The Dutch licensing company is a frequently used and reliable tax planning instrument.

There are many companies in the Netherlands which main activity is to receive royalties from or on behalf of group companies. The main reason to use the Netherlands as the location for such a "group licensing company" is the favourable Dutch tax regime for licensing activities (tax ruling) and the excellent legal and financial infrastructure.

We have extensive knowledge and expertise in the area of Dutch licensing companies and we are gladly prepared to advice you on this subject or to guide you to other professionals who can help you in other specialized areas (like international lawyers, accountants or trust companies).

If you are interested in our services, please feel free to contact us via e-mail or to call us at our office on the number +31 (10) 2010466.

The activities of a Dutch licensing company primarily consist of receiving royalties from or on behalf of group companies.

There are no virtually no limitations with regard to the activities of a Dutch licensing company.  The licensing activities can be combined with holding activities, financing activities or actual operating activities, like trading or manufacturing.

The centralization of activities in a Dutch licensing company will make the structure more robust and resistant to the international tendency to deny tax advantages to purely tax driven vehicles. We refer also to the page The Dutch holding company plus.

The activities of the licensing company can differ depending on the purpose of the structure. Roughly speaking one can distinguish the Dutch royalty conduit company and the Dutch IP company.

We have extensive knowledge and expertise with setting up licensing companies on behalf of foreign clients and we are gladly prepared to advice you on this subject.

If you are interested in our services, please feel free to contact us via e-mail or to call us at our office on the number +31 (10) 2010466.

The main activity of the Dutch royalty conduit company consists of receiving royalties on behalf of group companies.

The Dutch company is typically not the owner of intellectual property rights, but it only obtains a license from a group company which it then sub-licenses to other parties.

The owner of the IP is a group company. In order to avoid a high tax burden at the level of the owner of the IP, it is quite common that the company which owns the IP (and thus receives royalties from the Dutch company) is established in a jurisdiction which levies no or only few taxes over the IP income (tax haven). The Dutch tax system allows an easy transit of royalties to a tax haven company.

The ultimate licensee can be either a non-related party or a group company.

The primary motive for this structure is the reduction of foreign withholding taxes by virtue of applicable tax treaties or the EU Directive for Interest and Royalties.

The activities of a Dutch IP company can consist of all activities which are inherent to the ownership of intellectual property rights (IP). This can include registration, research & development, litigation against infringement, marketing, negotiating licenses and collecting royalties.

If the IP activities relate to the development and exploitation of registered patents, Dutch tax law provides for a special tax regime which effectively can provide for a 10% tax rate (see below under Patent Box).  The ownership of other forms of IP (other than patents) can ben structured by using a so-called IP company as will be described below.

Different from a typical conduit company, the Dutch IP company would typically be the owner of the IP. The ultimate licensee can be either a non-related party or a group company.

The motive for using a Dutch IP company can be tax driven (reduction foreign withholding taxes and tax ruling) or operationally driven (protection IP, excellent infra structure for the exploitation and development of IP). In practice, usually a combination of these two motives applies.

In case the ownership of the IP is expected to generate high profits it may be required to involve a second jurisdiction where the activities with regard to the IP are actually carried out (foreign branch).  Under certain conditions the profits earned through a foreign branch may be tax exempt in the Netherlands.

Apart from the 10% rate offered by teh Patent Box regime, the Netherlands do not have a special tax rate for IP related activities. In order to achieve a tax efficient structure it is then required to involve a second jurisdiction which applies a lower tax rate for licensing activities. This structure will only be effective if part of the activities are actually carried out in that other jurisdiction. In practice, the Netherlands Antilles or Switzerland are often used as second jurisdiction, but technically it can be virtually every jurisdiction (treaty country or non-treaty country) which has a favourable tax regime for licensing activities.

In every day speech the term royalties has a broad meaning. The term royalties is however not well defined in legal and tax legislation.

In the area of taxation the term royalties could be described as "any fees for intangible performances". For tax purposes "royalties" may include fees for technical services.

The underlying intellectual property can for instance be:

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  • patents
  • trade name
  • brand
  • copy rights
  • film rights
  • design and model
  • portrait
  • technical know-how

In certain industries the aforementioned rights may be bundled into one package, like image rights for sportsmen or artists.

