On July 8, the Dutch Ministry of Finance released a resolution (dated July 6) in which it relaxes the application of article 24 (4) of the tax treaty between the United States and the Netherlands. In very basic terms, article 24 (4) denies treaty benefits to dividend distributions in case of a hybrid US/NL structure.

The most obvious situation covered by the resolution is the so-called CV-BV structure, which is frequently used by US groups. The US group sets up a Dutch partnership in the form of a hybrid CV, which is checked as non-transparent in the US and which is regarded as transparent from a Dutch tax perspective. The hybrid CV owns all shares in a Dutch company, a BV, which acts for example as a holding or financing vehicle.

Until 2005, dividends paid out by BV to the hybrid CV benefited from the reduced dividend withholding tax rate under the US/NL tax treaty. Effective as of 2005, as a result of a new article 24 (4) which was introduced into the treaty by way of a protocol concluded in 2004, a dividend paid out by BV to CV no longer benefits from the reduced treaty rate, unless the dividend is reported as taxable income with the participants of CV in the United States. Without treaty protection, the dividend is subject to withholding tax at the rate of 25%.

Now, the Ministry of Finance has ruled that, in case certain conditions are fulfilled, article 24 (4) will not apply. As a result, if and to the extent the participants in the hybrid CV are US residents qualifying under the US/NL tax treaty, dividends paid out by BV to CV benefit from the reduced rate of dividend withholding tax (as was the case until 2005). It is noted that the rate usually is reduced to 0% or 5%, in case the US participant is an entity owning a certain percentage in the CV-BV structure, and to 15% in other situations (including US individuals).

The resolution states that, in order for article 24 (4) not to apply, BV must have a certain level of activities in the Netherlands. The wording in the resolution, literally translated, speaks of ´real´ activities. To be sure that BV has real activities, a request for an advance tax ruling can be filed with the tax authorities. The tax authorities have a special ruling team in Rotterdam which is competent for granting such advance tax rulings. A request is to be filed by the CV or by its US participants.

In determining whether or not BV has real activities, the ruling team will take into account the following factors:

1. is BV resident in the Netherlands;
2. are officers (board members) and/or employees of BV active in the Netherlands;
3. do these officers avail of sufficient professional knowledge and skills;
4. where are important board decisions taken;
5. where is the main bank account kept;
6. where is the bookkeeping kept;
7. what is the size of the equity and debt;
8. which activities are performed in or via the Netherlands;
9. is the personnel, which is active in the Netherlands, sufficiently qualified;
10. does BV run real risks;
11. is BV´s remuneration reasonable taking into account the activities and risks taken;
12. has BV properly fulfilled all its tax filing obligations.

These factors are to a large extent the same as the factors which have been laid down in various resolutions issued in 2001 and subsequent years, regarding the question under what circumstances in general an advance tax ruling can be obtained (for example for holding or conduit finance activities).

This resolution for non-application of article 24 (4) of the US/NL tax treaty is applicable to dividend distributions made in book years which started on or after 1/1/2006.

CMS Derks Star Busmann is very experienced and well equipped to give clients the proper advice and to assist in a request to the tax authorities for an advance tax ruling, to make sure that a particular structure meets the requirements. We will be pleased to help.

In case you would like to receive more information, please let us know.