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Netherlands: Tax regulations(EIU Viewswire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT Dutch corporate tax rates have fallen substantially in the past two decades and are set to drop even further to bring the country in line with the European Union average and strengthen the countrys attraction to foreign investors. A major reform of corporate tax legislation, called the Working for Profit Act (Wet Werken aan Winst), was passed by the lower house of parliament in October 2006 and will take effect from 2007. It lowers the main corporate income tax rate to 25.5% and adds even lower rates for small businesses, cuts the dividend withholding tax to 15% and introduces new regimes for taxation of income from royalties and interest. The new law also simplifies the application of the participation exemption, a major benefit of Dutch tax law for foreign companies that exempts dividends and capital gains from foreign subsidiaries from corporate tax. Additional existing benefits of the Dutch system for foreign companies include the large number of tax treaties to which the Netherlands is a signatory and the willingness of the tax authorities to provide advance rulings on tax treatment of investments. The Dutch Tax Service (Belastingdienst) recognises that taxation significantly affects an international companys choice of business location. It takes a client-oriented approach, providing potential international investors with definitive advance information on the application of Dutch tax legislation on possible future investments in the Netherlands. It may also be able to guide an investor in ways to reduce the corporate tax rate to 1015%. The Information Office for International Tax Services should be the first point of contact for foreign investors because it supplies information on all types of taxation in the Netherlands. Foreign investors may also be referred to the Tax Inspectorate in Rotterdam, which handles many of the requests for advance tax and pricing rulings. The Rotterdam office also has sole responsibility for the taxation of all foreign physical investments worth more than 4.5m. The advance-ruling process has been standardised in recent years through a number of ministerial decrees and reforms of the Corporation Tax Act in order to bring the process in line with best-practice guidelines dictated by the OECD. The tax inspector in whose area of jurisdiction the business locates is bound by the agreements made with the Information Office and the Rotterdam offices special ruling teams. The tax service delivers its rulings within eight weeks. Corporation tax is levied on all companies established in the Netherlands (resident taxpayers) and by certain companies not established in the Netherlands that receive income in the Netherlands (non-resident taxpayers). The Corporation Tax Act stipulates that all companies incorporated under Dutch law are regarded as established in the Netherlands. Other factors considered when determining if a company is established in the Netherlands include the location of effective management, of the head office and of the shareholders meeting. The Netherlands has a two-tiered corporate income tax system, which from 2007 will expand to three tiers. In 2006, the first 22,689 in corporate profit is taxed at a flat rate of 25.5%, down from 27.5% in 2005 and the remainder is taxed at 29.6%, down from 31.5% previously. From 2007, the rates are expected to drop to 20% on the first 25,000, 23.5% on 25,000 to 60,000 and 25.5% on the remainder. There are no provincial or municipal corporate income taxes, but some municipal taxes apply to companies in the Netherlands. Municipal rates, the most important of which is the property tax, vary considerably. Companies pay a variety of environmental taxes indirectly through suppliers. These include taxes on fuels, groundwater, tap water, waste and energy consumption. The Netherlands has no excess-profit tax or alternative minimum tax. Corporate taxation in the Netherlands, 2006The table below shows the approximate tax burden of three companies that earn pre-tax income of 10m. They are a Dutch subsidiary of a Dutch company (column A), and a US company(a) that either distributes earnings fully (in column B) or retains earnings completely (in column C).(A)(B)(C)Pre-tax earnings(b)10,000,00010,000,00010,000,000Corporate tax2,959,0702,959,0702,959,070Net income after corporate tax7,040,9307,040,930 7,040,930Withholding tax(c)00Total tax burden2,959,0702,959,0702,959,070Dividend distribution7,040,9307,040,930(a) US tax consequences have not been taken into consideration. (b) A reduced rate of 25.5% applies on the first 22,689 of taxable profit; a rate of 29.6% applies to the remaining profit. (c) Dividend withholding tax applies at a reduced rate of 5% if the recipient is a qualifying resident US company that holds at least 10% of the voting rights of the distributing company. On March 8th 2004 the Netherlands and the United States signed a new protocol to the 1992 double-tax treaty. Under it, dividends distributed by a company resident in one state to a company resident in the other state, owning 80% or