It is November and the end of the year is approaching rapidly. New tax laws will soon come into force, putting question marks over many tax structures using Dutch BVs. The essence of the new law is that a Polish entrepreneur who owns a foreign company which derives more than half of its income from passive sources, e.g. interest, dividends and capital gains, will pay tax in Poland on the profits of this foreign company at a personal level even though the money is still in the foreign company and cannot be taken out without paying taxes.
Dividend income which is exempt from tax on the grounds of the EU directive does not trigger CFC taxation at a Polish shareholder level, but there is no clarity as to whether this changes when the BV receives dividends both from EU and non-EU companies.
One of the main reasons to use a Dutch BV in group structures is the lack of capital gains tax in the Netherlands. In other words, when you sell your Polish subsidiary, which is directly underneath a Dutch BV, you do not pay income tax on the difference between the acquisition price and the sale price. The sale price can thus be reinvested in full. This so-called participation exemption has been around in the Netherlands for years. It is not a means to avoid tax but a way to postpone tax, a way to promote further investment.
The new Polish CFC (“Controlled Foreign Company”) rules were written to stop Polish entrepreneurs from hiving off profits to tax havens abroad. Suppose you have a chain of coffee houses using a recognizable brand name, you park the ownership of the brand name in a jurisdiction with a low tax rate, and then you let the Polish company that runs the coffee houses pay a license fee depending on turnover. If the license fee is high enough, the Polish company will never make any sizable profit but the off-shore company will be taxed at a very low rate or will be tax exempt. This is of course undesirable from the point of view of the Polish state. There are also efforts under way at the OECD to come up with recommendations to all member states to implement common rules to combat such practices – BEPS Action Plan.
As is often the case, though, with rules written to combat clear abuse of international tax treaties, it also hits honest entrepreneurs who run a mid-size multinational group of companies and who wish to group all these companies together under a Dutch BV (the Netherlands has one of the largest treaty networks) in order to pool resources and use the profits from the sale of one company to grow others, with each of these operating companies paying its taxes.
Another very legitimate reason to use a Dutch BV is, for example, to structure a joint venture. Under Polish corporate law, it is very difficult, if not downright impossible, to terminate a joint venture in which both partners no longer see eye to eye in such a way that the company can be saved. Dutch jurisprudence on the subject is wider and clearer and that is why I have often advised clients to consider setting up the joint venture vehicle in the Netherlands with a 100% subsidiary in Poland.
These entrepreneurs are now forced to rethink their corporate structures, hire expensive tax advisors and create ever more complicated structures to achieve perfectly legitimate goals whilst paying their fair share of taxes in Poland. For some, the cost of maintaining these new structures will be prohibitive whilst for the really big international corporations the potential benefits are so large that they will find different solutions. 2015 promises to be a good year for tax advisors.