Apart from the 10% rate offered by the Patent Box regime, The Netherlands do not have a special tax rate for royalty companies. The normal corporate income tax rate applies.

However, the Dutch tax system is internationally orientated and contains certain general features which makes it beneficial to use the Netherlands as the base for conducting cross border licensing activities.

We have extensive knowledge and expertise with setting up licensing companies on behalf of foreign clients and we are gladly prepared to advice you on this subject.

If you are interested in our services, please feel free to contact us via e-mail or to call us at our office on the number +31 (10) 2010466.

The benefits of the Dutch licensing company

The benefits of a Dutch licensing company primarily depend on the nature of the structure.

The main benefits are:

1. The low foreign withholding taxes on royalties by virtue of the Dutch tax treaties or the EU-Directive for interest and royalties
2. No Dutch withholding tax on outbound royalties
3. Tax deduction of expenses and losses
4. Patent Box regime (10% tax rate)
5. No tax haven status for the application of foreign anti-abuse provisions
6. The possibility to obtain an advance tax ruling for royalty activities
7. Tax credits for foreign withholding taxes incurred
8. No transfer tax or stamp duties
9. No foreign currency exchange restrictions
10. The possibility of calculating tax profits in foreign currency (functional currency)
11. The tax exemption for foreign branch profits
12. The possibility to combine activities

 The reduction of foreign withholding taxes on royalties by virtue of tax treaties

In many countries, royalties paid to a licensor in another country are subject to a withholding tax at source. This tax is generally for the account of the recipient.

Countries are free to determine their domestic withholding tax rates. In practice the withholding tax rate for royalties is around 30%.

The Netherlands concluded numerous bilateral tax treaties in which the country of origin is limited in its right to levy a withholding tax on royalties paid to a Dutch company.

For an overview of the treaty rates we refer to the page Overview of royalty withholding tax under Dutch tax treaties.

In order to qualify for the reduced treaty rate most tax treaties prescribe a procedure for an (partial) exemption of the withholding tax at source.

The recipient of the royalties (i.e. the Dutch company) must apply for a so-called residence statement with its local Dutch tax inspector. In this statement the tax inspector should confirm that the Dutch company is a tax resident of the Netherlands and, if a presribed form is to be used, ussualy that it is the beneficial owner of the royalties.

For most treaties a standard form is to be used for this application. The tax inspector will verify the information provided and if he approves he will issue the residence statement. This residence statement is then to be forwarded to the payee of the royalties who is then allowed to apply the (partial) exemption of the withholding tax at source.

Nowadays the Dutch tax authorities have become more critical in providing a residency statement. If the Dutch company has no substance in The Netherlands and it incurs (virtually) no risks on the licensing activities, the Dutch authorities may deny the issuance of a residence statement because the Dutch company may not be viewed as the beneficial owner of the royalties. This problem should be viewed in conjunction with the current tax ruling policy for group financing activities, which also covers intra-group licensing activities.

As from the tax year 2004 the EU Directive for interest and royalties entered into force.

On the basis of this 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:

1.  
   1. 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 (a corporation as listed in the Annex to the Directive)
   2. Is considered to be a resident in that Member State (and thus not outside the EU)
   3. And is, without exemptions, subject to tax in that Member State

The Netherlands do not levy a withholding tax on outbound royalty payments.

A Dutch licensing company is entitled to wide range of tax deductions. This includes:

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  •  
    •  
      • royalties paid on licenses obtained
      • interest on funding expenses
      • R & D expenses
      • marketing expenses
      • depreciation of IP
      • business losses
      • bad debt losses

To the extent expenses are charged by related parties, the amount of the expenses should be at arm’s length i.e. in line with what would have been charged in case of a similar transaction between non-related parties.

Intra-group charges should be properly documented by invoices and underlying written agreements. On top of that the method to determine the amount of the expenses charged by related parties should be documented.

Interest expenses charged by group companies are tax deductible to the extent the Dutch company has a debt/equity ratio of no more than 3:1.

In order to get 100% certainty about the acceptability of intra-group charges and losses it is possible for the Dutch company to obtain a tax ruling in the form of an Advance Pricing Agreement.

