Articles

Chinese outbound investments into Germany or Greece

Chinese outbound investments into Germany or Greece

Chinese outbound investments into Germany or Greece

11.10.2013 NL law

The volume of Chinese outbound M&A continues to increase, with ever more activity destined at European targets. The take-off of Europe-bound Chinese M&A is fuelled by several factors, including cash-stripped governments selling assets to cash-rich Chinese suitors, and Chinese companies looking to acquire technological knowhow as well as managerial and marketing skills from their European counterparts.

In this newsletter, we will discuss how Chinese investors thinking about investing in Europe should be able to achieve an attractive and tax efficient investment structure with the Netherlands or Luxembourg as the logical gateway to Europe. 

This attractive and tax efficient investment structure can be achieved as Dutch and Luxembourg holding companies ("DutchCo" and "LuxCo", respectively) controlled by investors (ultimately) established in China generally have access to a wide double tax treaty network and can benefit from the European Union Directives with respect to (withholding) taxes in respect of dividends, interest and royalties. 

As most recently the investment of Chinese investors in Germany and Greece has seen increased activity, this briefing focuses on the use of the Netherlands and Luxembourg as gateway to Germany and Greece. Both countries can also be seen as prime examples of the factors described above, i.e. Chinese investors’ thirst for distressed assets (Greece alongside other, mainly Southern, European countries) and/or superior technology (Germany). However, the principles described herein generally apply as well for investments into each of the currently 28 member states of the European Union and the 3 member states of the European Economic Area (Norway, Iceland and Liechtenstein).

Given that for regulatory and other reasons Chinese investors just as often prefer to make their foreign investments via Hong Kong, this briefing addresses investment structures involving an intermediary holding company established in Hong Kong ("HKCo") controlled by a Chinese established company ("ChinaCo"). The same principles, however, apply to investments by ChinaCo directly into DutchCo or LuxCo.

This briefing does not address the use of an intermediary Belgian holding company, since those are generally less well-suited to operate as intermediary conduit vehicles, unless accompanied by regional headquarters or other functions generating sufficient tax-deductible costs to offset the tax leakage caused by Belgium’s participation exemption being limited to 95% of received income.

1. Typical investment structure 

Typical investment structures of Chinese investors making their investments in a German company ("GermanCo") or a Greek company ("GreekCo") either directly from China, or indirectly from Hong Kong through the Netherlands or Luxembourg, may be depicted as follows: 

Schema

As reflected in the following table and addressed in further detail under the heading International tax aspects, investing through Hong Kong may – in particular under the 1987 double tax treaty between China and the Netherlands currently still in force – also be preferable given the reduced dividend withholding tax rates that apply under the double tax treaty between Hong Kong on the one hand, and the Netherlands and Luxembourg on the other hand (withholding taxes in respect of interest and royalties are not relevant here given the absence of such taxes in the Netherlands and Luxembourg; see below).

Treaty rates in % Dividend
NL - China 10
(0/5 under the 2013 treaty: signed, not yet in force)
NL - Hong Kong 0/10
Lux - China 5/10
Lux - Hong Kong 0/10


However, for purposes of the Chinese domestic foreign tax credit rules (Circular 125), a direct investment from China may be preferable as this would limit the number of intermediary holding companies below ChinaCo.

2. EU Directives

General

DutchCo and LuxCo have access to the EU Parent-Subsidiary and EU Interest and Royalty Directives. Under these EU Directives, payments of dividends, interest and royalties made by GermanCo and/or GreekCo to DutchCo or LuxCo, respectively, are generally exempt from withholding tax in Germany and Greece. Although Germany has domestic anti-abuse measures against the use of foreign holding companies solely for tax structuring purposes, the German withholding tax exemption should be available to DutchCo or LuxCo provided they satisfy the German substance requirements enabling them to obtain a German withholding tax exemption certificate. 
The reduction of withholding taxes which may be achieved is reflected in the following diagram (see Annex II for an overview of the overall reduction of withholding taxes which may be achieved):

