In the decision-making process of foreign investments, pure financial considerations, i.e. expected return on the intended investment and the overall economic outlook of the country involved, are pivotal. Almost every board of directors will also assume some kind of tax planning as a way of increasing the outcome of this financial equation.
However, risk management is also part of good-decision making. In international business, risks are often related to external factors such as a politically unstable jurisdiction, deprivation, and tax discrimination, in addition to an incompetent court system.
However, investment protection planning is too rarely being made by the decision makers despite the fact that it protects shareholders against financial loss due to political risks. The pre-eminent instrument to protect investments, particularly in emerging markets, is Bilateral Investment Treaties (BITs).
Bilateral Investment Treaties
Bilateral Investment Treaties (BITs) are agreements between two countries protecting investments made by investors from one contracting state in the territory of the other contracting state. The purpose of BITs is to stimulate foreign investments by reducing political risk and arranges for:
- Protection from expropriation by giving access to international arbitration and enforceable compensation;
- Fair and equitable treatment for foreign investments by foreign governments;
- Guarantee of free transfer of funds by foreign investors without delay, including protection against foreign exchange restrictions.
The Netherlands BIT network
Dutch tax policy is historically aimed at eliminating double taxation imbedded in its nearly 100 international tax treaties and the Dutch participation exemption. In addition, it imposes no withholding tax on interest and royalties.
Consequently it belongs to the most popular onshore country for establishing an intermediary company. Apart from the favorable tax system and treaties, the Netherlands offer the gold standard in BITs as it provides for the broadest definitions of “investment” and “investor” easily giving access to international arbitration.
The Dutch BIT treaty network has almost 90 BITs in effect. These include the BRIC countries (Brazil, Russia, India and China) and many emerging and frontier economies.
In recent high profile cases Dutch BIT’s have proved to be a cost-efficient and easy solution to insulate foreign investors from political risks. Examples include:
- Yukos against Russia in which the shareholders were granted compensation in excess of USD 50bn;
- The Conoco-Phillips compensation against Venezuela; and
- The multiple Argentinean sovereign debt default cases.
When investing in China, it be may beneficial to interpose a Dutch intermediary holding company given the investor-friendly Dutch-China BIT. The Dutch-China BIT has the following features:
- A very broad definition of investments including, for example, intellectual property rights;
- Protection for the benefit of intermediary holding companies; and
- Direct access to ICSID or UNCITRAL arbitration (contrary to many other China BITs).
Given that the Dutch-China Tax Treaty provides for 10 percent dividend withholding tax whereas an investment by a Hong Kong entity would only trigger 5 percent withholding tax, the investment should not be directly made through a Dutch subsidiary. To add BIT protection, the Dutch subsidiary should be interposed above the Hong Kong entity. Given the Dutch participation exemption and the numerous Dutch tax treaties - or by structuring the Dutch entity as a “cooperative” -, interposing the Dutch entity will not lead to additional corporate tax and dividend withholding tax.
When making an international investment, there are considerations beyond effective tax planning. A BIT due diligence should be performed before deciding upon the structure. The outcome may well be that without access to the Dutch BITs and the level of protection offered, investments into certain jurisdictions would not be feasible.
Interposing a Dutch intermediate holding company is a cost-efficient and easy solution to safeguard your investments against political risk and will assist the board of directors in its obligation to maintain adequate risk controls.
We are happy to further explain the working of Dutch BITs in international business and assist on all matters regarding your corporate structure involving a Dutch investment company.