more of the voting power in the company distributing the dividends, may be exempt from withholding tax if certain conditions are met (under the treaty, the lowest withholding rate on dividends was 5%). This part of the protocol took effect for dividends paid or credited on or after February1st2005.Source: Economist Intelligence Unit calculations.Taxable profit is defined as profit less deductible losses and allowances. Trading income and capital gains are not differentiated in that both are included in a company's profit-and-loss account; hence, both are included in taxable profit. Profit and taxes should be calculated in euros since January1st 2002, although an exception may be obtained for filing in a foreign currency for up to ten years. Taxable profit must be calculated according to sound business practice, a legal concept supported by case law that may differ from generally accepted accounting principles. For example, unrealised losses may be taken into consideration whereas unrealised profit may be deferred until actual realisation. Consistency is required, and the method of determining profits may be changed only if it is compatible with sound business practice (that is, the change itself must not aim to cause an occasional tax benefit). In general, all expenses related to doing business are deductible from profit, though there are some restrictions for mixed expenses, which are business expenses with a private element. Certain costs are not deductible, including fines, some interest charges and some entertainment costs. The following expenses are deductible when determining tax liability: Formation costs incurred in setting up a business, including capital tax, may be deducted in full in the year they occur, or they may be amortised over 35 years (moreover, the capital tax is abolished from 2006). Reserves earmarked for certain types of future spending and self-insurance schemes are deductible, as are funds derived from the sale of fixed assets when set aside as reserves for future asset replacement. Rents, royalties and interest payments on corporate debt are deductible. Remuneration paid to members of the managing and supervisory boards is generally deductible. Many types of taxes are deductible. Foreign taxes are deductible if the foreign profits do not already benefit from a Dutch double-taxation treaty or a similar arrangement. Bad debts and funds put aside as provisions for doubtful debts are deductible. Pension plan contributions are deductible. Bonuses paid to employees through an internal profit-sharing plan are deductible. In certain circumstances, employee share options are deductible. Commissions are usually deductible. Gifts considered to be normal business expenses are fully deductible, unless they are not related to the business (such as contributions to religious, social, charitable and certain other institutions). These expenses, in so far as they exceed 227, are limited to 6% of profits unless they can be qualified as advertising expenditures. The eligible amount rose to 10% of profits from 2006. Capital losses are fully deductible. Mixed costs such as entertainment, which have both a personal and corporate benefit, generated by persons holding more than 5% of the company's share capital may not be deducted. Companies take a flat rate of 1,500 in non-deductible expenses for each such person. From 2006, the rule is extended to all employees. The non-deductible amount is then 0.4% of the total taxable wage bill for the enterprise, with a minimum non-deductible amount of 4,000, or for smaller companies, 25% of all such mixed costs.Realised gains from foreign exchange are taxable at the regular Dutch corporate income tax rates, and losses are deductible as soon as they are recognised, unless the participation exemption applies to these gains and losses. Dutch authorities do not distinguish between the handling of short-term forex debt and the current portion of long-term debt. The picture is less clear for translation adjustments. On balance-sheet items, the treatment of gains or losses is governed by the accounting principles applicable to determining a company's annual profit. Unrealised profits arising from a forex claim or liability are postponed until realised. Losses are recognised immediately, and these losses have to be recaptured against future profit. In addition to operating expenses, standard allowances exist for maintenance and uninsured risk provisions, fixed-asset investment and depreciation. The Corporation Tax Act also allows for a participation exemption, which is designed to avoid double taxation on profit redistributed to a parent company from a subsidiary. Dividends and capital gains from selling shares in subsidiaries are tax exempt, and, under certain conditions, losses from liquidating a holding or a decline in the value of an acquired loss-making company may be written off. Generally, the participation exemption applies when a taxpayer holds more than 5% of the capital of an entity. Technically, a Dutch company is subject to tax on worldwide income, but the participation exemption may also be applied to capital gains and dividends from foreign subsidiaries. However, the