Corporate tax system

How is the corporate income tax system organised in the Netherlands and what are the applicable rates?

Recent reforms to the Dutch corporate income tax system have improved the investment climate for foreign companies by offering additional tax relief for companies doing business here.

As of January 1, 2007, the corporate income tax rate is 25.5%, which is lower than the national average of the EU-25 (25.8%) and far below the average of the EU-15 (29.5%).

For smaller firms, even lower rates apply—20% for the first € 25,000 of taxable profits and 23.5% for profits between € 25,000 and € 60,000.

Also reduced for all firms, is the dividend tax rate, down from 25% to 15%.

The new corporate tax structure "Working on Profit" that came into effect on January 1, 2007, also includes measures that will fuel innovation. Pending approval by the European Commission, a 10% tax rate will apply for income from innovations ("patent box"). Financing profits within a group will be subject to a separate rate of 5% ("interest box").

For decades, the Netherlands Participation Exemption has not taxed foreign business profits (dividends as well as capital gains) derived from subsidiaries. The Capital Tax—a tax levied on capital contributions to companies—has been abolished as of January 1, 2006.

In the Netherlands, taxpayers can find out in advance what fiscal effects a planned transaction will have. Since 2001, this has been accomplished through advance pricing agreements (APA) with, and advance tax rulings (ATR) by, the Dutch tax authorities. APAs and ATRs are treated as agreements binding both the taxpayer and the tax authorities.

What are the different types of taxes I should be aware of while starting a business?

Keep in mind that you may need to pay value-added tax (VAT), which is almost always compulsory for businesses to charge clients. Income tax is to be paid if you are the direct/shareholder/employee of a limited company. However, if you are an entrepreneur, you could benefit from certain exemptions. If you employ staff, you will need to pay wage tax. If you have a private company with limited liability, you will pay corporation tax as well.

Are there tax and customs advantages to importing my goods via the Netherlands?

As foreign trade and investments contribute significantly to the Dutch economy, the Dutch government works hard to create an attractive business climate for foreign companies. It aims to facilitate doing business via the Netherlands through cooperation and flexibility, as well as streamlined customs procedures that quickly validate documents. Bureaucratic red tape and custom checks have been replaced by streamlined administrative controls. Examples of this are:

Customs bonded warehousing
Theoretically, customs duties are due when goods are imported into the European Union. But the Netherlands allows the payment of these duties to be postponed through the storage of the goods in a customs bonded warehouse. Only when the goods are shipped out of the warehouse does the company pay the import duties. This can result in considerable cash-flow advantages.

VAT deferment system
In contrast to most other EU member states, the Netherlands has instituted a system that provides for the deferment of VAT at the time of import. Instead of paying VAT when the goods are imported into free circulation within the EU, the payment can be deferred to a periodic VAT return. Under this system, the VAT at import should be declared, but the amount can be deducted on the same return. The bottom line is that there is no actual payment of VAT at import, so that you can realise cash-flow and interest earning benefits.

Highly automated customs procedures
Dutch Customs makes use of computerised clearance systems that speed up the flow of cargo. Also, as a result of unified and standardised documentation across the EU, approval time is minimised and costly delays are eliminated.

Do I need to register for value-added tax (VAT)?

A company without an establishment in the Netherlands can appoint a fiscal representative. A fiscal representative works for a foreign company and deals with all its VAT obligations (VAT declarations, listing and the paying of VAT). There are two types of fiscal representatives, limited and general.

The limited fiscal representative
A limited fiscal representative acts on behalf of a foreign company to import the goods and make the subsequent deliveries. This means importing from outside the EU to a customer in the Netherlands or another member country.

The general fiscal representative
The general fiscal representative acts on behalf of a foreign company for all deliveries for which tax must be paid, the intra communal acquisition and the import.

For both types of fiscal representative, a license is needed as well as a customer's statement officially appointing the fiscal representative.

What taxes does an employer need to pay on behalf of an employee?

First of all, an employer withholds pay-as-you-earn tax, as well as the employee share in Dutch social security contributions (if applicable) on the income of the employee. This tax is then remitted to the authorities. Even when an individual is on a US payroll, a formal obligation remains in the Netherlands to operate a ‘shadow payroll’.

Also, when the employer is employing individuals, covered by Dutch social security, the company needs to pay the employer share in social security contributions to the government.

Is it expensive to employ individuals in the Netherlands because of the relatively high tax rates?

Admittedly, the Netherlands has a reputation as a high tax country—with its top tax rate at 52%. On the other hand, the taxable basis in the Netherlands is limited. For example, capital gains are tax-free and mortgage interest paid for a principal residence is fully tax deductible. The 30% ruling reduces the taxable base for foreign employees even further, resulting in an effective top tax rate of 36.4% on employment income.

Also, employer costs are relatively limited. Employer social security contributions, for example, are capped.

Overall, the tax burden can compete favourably with many European jurisdictions.