Domestic rates in % Dividend Interest Royalty
Germany 25 25 15
Greece 25 33 25
China - Germany 10 0/10 10
China - Greece 5/10 0/10 10
NL/Lux - Germany 0 0 0
NL/Lux - Greece 0 0 0

 

EU Parent-Subsidiary Directive

In order for DutchCo and LuxCo to qualify for the exemption from withholding tax in respect of dividends in Germany and Greece, pursuant to the EU Parent-Subsidiary Directive they need to have a shareholding relationship of at least 10% (certain other requirements may need to be met as well).


EU Interest and Royalty Directive

The EU Interest and Royalty Directive requires a shareholding relationship of at least 25% in order to be eligible for the exemption from withholding tax in respect of interest and royalties (certain other requirements need to be met as well).


3. Double tax treaties

DutchCo and LuxCo also have access to a wide double tax treaty network of each of the Netherlands and Luxembourg. Under the Dutch and Luxembourg double tax treaties, capital gains in respect of share disposals are in principle not taxable in Germany and Greece (compare the diagram below).

Capital gains Shares Shares in real estate company
Netherlands - Germany NL NL (Germany under the 2012 treaty: signed, not yet in force)
Netherlands - Greece NL NL
Luxembourg - Germany Lux Lux (Germany under the 2012 treaty: signed, not yet in force)
Luxembourg - Greece Lux Lux
China - Germany CN CN
China - Greece CN GR

 

In other words, an exit could be structured in such a way as for it not to trigger any capital gains taxation; the subsequent up-streaming of the sale proceeds should also be tax-efficient given the zero withholding tax rates discussed above.

4. Key domestic tax features of the Netherlands

General

DutchCo is, in principle, fully liable to Dutch corporate income tax ("CIT") as a domestic taxpayer which allows it to claim benefits under double tax treaties. The marginal top Dutch CIT rate is 25% (a 20% rate applies to profits not exceeding EUR 200,000).

Participation exemption

However, provided that DutchCo holds at least 5% of the share capital of GermanCo or GreekCo and the activities of GermanCo and GreekCo are sufficiently active, any income (dividends and capital gains) derived by DutchCo from its investment in GermanCo or GreekCo is exempt from Dutch CIT under the participation exemption. There is no minimum holding period in order for the participation exemption to apply.

Intragroup financing

Any interest payments received by DutchCo in respect of the Loan granted by it to GermanCo/GreekCo is in principle fully subject to CIT on an accruals basis. Such taxable interest income can, however, be offset by corresponding deductible interest payments made by DutchCo in respect of the Loan granted to it by ChinaCo/HKCo, subject to a small arm's length spread in respect of these payments to be retained by DutchCo as income for CIT purposes. Depending on the applicable interest deductibility restrictions at the level of GermanCo/GreekCo, the interest payments made by GermanCo/GreekCo may result in a reduced (corporate) income tax burden for GermanCo/GreekCo in respect of their profits, whilst effectively no additional CIT is incurred at the level of DutchCo.

Withholding taxes

Subject to treaty relief (see under the heading Dutch international tax aspects below), dividend distributions made by DutchCo are subject to 15% withholding tax ("WHT"). If, however, DutchCo were to be incorporated as a cooperative (and provided certain further conditions are satisfied), dividend distributions made by DutchCo are not subject to WHT at all.
Payments of interest and royalties made by DutchCo are not subject to WHT (subject to certain limited exceptions for payments in respect of hybrid debt instruments). This makes the Netherlands an attractive jurisdiction for intragroup financing/licensing.

