By Don Wilson, Isabelle MacInnes, Alyson Rodi, John Linders and Haico Vollema

The Australian Tax Office (ATO) recently issued a private binding ruling on the treatment for Australian corporate income tax purposes of a Dutch co-operative association (coöperatieve vereniging). Although not binding authority for other taxpayers, the private binding ruling is a good indication of the ATO’s views on this issue.

According to the new ruling, a Dutch co-op is regarded as a corporate entity that can qualify for the Australian participation exemption on its dividends and on any share disposal capital gains provided the usual qualification rules are satisfied. Since there is no Dutch withholding tax on dividends paid by the Dutch co-op under Dutch domestic tax law, use of a properly structured Dutch co-op reduces the rate of withholding tax from the a Netherlands company to an Australian company from 15% to nil.

In addition, a Dutch co-op, like the Dutch limited company (BV) and unlimited company (NV), is fully entitled to the Dutch participation exemption (provided the subsidiaries held by the co-op qualify under the Dutch participation exemption rules, which would almost always be the case) if the subsidiaries are engaged in active business activities or subject to an effective tax a rate of at least 10% in their local jurisdiction. This, combined with a nil withholding rate on dividends under the EC Parent-Subsidiary Directive (subject to anti-abuse provisions in certain EU jurisdictions), can allow for tax-efficient repatriation of EU group earnings to an Australian parent company.

In the Netherlands, a co-operative association is regarded as an entity for Dutch corporate income tax purposes and, as such, is subject to corporate income tax according to Dutch tax law without any limitations regarding source of income. As a result, a Dutch co-op is considered a resident of the Netherlands under the rules of the Netherlands’ numerous tax treaties.

However, as opposed to other Dutch companies (i.e. a BV or NV), a Dutch co-op is not subject to Dutch dividend withholding tax, provided the co-op is organized in such way that the co-op does not qualify as an entity with its capital divided into shares. Despite the lack of shares, the Australian private ruling concluded that the membership interests in the Dutch co-op met the definition of “shares” for Australian tax purposes, which was a requirement to have the dividends from the Dutch co-op qualify as exempt income. Several of the normal corporate legal characteristics of the Dutch co-op must be altered in the articles of association to achieve this Australian characterization. For example, the articles should provide for transferability of the member interest with the prior unanimous consent of the other members and for voting rights in proportion to capital.

Considering the application of the Dutch participation exemption and the absence of dividend withholding tax, the key benefit of a Dutch co-op in the international environment is a holding structure with a Dutch co-op as the top intermediate holding company between the Australian parent and its European subsidiaries and potentially other group companies elsewhere in the world where the Netherlands has more favorable dividend withholding rates than Australia.

Such a holding structure creates an opportunity for an Australian parent company to repatriate funds from its European subsidiaries to Australia, without any tax cost and, in relation to subsidiaries in certain non-EU countries, repatriate funds subject to a reduced withholding tax rate on dividends in accordance with the tax treaty between the Netherlands and that specific country.

Simplified structure:[SEE ATTACHED PDF FOR IMAGE]

This structure provides a relatively simple way to eliminate or reduce withholding tax on dividends from the subsidiaries in various countries to the parent company in Australia compared with other possible structures, such as use of a Spanish holding company using the ETVE regime. It should be noted, however, that some EU countries (e.g. Germany) may apply anti-abuse rules negating application of the EC Parent-Subsidiary Directive if the direct parent company has no real substance in the country of residence. The direct parent company should perform an actual economic function within the group; otherwise, this company may not be regarded as eligible for the reduced rate of withholding tax on dividends. As a possible solution, a Dutch operational limited company (BV) could be integrated into the structure between the EU subsidiaries and the Dutch co-op. This could also make the structure more robust, since not all jurisdictions are familiar with a Dutch co-op from a treaty eligibility perspective.

In addition, there is another issue to consider which relates to Dutch tax law. The membership of a Dutch co-op is considered a substantial shareholding from a Dutch tax perspective. This could lead to a Dutch income tax liability with respect to income and/or capital gains derived from the membership of a Dutch co-op.

A (Dutch or foreign) corporate member of a Dutch co-op could be subject to Dutch corporate income tax as a domestic or foreign taxpayer, unless:

Fortunately, provisions in Dutch tax law provide an escape from the taxation of dividends received by a substantial shareholder, i.e. the Australian parent company, in the case at hand. If the membership of the co-op can be considered as part of the business assets of the member, the Netherlands does not levy tax on income or capital gains derived from a Dutch entity, including a Dutch co-op. In practice, this kind of issue can be addressed by obtaining a tax ruling from the Dutch tax authorities. An Advance Tax Agreement (ATR) can be concluded with the Dutch authorities, on the basis of which the Australian parent company can obtain certainty that no Dutch dividend withholding or corporate income tax is due in relation to dividend income from a Dutch co-op and no Dutch corporate income tax is due in relation to any capital gains derived from a transfer of the membership interest in the Dutch co-op.

The Australian ruling also opens the door to inbound investment into Australia by Dutch co-ops which, if properly structured, can be classified as corporations for Australian tax purposes (based on the criteria in the ruling) and, therefore, eligible for treaty benefits. Since franked dividends from an Australian company are not subject to withholding tax under domestic law, a Dutch co-op owned by various private equity interests could get franked dividends from Australian companies free of withholding tax even without treaty protection.

Australia does not generally tax nonresidents on sale of shares of Australian companies unless the company is land rich, so there is also no need to rely on the treaty to eliminate tax on exit. However, the Dutch co-op may require treaty rates of withholding on other income or to protect from having a permanent establishment in Australia.

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