foreign subsidiary must be subject to tax in the country where it is established and the holding must not be purely for the investment purposes of the parent. The not for investment requirement was dropped in 1992 for subsidiaries in the European Union if the parent company has at least a 20% stake and it can be shown that the main purpose for interposing the qualifying EU subsidiary is not to evade or defer tax. The participation exemption also applies to currency gains and losses arising from instruments used to hedge conversion risks on investments in foreign subsidiaries, as well as options. Expenses allocable to foreign subsidiaries, such as finance costs and management costs, were previously not deductible under the participation exemption. However, the European Court of Justice ruled in September 2003 in a case brought by Bosal (a Dutch steel manufacturer) that the denial of a tax deduction for expenses related to foreign subsidiaries in the EU is discriminatory. The Dutch Ministry of Finance subsequently introduced new legislation, effective from 2004, allowing the deduction of expenses related to foreign subsidiaries in the EU and European Economic Area (the EU plus Iceland, Liechtenstein, and Norway). In reaction to the Bosal ruling, Dutch legislators also introduced thin-capitalisation rules in 2004 that block corporate groups from loading up certain units with excessive intra-company debt as a way to avoid generating taxable income. The Dutch thin-capitalisation rules take a debt-to-equity ratio of 3:1 as a starting point. However, if the debt-to-equity ratio for the group as a whole exceeds 3:1, the Dutch company may be leveraged to the same extent. (The actual ratios used are the average of the opening balance-sheet ratios and the closing balance-sheet ratios.) Third-party loans are also considered when calculating these ratios. New tax legislation expected to take effect from 2007 deals further with this issue, attempting to put domestic and foreign subsidiaries on the same tax footing. The participation exemption will apply to all domestic and foreign subsidiaries where the parent company has at least a 5% stake. The not for investment test is scrapped, as are other exceptions for stakes of less than 5%. In order to prevent abuse, subsidiaries used largely for passive financing and investment must show they are subject to an effective tax rate of at least 10% in order for the participation exemption to apply. Losses incurred may be carried forward indefinitely against taxable income. Losses may also be carried back three years and offset against earlier profit. In order to help pay for the proposed cut in tax rates, the government plans from 2007 to limit carry-forward losses to nine years and carry-back to one year. A transitional period will require that all losses from 2002 or earlier must be used up by 2011. In certain circumstances, loss compensation is no longer available if there has been a shift of 30% or more in the ultimate interest in the entity. Loss compensation has been limited for holding and finance activities. Such losses can generally be offset only with profits of years in which similar activities have been performed. Local branches and subsidiaries are treated the same way for determining corporate income tax. However, branches are usually exempt from withholding tax on profit remittances to foreign parents. If there is no double-taxation treaty, companies may usually deduct from their Dutch taxes any withholding taxes that foreign governments levy on transferred profits. However, a Dutch company may not credit any foreign withholding tax levied on dividends received from foreign subsidiaries to which the participation exemption applies. Investment institutions, which do not pay corporate tax, must apply for a special arrangement to offset foreign withholding taxes against income from securities and claims. The straight-line method of depreciation is the most commonly used, although companies may sometimes choose the declining-balance method. Once a choice is made, it may be changed only in unusual circumstances. Assets (whether tangible or not) owned or used by a company for the purpose of its trade are subject to depreciation if their values necessarily diminish over time. Depreciation is calculated at cost less residual value; fortax purposes, it begins on the day an asset is first used. The normal annual depreciation allowance for equipment is 10%, though up to 25% may sometimes be allowed. The rate on buildings is usually 1.53%, though 4% is possible. Depreciation rates for vehicles and other short-term business assets vary, depending on the frequency of use. Certain qualifying environmental investments may be depreciated on an accelerated basis (that is, a depreciation of 100% is allowed). As a rule of thumb for depreciating other assets, the following life expectancies are acceptable: commercial buildings, 2050 years; office equipment, 510 years; and goodwill, 35 years. The government has proposed raising the minimum depreciation period for all equipment to five years, and for acquired goodwill to ten years. A tax-deductible writedown of the value is then still possible prior