Capital gains tax non-residents

Subject to treaty relief (see under the heading Dutch international tax aspects below), in case ChinaCo/HKCo disposes its shares in DutchCo, the capital gains triggered upon such disposal could only become subject to Dutch CIT at the marginal top rate of 25% if (i) ChinaCo/HKCo holds an interest of at least 5% in DutchCo; (ii) such interest is held by ChinaCo/HKCo with the aim to avoid Dutch personal income tax or dividend withholding tax of another person; and (iii) such interest does not form part of the assets of a business enterprise carried on by ChinaCo/HKCo. In this respect, it is noted that so long as the interest held by ChinaCo/HKCo forms part of the assets of a business enterprise carried on by ChinaCo/HKCo, one of the cumulative tests would not be satisfied, and (thus) no Dutch capital gains taxes would be triggered under Dutch domestic law.

Advance tax ruling

Advance tax clearance from the Dutch tax authorities confirming the Dutch tax treatment of DutchCo's holding, financing and licensing activities is available, provided that DutchCo satisfies the Dutch substance requirements (see Annex I for an overview of such requirements).  Reference is made to our 5 September Tax Alert (available in English only) on the recent developments with respect to the Dutch substance requirements.
In addition, the Dutch tax authorities are able to issue tax residency certificates confirming DutchCo’s Dutch tax residency, thereby allowing it to satisfy formalities required by other countries to claim tax benefits under double tax treaties.

5. Key domestic tax features of Luxembourg

General

LuxCo is, in principle, fully liable to Luxembourg CIT as a domestic taxpayer which allows it to claim benefits under double tax treaties. The overall Luxembourg tax rate is 29.22% for companies having their registered office in Luxembourg City. 

Participation exemption

However, provided that LuxCo holds at least 10% of the share capital of a qualifying GermanCo or GreekCo (or a participation with an acquisition cost of at least EUR 1.2 million in case of dividends, and EUR 6.0 million in case of capital gains) for at least 12 months, any income (dividends and capital gains) derived by LuxCo from its investment in GermanCo or GreekCo is exempt from Luxembourg CIT under the participation exemption. In case the holding period has not yet lapsed, this requirement is also satisfied if LuxCo commits itself to hold the minimum participation for an uninterrupted period of at least 12 months.

Intragroup financing

Any interest payments received by LuxCo in respect of the Loan granted by it to GermanCo/GreekCo is in principle fully subject to CIT on an accruals basis. Such taxable interest income can, however, be offset by corresponding deductible interest payments made by LuxCo in respect of the Loan granted to it by ChinaCo/HKCo, subject to a small arm's length spread in respect of these payments to be retained by LuxCo as income for Luxembourg tax purposes. Depending on the applicable interest deductibility restrictions at the level of GermanCo/GreekCo, the interest payments made by GermanCo/GreekCo may result in a reduced (corporate) income tax burden for GermanCo/GreekCo in respect of their profits, whilst effectively no additional tax is incurred at the level of LuxCo.

Minimum taxation

A minimum taxation of EUR 3,210 applies to each Luxembourg company that owns more than 90% of its assets in financial assets, otherwise a minimum taxation amount applies that depends on the balance sheet total of LuxCo.

Withholding taxes

Subject to treaty relief (see under Luxembourg international tax aspects below), dividend distributions made by LuxCo are subject to 15% WHT, unless an exemption applies which would be the case if ChinaCo or HKCo (i) owns at least 10% of the shares in LuxCo (or shares they acquired for a price of at least EUR 1,2 million) for at least 12 months; and (ii) are subject to an income tax regime which is comparable to the Luxembourg tax regime. Meeting the later requirement can be met, but differs on a case by case basis. In this respect, it is worth noting that a distribution upon the (partial) liquidation of LuxCo is not subject to WHT as a matter of Luxembourg law. Finally – and as addressed in more detail under Luxembourg international tax aspects below –, under the Luxembourg – Hong Kong double tax treaty the domestic Luxembourg 15% WHT is reduced to 0% in case of a participation of 10% or with an acquisition cost of at least EUR 1.2 million. 

Payments of interest and royalties made by LuxCo are generally not subject to WHT. By financing LuxCo with a combination of equity, debt and or convertible debt, such WHT may easily – and often is – completely avoided. 

