategy is referred to as “the Dutch Sandwich.” For the last 400+ years the Dutch have been innovators in finance and the process of using holding companies for tax relief was another Dutch innovation. Recently new agreements have been made that make the Dutch Sandwich even healthier for your bottom line.
Zero Percent Withholding Tax Rate on Dividends—What?!
A 0% tax rate is about as substantial as one can get! As long as the following criteria are met, no tax will be withheld on dividends issued from a foreign company and received by a parent company on Curaçao through its subsidiary company in the Netherlands:
-The shares of the parent company on Curaçao are listed on a recognized securities exchange;
-The owner of the parent company on Curaçao has at least 50% of its shares listed on a recognized securities exchange;
-The parent company on Curaçao functions as the headquarters of a multinational group of companies or at least plays an important role in the financial arrangements of the multinational group;
-The parent company on Curaçao has sufficient ties with Curacao, i.e. has at least three full-time, active employees who are permanent residents of Curaçao;
-If the entity paying the dividend carries on a business in the Netherlands and the dividends paid out are derived from that business operation;
-If at least 50% of the shares are held directly or indirectly by individuals who are permanent residents of Curacao or the Netherlands.
To qualify a company who wants to set up a Dutch Sandwich has to comply with only one of the above criteria. In case an interested company complies with only part of the above criteria, a request can be made to the inspectorate of taxes on the basis of a catch-all provision. This request will be honored if it is clear that obtaining a tax exemption is not the sole or main purpose of incorporating, acquiring, or maintaining the company receiving the dividend.
Other Withholding Tax Rates Applicable
The standard withholding tax rate for dividends paid from the Netherlands is 15% and applies in all other circumstances. In many of the treaties that the Netherlands has with other countries, the rate is lower. By taking advantage of the Dutch Sandwich, the rate can be lowered to 0%. The previous floor on the tax rate was 8.3%, which was applicable under the former tax arrangement in force before January 1, 2016. Any company that does not meet the criteria to reduce the tax rate to 0% under the new agreement can still reduce the rate to 8.3% and, with the intervention of the inspectorate of taxes, can reduce the tax rate to 5%.
This new tax arrangement between Curaçao and the Netherlands provides new opportunities for routing dividends in international holding structures through the Netherlands and Curaçao whereby a 0% withholding tax rate is possible. Provided that the parent company has sufficient substance in Curaçao, which can be achieved by meeting one or more of the above-mentioned requirements, it is a relatively easy procedure to set up. Drop by Sadeyka’s kitchen and we’ll make a Dutch Sandwich together!