Over the last decade the international community has become increasingly aware of the phenomenon of treaty shopping i.e. the use of conduit companies with the main purpose to benefit from the reduced withholding tax rates provided by tax treaties.

Many countries have incorporated anti-abuse provisions in either their domestic tax legislation or in the tax treaties concluded with other countries, like The Netherlands, to counter the use of purely tax driven conduit companies.

The principles of the new Dutch ruling policy make the Dutch company quite resistant to foreign anti-abuse provisions, but it should still be verified case by case to what extent a Dutch licensing company is affected by foreign anti-abuse provisions.

The Netherlands have extensive policy which describes the conditions for obtaining a tax ruling for intra-group financing activities. This policy applies to basically all financial services rendered between related parties and therefore also applies to Dutch licensing companies.

The benefit of a tax ruling is that 100% certainty can be obtained with regard to the margins to be reported as taxable profits (transfer pricing) and the right to obtain a residence statement. A resident statement is generally required to invoke treaty benefits (i.e. the reduction of foreign withholding tax rates).

Up to March 2001 it was possible to obtain an advance tax ruling in which fixed margins were agreed upon for virtually risk free group licensing transactions. As of April 2001 however, new Dutch ruling policy was introduced with more stringent conditions. Old ruling companies were protected by a grandfather rule which expired in 2005.

Under the new ruling policy a Dutch licensing company must comply with certain operational substance requirements (own office, own bank account, etc.) and economical substance requirements (risks on the transactions).

The Dutch company should also have an equity at risk. The amount of equity at risk required is dependent on the risks incurred on the transaction(s).  The ruling policy itself does not give any concrete guidelines for the required minimum. On the basis of informal discussions with the Dutch tax office we have been able to obtain information on an acceptable method to determine a resonable benchmark.

The new policy does not provide fixed margins, but instead the tax payer must provide evidence that the rates used are at arm’s length.

The introduction of the substance requirements in conjunction with the open transfer pricing discussion about the royalty rates and the amount of the expenses, have made the process of obtaining an advance tax ruling more burdensome for the tax payer. Rulings are however still issued, but the process to obtain it requires more time and effort from the tax payer.

Nevertheless, the new Dutch ruling policy is viewed as an improvement, because the heavy substance of the Dutch company and the transfer pricing requirements, make the Dutch licensing company more compatible to foreign tax regimes and resistant to the anti-abuse provisions of foreign states.

In particular the requirement to substantiate the royalty rates charged by and to related parties may constitute a significant burden. In many cases it is not easy to determine the market value of intellectual property and the market rates for a royalty.

For this reason there is an increased interest from the market place for the engagement of an independent licensing agent. This is in fact a third non-related party which sub-licenses the IP to the ultimate licensee on a turnkey basis. For more information about this structure please contact us.

We have extensive knowledge and expertise with regard to obtaining advance tax rulings for licensing companies on behalf of foreign clients and we are gladly prepared to advice you on this subject or to represent you in the ruling process.

If you are interested in our services, please feel free to contact us via e-mail or to call us at our office on the number +31 (10) 2010466.

In the event that a Dutch licensing company incurs foreign withholding taxes on the royalties received, it will in most cases be entitled to a tax credit.

A Dutch licensing company must always include the grossed up royalties received in its taxable profits.  Without further provisions double taxation would occur if the royalties received were already subject to a foreign withholding tax.

As a method to avoid double taxation, the Dutch company is in most cases allowed to deduct the foreign withholding tax from the Dutch corporate tax calculated over the grossed up (royalty) income.

The credit has two limitations. In the first place the credit can never be more than the actual foreign withholding tax paid (unless a tax treaty provides for a so-called tax sparing credit). In the second place the amount of the credit is limited to the Dutch corporate income tax which actually becomes due over the net amount of royalty income (after deduction of allocable expenses).

In case the tax cannot be utilized in a particular year due to Dutch tax losses, a carry forward to later years is allowed.

The right to a tax credit is usually based on a tax treaty. If for instance a Dutch company incurs Italian withholding tax with regard to royalties received out of Italy, the tax treaty between The Netherlands and Italy provides for the entitlement to a tax credit.

