As introduced in the last issue, the Technology Law Bulletin is providing a series of articles which address the common issues and challenges small and mid-sized U.S. companies face in doing business abroad. In this, the second part of our four-part series, the TLB reviews certain aspects of “going international” into the Netherlands.
Until recently, the Netherlands was known as a tax-haven to “treaty-shoppers” — individuals and businesses seeking the most tax-friendly location in which to set up their business. However, recent changes in the U.S. – Netherlands tax treaty have increased tax rates and effectively eliminated these tax advantages.
While the Netherlands may no longer offer the tax advantages it once did, there are still many reasons why it may be a good place for a U.S. company to initiate European operations.
As a leading industrialized nation offering one of the healthiest economies in Europe, the Netherlands offers political stability, strong currency, and a flourishing free-market economy. Although the national language is Dutch, most people also speak English. To promote new investment, the Netherlands government and government-related agencies offer a variety of financial incentives in the form of grants and tax credits to foreign investors, including particular incentives specifically for high-technology ventures. Finally, its location in northwestern Europe, bordering Germany to the east and Belgium to the south, provide easy access to some of the most vibrant economies in the European market.
A fundamental consideration for any overseas venture is the business form under which the entity will operate. The following hypothetical reviews the choices available for operating in the Netherlands and the business and tax ramifications of the various choices.
DATACAD/US, Inc., a U.S. software company with principal offices in Burlington, Massachusetts, develops and markets computer assisted design (CAD) software for architects. DATACAD has an American sales representative who periodically travels to the Netherlands and, using her hotel room as an office, visits prospective customers. The travel costs, physical strain on the representative and marketing “from the outside” has management considering whether the company is realizing its full potential market share. DATACAD has contacted its U.S. law firm seeking advice on the feasibility of opening an office in the Netherlands.
Since DATACAD has never ventured overseas before, it should concentrate on minimizing its initial costs in case the venture proves disappointing. The simplest way to establish a business in the Netherlands without setting up a separate legal entity (such as a subsidiary) is through a branch office. DATACAD would need to register the branch with the Commercial Register (which is a government agency) in the district where the office is located. Any executives working in the branch who have the authority to sign contracts must also be included in the Register.
The branch is merely an overseas office of the parent. As such, the parent will be liable for actions taken and any debts or obligations incurred by the branch. One of the more convenient aspects of a branch office is that if the operation is not successful, a branch office is relatively easy to wind down.
Although a branch office may prove useful to DATACAD in the early stages of doing business, once established, DATACAD should consider transferring its Netherlands operations to a local subsidiary in order to limit DATACAD’s potential liabilities arising from the overseas business. Since the costs involved in establishing a subsidiary and dissolving the subsidiary if the business does not pan out, are more significant than with a branch, DATACAD should not take this step until it is committed to pursuing its overseas operations.
Netherlands law provides for two types of limited liability companies, which are similar to U.S. corporations: the private company (“BV”) and the public company (“NV”). The most common form of entity is the BV, which can be compared with privately held corporations in the U.S., and the German “GmbH” and British “Ltd.” As with U.S. corporations, the liability of the shareholders of a BV or an NV is limited to their capital contribution. For DATACAD, this means that its liability for actions of the Netherlands subsidiary will be limited to DATACAD’s equity investment. Also, a BV has the authority to issue shares to evidence ownership and these shares can be transferred to new stockholders; however, only shares of an NV may be issued or traded publicly.
The tax implications of operating a branch vs. subsidiary are quite complex and must be reviewed on a case-by-case basis. One issue of particular concern is the tax treatment of dividends paid by a Netherlands subsidiary. Although a BV or NV would be free to remit dividends back to its U.S. parent, it would be required to withhold 15% of any dividend payment to cover the parent’s potential local tax liabilities. The Netherlands requires this withholding to avoid chasing overseas companies to collect taxes. If the parent has no tax liabilities in the Netherlands and seeks to recover the amounts withheld, it must file its U.S. tax return in the Netherlands. Since many companies (especially privately held companies) are reluctant to file their U.S. tax returns in foreign countries, some or all of the 15% withholding (depending on the U.S. parent’s tax situation) may be lost.
If a company chooses to do business in the Netherlands, it should be aware of the Benelux Economic Union, which is comprised of Belgium, the Netherlands and Luxembourg. Through a customs union, economic cooperation, and harmonization of the national economic policies, the three countries have integrated their economies to create one Benelux market. Although this market has been integrated into the European Economic Community (EEC), certain Benelux law still remains in effect as local law (for example, The Uniform Benelux Act on Trademarks and The Uniform Benelux Design Act) and must be consulted.