How I can avoid dividend withholding taxes

Dividends can often be distributed abroad without any withholding taxes either by using international tax treaties or, within the EU, 'Directives' such as 90/435 - A speciality of the SCF Group

Virtually all EU countries apply withholding taxes when local companies seek to distribute dividends to externally based shareholders (corporate or not). The rates that apply will be governed by a number of factors including whether there is a tax treaty in situe between the country where the sending company is based and the country where the recipient company is based. Other factors that are often pertinent include:

1. The local tax treatment of dividend distributions
2. The relationship between the sending company and the recipient company, namely whether the latter is the parent of the former often known as a participation exemption (PE)
3. Whether the companies involved as based within the EU and whether they can benefit from the EU Parent/Subsidiary Directive 90/435

The importance of the Netherlands and Luxembourg

Traditionally both the Netherlands and Luxembourg have sought to act as tax efficient conduits for particularly multi-national companies. Prima facie, this may seem strange given that both countries would seem to have high corporate taxes but as with most sophisticated tax planning jurisdictions there is a multi-layered approach to taxation and withholding taxes specifically aimed at attracting multi-national companies to locate administrative offices within their territories. For example, in the case of the Netherlands multi-national companies setting up administrative offices in Holland, they need only pay local corporate taxes (normally 34.5%) on the cost of running the Dutch office and not on the basis of funds being received or distributed. Such benefits should be seen in the light of the Netherlands, despite being a small country, having some of Europe’s largest multi-national companies including Royal Dutch Shell, Unilever and Philips Electrical. It also explains why the Netherlands and the closely related country of Luxembourg have few restrictions and/or withholding taxes on placed upon the distribution of dividends save those deemed prudent to appease countries such as the United States of America and Germany.

Luxembourg – its Participation Exemption Rules – The EU Parent/Subsidiary Directive 90/435

SOCIETE DE PARTICIPATION FINANCIERE OR A 1990 LUXEMBOURG HOLDING COMPANY: The most important fact to know about the 1990 companies is that they do benefit from Luxembourg's double taxation treaty network and the E.U. Parent/Subsidiary Directive. To obtain and ensure these benefits, it is necessary to pay the normal Luxembourg corporate tax rate of 33.3% and a nominal net worth tax of 0.5%. Of course, as a normal Luxembourg company the standard 15% dividend payment withholding tax, subject to treaty modifications, will apply. However, provided the criteria of the E.U. Parent/Subsidiary Directive are satisfied, there should be no withholding tax problems for companies operating within the European Union. However, the real point of the 1990 Holding Companies is that once they have a 10% interest in the paying company or an investment of at least €1,500,000.00 thereto, such payments will be totally exempt from further Luxembourg taxation. In respect to capital gains derived from any share dispositions, these will also be tax exempt, provided the holding company has at least a 25% interest in the company from which the capital gain income was derived or that such investment realises a gain of €8,000,000.00

SPECIFIC CRITERIA, WHICH MUST BE SATISFIED TO AVOID NORMAL LUXEMBOURG CORPORATE TAXES

The 10% or 25% participation or monetary criteria have been satisfied.

Save where the holding company is less than a year old, it has held the appropriate interest for 12 months before the start of the previous calendar year of the financial year in which the income is realised.

Non-Luxembourg subsidiary companies must either benefit from an appropriate double taxation treaty or have paid indigenous taxes equivalent to at least 15% on their profits.

Luxembourg companies can only make dispositions to a 1990 Holding Company if they themselves are fully taxed corporate entities. This provision is meant to prevent payments being made from tax-free 1929-or 1977 Holding Companies into a 1990 Company. If this was allowed, companies could operate on a virtually tax free basis and avail of the treaty network.

CRITERIA REQUIRED TO SATISFY THE
E.U. PARENT/SUBSIDIARY DIRECTIVE (90/435)

• At least 25% of the equity of the subsidiary company is owned by the parent company.
• The subsidiary company is fully taxable in it's country of registration, excluding Luxembourg 1929 and 1977 companies 
• Both the parent and subsidiary companies are located in one of the 27 EU member states.

Note, more recent members may not have enacted legislation to give effect to the Directive - That the parent has held the required equity stake for at least two years

Example of how a Luxembourg 1990 Company can be used to reduce withholding taxes on Dividends:

1990 LUXEMBOURG HOLDING COMPANIES TAX TREATY CONSEQUENCES

A 1990 Luxembourg company's structure, as demonstrated, can provide a very tax efficient tax mitigation vehicle. However, whilst access is given to Luxembourg's treaty network, it must be remembered that this jurisdiction has not managed to negotiate as favourable withholding tax rates as The Netherlands. In particular, The Netherlands has managed to negotiate zero withholding tax rates in respect of dividends with many different countries where there has been a participation exemption. It will be noted that this is not the case for Luxembourg and that it has a far less extensive treaty network. Nevertheless, in certain circumstances Luxembourg can be preferable, especially in the case of the United States where the same withholding tax rates apply when a participation exemption exists for dividends, interest and royalties. A further problem that could be faced by a tax planner is how to make future re-investments on a tax efficient basis given that Luxembourg does not have the same tax treaty re-entry ability of The Netherlands. Obviously, use can be made of the Dutch/Luxembourg treaty, which is quite favourable, but the various expenses and treaty ramifications must be considered carefully before taking any decisions.

THE LUXEMBOURG
DOUBLE TAXATION TREATY NETWORK

NOTES

(i)  = Normal tax rate
(ii) 'P.E.' = Participation Exemption subject to the given special negotiated rate.
(iii) 'EU' = European Union Parent/Subsidiary Directive (90/435) is or will shortly apply (i.e. new member states).
(iv) '♦' - Where the participation exemption requires the company located in the applicable Jurisdiction to own at least 25% of the Luxembourg company's shares or voting power before receiving dividend payments.

SPECIFIC COUNTRY NOTES

(a) Austria: No withholding taxes will apply, provided the Austrian company owns less than 50% of the Luxembourg Company making the payments. If it owns more than 50%, the 10% withholding tax will be applicable.
(b) Brazil: 15% withholding taxes will apply provided the Brazilian company owns at least 10% of the Luxembourg company.
(c) Indonesia: The 12.5% withholding tax rate will be reduced to 10% where the royalties relate to technical services.
(d) Switzerland: Same provisions as outlined in (iv) above, save that the 25% interest must have been held for a minimum of two years.
(e) The United States: For the U.S. participation exemption to exist, a U.S. company must own at least 50% of the equity of the Luxembourg company and no more than 25% of the gross income must emanate from interest and dividend payments received from third party investments made by the Luxembourg company outside the associated group of companies.