If no tax treaty applies (i.e. the royalties come out of a non-treaty state) the Dutch company can still be entitled to a tax credit but then on the basis of teh Dutch unilateral provisions for the avoidance of double taxation. It is noted however, that this only applies to royalties received out of countries, which in the view of the Dutch government qualify as developing countries.

The Dutch company always has the choice to abandon its right on a tax credit and instead claim the amount of the foreign withholding tax incurred as a deductible business expense.

It is noted that the Dutch ruling policy for licensing (and financing) companies does not limit the right on a tax credit.  This means that the situation can occur, that despite the fact that the Dutch company is only taxed for a percentage of the royalty income, it is in essence still entitled to a 100% tax credit for foreign withholding taxes incurred.

The Netherlands do not levy any transfer taxes or stamp duties with regard to the transfer of intellectual property.

There are no restrictions to bring money into the country or to repatriate funds from The Netherlands. There are however some reporting requirements.

A Dutch company is under certain circumstances allowed to keep its books and to calculate its taxable profits in a currency other than the EURO. An election should be made before the foreign currency can be applied as functional currency.

A Dutch BV is in essence subject to Dutch corporate income tax for its worldwide profits.

However, on the basis of tax treaties or, if no tax treaty applies, the Dutch unilateral rules for the avoidance of double taxation, the Dutch BV can be eligible for a tax exemption of certain foreign sources of income.

A Dutch BV with a foreign royalty branch (exploitation of IP) can under certain conditions qualify for such an exemption. The conditions for the exemption depend on the application of tax treaties.

If a tax treaty applies, the conditions for the exemption can be summarized as follows:

1.  
   1. the foreign branch must have substance in the country where it is established (own office, employees, etc)
   2. the foreign branch must actually conduct business activities (other than managing portfolio investments)

If no tax treaty applies, the conditions for the exemption can be summarized as follows:

1.  
   1. the foreign branch must have substance in the country where it is established (own office, employees, etc)
   2. the foreign branch must actually conduct business activities (other than managing portfolio investments)
   3. in case the activities consist of licensing to group companies, the licensing activities should comply to certain extra (substance) requirements specified in Dutch tax law
   4. the profits of the branch must actually be subject to a profit tax in the country where the branch is established

The extra substance requirements mentioned under 3, relate to a variety of specified substance requirements. The most important requirement relates to the skills, experience and responsibilities of the employee(s).

If these extra requirements cannot be met, the exemption is replaced by a tax credit for taxes actually paid abroad. It is noted that certain new tax treaties contain a similar provision.

We have extensive knowledge and expertise with setting up and maintaining licensing branche structures on behalf of foreign clients and we are gladly prepared to advice you on this subject.

If you are interested in our services, please feel free to contact us via e-mail or to call us at our office on the number +31 (10) 2010466.

Dutch VAT

In essence a Dutch licensing company is subject to the normal Dutch VAT regime. This means that it should register as a VAT entrepreneur and file VAT returns periodically.

A Dutch licensing company needs to comply with Dutch tax filing and registration requirements.

In essence they are the same as for a normal BV, but as a consequence of its specific activities, the tax compliance does require specific expertise.

For a Dutch licensing company in particular the following is relevant:

1.  
   1. Registration for tax purposes
   2. Annual corporate income tax return
   3. Obtaining tax residency statements (if required)
   4. Dividend withholding tax returns (if required)
   5. VAT returns

There is an increased scrutiny from the Dutch tax authorities with regard to royalty companies (and other tax planning like vehicles). Where a couple of years ago, the low effective tax burden of a licensing company was rarely challenged by the tax authorities, nowadays it is quite common that royalty companies are closely scrutinized and subjected to extensive tax audits.

We have extensive expertise in the area of royalty companies and we provide turnkey tax compliance services.

We are providing tax compliance services to many foreign-based clients. If you are interested in our services please feel free to contact us via e-mail or to call us at our office on the number +31 (10) 2010466.

We have extensive experience with setting up and maintaining Dutch licensing companies. We provide amongst others the following services:

If you are interested in our services, please feel free to contact us via e-mail or to call us at our office at the number +31 (10) 2010466.