Net wealth tax

LuxCo is annually subject to 0.5% net wealth tax which is determined on LuxCo’s net wealth as per January 1st of each year. Under the same conditions of the participation exemption for dividend (see above), except that the 12 month holding period does not apply here, a full exemption of net wealth tax applies for participations. 

Capital gains tax non-residents

Subject to treaty relief (see under Luxembourg international tax aspects below), in case ChinaCo/HKCo disposes its shares in LuxCo, the capital gains upon such disposal could only become subject to Luxembourg tax at a rate of 29.22% if (i) ChinaCo/HKCo holds an interest of at least 10% in LuxCo; and (ii) such interest is disposed of within 6 months after its acquisition date.

Advance tax ruling

Advance tax clearance from the Luxembourg tax authorities confirming the above Luxembourg tax treatment is available. 
In addition, the Luxembourg tax authorities are able to issue tax residency certificates confirming LuxCo’s Luxembourg tax residency, thereby allowing it to satisfy formalities required to claim tax benefits under double tax treaties (see below with respect to such benefits).

6. Dutch international tax aspects


The Netherlands – China double tax treaty 

Under the Netherlands – China double tax treaty the rights to tax income distributions and capital gains are attributed to the Netherlands and China as follows:

1. the domestic Dutch WHT rate in respect of income distributions made by DutchCo to ChinaCo is reduced from 15% to 10%, provided ChinaCo is considered the beneficial owner of such income (see above with respect to the use of a cooperative in order to reduce this rate to 0%); and
2. China has the right to tax capital gains upon the disposal by ChinaCo of the shares in DutchCo. Hence, the Netherlands will have to refrain from taxing such capital gains (even if ChinaCo were to fall within the scope of Dutch capital gains tax for foreign resident taxpayers; see above for further details on these rules).

On 31 May 2013, the Dutch State Secretary of Finance announced the signing of a new double tax treaty (including protocol) with China. In our China Newsletter of 7 June 2013, we elaborate on the key features of this treaty. The 2013 Netherlands – China double tax treaty makes the investment structure between the Netherlands and China even more attractive and tax efficient. Please find below the relevant international tax aspects.

The Netherlands – China double tax treaty 2013

Under the 2013 the Netherlands – China double tax treaty the rights to tax income distributions and capital gains are attributed to the Netherlands and China as follows:

1. the domestic Dutch WHT rate in respect of income distributions made by DutchCo to ChinaCo is reduced from 15% to:
a. 5% in case ChinaCo is the beneficial owner and holds a participation of at least 25% in DutchCo; 
b. 0% if ChinaCo is the beneficial owner of the dividends and is the Government of China, any of its institutions, or any other entity the capital of which is directly or indirectly wholly owned by the Government of China; and
c. 10% in all other cases;
2. if ChinaCo realizes a capital gain in respect of the disposal by ChinaCo of the shares in DutchCo, such gain may only be taxable in the Netherlands if ChinaCo at any time during the twelve-month period preceding the share disposal directly or indirectly held a participation of at least 25% in DutchCo (even if ChinaCo were to fall within the scope of Dutch capital gains tax for foreign resident taxpayers; see above for further details on these rules).

However, the Netherlands will have to refrain from taxing such capital gains if (a) the disposed shares are listed on a recognized stock exchange and not more than 3% of the shares in the company are disposed of by the alienator during the relevant tax year; or (b) the shares are held by the Government of China, any of its institutions, or any other entity the capital of which is directly or indirectly wholly owned by the People's Republic of China.

NB: The 2013 Netherlands – China double tax treaty is signed, but not yet in force. On 5 September 2013, the Netherlands – China double tax treaty was submitted to Dutch parliament for parliamentary approval. 

