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Netherlands-Argentina tax structuring opportunities

Netherlands-Argentina tax structuring opportunities

Netherlands-Argentina tax structuring opportunities

18.03.2013 NL law

As from 1 January 2013 the tax treaty between Argentina and Spain ceased to have effect due its termination by Argentina on 29 June 2012. Although Argentina and Spain are currently negotiating a new tax treaty that is envisaged to enter into force with retroactive effect per 1 January 2013, European jurisdictions other than Spain may become more important in existing and future cross-border structures involving investments into Argentina. 
 

Taking into account its long established position for (joint venture) holding and financing entities together with the fact that a Bilateral Investment Treaty (“BIT”) is in place between the Netherlands and Argentina, the Netherlands is an interesting jurisdiction for investments in Argentina. 

1.  The Netherlands – Argentina tax treaty 
 
In 1996 the Netherlands and Argentina signed a tax treaty which entered into force in 1998 with the effective date of 1 January 1999 (the “Tax Treaty”). In line with Argentine tax treaty policy, the Tax Treaty is based on the UN Model double taxation convention 1980 which, compared to the OECD Model Convention, places a greater emphasis on the right to levy tax by the source country. The Netherlands agreed to deviate from its Dutch standard tax treaty format provided that Argentina agreed to include an extensive most-favored-nation clause. In short, this most-favored-nation clause holds that if Argentina, under any double tax treaty concluded between Argentina and another OECD country after the date of conclusion of the Tax Treaty, limits its taxation1 to a lower rate – including exemption or taxation over a reduced taxable base – such lower rates shall automatically apply to the Tax Treaty. Currently, there does not appear to be a treaty in place that triggers the application of the most-favored-nation clause. That may change, however, if Argentina and Spain include a more favorable tax rate in their new tax treaty.

1.1.            Withholding tax rates

In short, the following domestic and Tax Treaty withholding tax rates apply in respect of the Netherlands and Argentina:

Dividends Interest Royalties
Domestic rates (%)
The Netherlands 0 / 15 0 0
Domestic rates (%)
Argentina 0 / 35 15.05 / 35 12.25 / 28 / 31.5
Treaty rates (%) 10 / 15 0 / 12 3 / 5 / 10 / 15

1.1.1. Tax Treaty rates – dividends

Generally a rate of 15% applies to dividends distributed by a company resident in one state if the recipient is the beneficial owner of the dividends and is resident in the other state. However, if the beneficial owner is a company - other than a partnership - which holds directly at least 25% of the capital of the company paying the dividends, the rate is reduced to 10%. In practice, however, the 10% and 15% rates only apply to Netherlands-source dividends, because Argentine-source dividends paid to non-residents are exempt under Argentine tax law.

1.1.2. Tax Treaty rates – interest

The maximum withholding rate on interest is generally 12%, although an exemption applies to interest paid or received by the central or local government or the central bank of either state (or agencies thereof) and to interest paid on certain loans guaranteed or secured by a state or a government agency (including financial institutions) or sales on credit of industrial, commercial or scientific equipment. In practice, however, these rates only apply to Argentine-source interest because Dutch tax law exempts most interest payments to non-residents. 
 
1.1.3. Tax Treaty rates – royalties

The following Tax Treaty rates apply:

  • 3% on payments relating to (journalistic) news;
  • 5% on payments relating to copyright on literary, theatrical, musical, artistic or scientific works. Excluding payments relating to films, videotapes etc.;
  • 10% on patents, trademarks, models, know-how, software, technical assistance and leasing other than financial leasing; and
  • 15% for all other royalties.

However, the Tax Treaty rates for royalties in practice only apply to Argentine-source royalties because Dutch tax law exempts royalty payments to non-residents.

2.  Termination Argentina-Spain tax treaty 
 
The tax treaty with Spain is the third tax treaty to be terminated by Argentina in 2012. Argentina also terminated its tax treaties with Switzerland and Chile that year. Argentina’s reason for terminating these three tax treaties is generally said to be alleged abuse of the treaty provisions. One of the more specific reasons is said to be that Argentina could not collect personal assets tax charges (“PATC”) from investors from these three jurisdictions and from conduit companies investing in Argentina through these jurisdictions. After termination of these treaties, there are no longer any tax treaties in place under which Argentina is barred from levying PATC and it has therefore become an irrelevant factor in considering which jurisdiction is the most suitable when structuring investments into Argentina. 
 
3.  Why make use of a dutch entity? 

For the following reasons, the Netherlands seems to be a suitable jurisdiction when considering structuring investments into Argentina:

  • Substance can easily be established;
  • It has concluded a BIT with Argentina which offers protection to Dutch and Argentine investors from direct or indirect measures of nationalization or expropriation by the other country and any other measure having a similar effect;
  • It has one of the world's most extensive tax treaty networks. For example, it has a tax treaty with the United States. This is one of the reasons why the
  • Netherlands is an attractive inbound and through-bound jurisdiction for US investors;
  • Under Dutch tax law, dividends received from, and capital gains realized in respect of, qualifying subsidiaries are fully exempt from Dutch corporate income tax: the so-called participation exemption;
  • Tax rulings can generally be obtained; and
  • The Netherlands has a stable and reliable government.

For these reasons and taking into account the recent termination of the Argentina tax treaties with Spain, Switzerland and Chile, we believe that the advantages of using the Netherlands as a jurisdiction when structuring investments into Argentina should be considered.

[1] Taxation at source on insurance or reinsurance premiums, on dividends, on branch profits, on interest, on royalties, on capital gains, on independent personal services, on other income or on specific items of such income.

Team

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