The Netherlands – Hong Kong double tax treaty

Under the Netherlands – Hong Kong double tax treaty the rights to tax income distributions and capital gains are attributed to the Netherlands and Hong Kong as follows:

1. the domestic Dutch WHT rate in respect of income distributions made by DutchCo to HKCo is reduced from 15% to (i) 10% in all cases; and (ii) 0% in case of a shareholding of at least 10% (and certain stringent additional conditions are satisfied), provided HKCo is considered the beneficial owner of such income (see above with respect to the use of a cooperative in order to reduce this rate to 0% if it were not be possible to satisfy the additional treaty conditions); and
2. Hong Kong has the right to tax capital gains upon the disposal by HKCo of the shares in DutchCo. Hence, the Netherlands will have to refrain from taxing such capital gains (even if HKCo were to fall within the scope of Dutch capital gains tax for foreign resident taxpayers; see above for further details on these rules). Furthermore, given that Hong Kong (subject to certain limited exceptions) generally does not levy capital gains tax, this effectively results in no taxation on any capital gains.

7. Luxembourg international tax aspects

Luxembourg – China double tax treaty

Under the Luxembourg – China double tax treaty the rights to tax income distributions and capital gains are attributed to Luxembourg and China as follows:

1. the domestic Luxembourg WHT rate in respect of income distributions made by LuxCo to ChinaCo is reduced from 15% to (i) 5% in case of a 25% shareholding; and (ii) 10% in all other cases, provided ChinaCo is considered the beneficial owner of such income (see above with respect to the use of hybrid (debt) instruments in order to reduce this rate to 0%); and
2. China has the right to tax capital gains upon the disposal by ChinaCo of the shares in LuxCo if it holds a shareholding of less than 25% in LuxCo.  Hence, in that case Luxembourg will have to refrain from taxing such capital gains. If, however, ChinaCo holds a shareholding of 25% or more in LuxCo, Luxembourg – not China – has the right to tax such capital gains (see, however, above with respect to the Luxembourg domestic treatment: Luxembourg does not tax capital gains realized by non-residents if the disposal takes place more than 6 months following the acquisition date of the disposed shares).

Luxembourg – Hong Kong double tax treaty

Under the Luxembourg – Hong Kong double tax treaty the rights to tax income distributions and capital gains are attributed to Luxembourg and Hong Kong as follows:
1. the domestic Luxembourg WHT rate in respect of income distributions made by LuxCo to HKCo is reduced from 15% to (i) 0% in case of a participation of 10% or with an acquisition cost of at least EUR 1.2 million; and (ii) 10% in all other cases, provided HKCo is considered the beneficial owner of such income; and
2. Hong Kong has the right to tax capital gains upon the disposal by HKCo of the shares in LuxCo. Hence, Luxembourg will have to refrain from taxing such capital gains. Again, given that Hong Kong (subject to certain limited exceptions) generally does not levy capital gains tax, this effectively results in no taxation on any capital gains.

8. Conclusion

Chinese investors thinking about investing in Europe should be able to achieve an attractive and tax efficient investment structure when using the Netherlands or Luxembourg as their gateway to Europe. 
In particular, using a Dutch or Luxembourg intermediate vehicle will allow Chinese investors to benefit from (i) reduced or exemption of local withholding taxes in respect of dividend, interest and royalties in the country of the target; (ii) protection against non-resident capital gains taxation; (iii) complete tax neutrality for the Dutch or Luxembourg intermediary holding company; and (iv) a reduced (corporate) income tax burden in country of target.

 

All rights reserved. Care has been taken to ensure that the content of this e-bulletin is as accurate as possible. However the accuracy and completeness of the information in this e-bulletin, largely based upon third party sources, cannot be guaranteed. The materials contained in this e-bulletin have been prepared and provided by Stibbe for information purposes only. They do not constitute legal or other professional advice and readers should not act upon the information contained in this e-bulletin without consulting legal counsel. Consultation of this e-bulletin will not create an attorney-client relationship between Stibbe and the reader. The e-bulletin may be used only for personal use and all other uses are prohibited.

Team

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