to the minimum period elapsing, if the market value has fallen below the book value. Depreciation of land is not allowed. Under proposed changes to tax legislation expected to take effect from 2007, depreciation on real estate will be limited to 50% of the economic value, or if the property is purely for investment purposes, to 100% of the economic value. The economic value is considered the price the empty building in its current state would fetch on the open market for immediate use; it is determined by local authorities as part of the assessment of property tax. Amid a previous absence of special depreciation arrangements for research and development, the government has proposed a new regime as part of its tax reforms expected to take effect from 2007. Businesses will no longer be required to capitalise costs from research and development and can instead expense the costs in the year they occurred. Depreciation is always calculated on original cost, and assets may not be revalued for tax purposes. Profit on the resale of depreciated assets is normally taxable unless it is reserved for replacement; the amount of the profit is then immediately deducted from the depreciable value of the replacement. A taxpayer must file a tax return every year, within six months of the end of the financial year. Businesses have been expected to file all returns electronically with the Tax Service since January1st2005; forms are available on the Internet. The tax return should be accompanied by all the information required to determine taxable profits. This includes the balance sheet and profit-and-loss account, details of directors remuneration and all other information requested by the tax inspector. If a company does not meet these obligations or does not file a proper tax return, the inspector may issue an estimated assessment. Failure to fulfil these obligations might also have implications for the onus of proof in any appeals procedure. A provisional assessment is usually raised in the first month of the taxpayers financial year. The assessment is generally based on information from the preceding two years. This assessment, for the current year, is payable in monthly instalments for the remaining months of the year. The taxpayer can indicate that the tax due will be lower than that of the provisional assessment and ask for it to be adjusted. A second provisional assessment can be raised within eight months of the start of the financial year based on an estimate of the taxable income for the current year. The tax inspector determines the final assessment on the basis of the tax return. The final assessment may be issued no later than three years after the tax year concerned. For assessments (preliminary as well as final) that are raised after the tax year, interest will be due or refunded. The charge is simple interest, pegged to market rates and adjusted quarterly. The right to issue revised tax assessments expires five yearssometimes 12 yearsafter the end of the year. Ifthe tax service has granted permission to defer the tax return, then this assessment period is extended by the period of deferment. The capital contribution tax of 0.55% has been abolished, with effect from January1st 2006. This tax was levied at the time of formation of a company or upon increases in its capital. Most neighbouring countries have already eliminated, or plan to eliminate, similar capital taxes, so the Netherlands intends the move to improve its attractiveness for foreign investors. Corporate capital gains are included in taxable profits and are subject to normal corporate tax; capital losses are fully deductible. The basis for computing a capital gain or loss is the difference between the book value of an asset (original cost minus depreciation) and the amount for which it could be sold (its disposable proceeds). There is no capital gains tax for individuals, except for business profits and gains on substantial shareholdings. Capital gains derived from selling shares in a qualifying holding are in principle exempt from tax under the participation exemption. Generally, the participation exemption applies when a taxpayer holds more than 5% of the capital of an entity. If fixed assets are lost, damaged or sold at a price above book value, profit may be set aside in a tax-free reserve to replace the assets eventually at a similar economic value. The tax reserve does not apply to intangible fixed assets that are kept as part of a portfolio investment. Although contributions to this reserve are deductible from taxable profit, the reserve must be applied against the cost of replacing the asset and should be terminated within three years of its creation. Losses from the sale of a participation may not be deducted from the parent companys taxable profit. A write-off for the declining value of a holding resulting from losses incurred is not deductible. Two deductions for losses from liquidation and start-up losses were eliminated beginning in 2006. Abolishing the deductions saves the government around 180m a year and is part of a package of measures to widen the corporate tax base while lowering the corporate tax rates. The loss resulting from liquidation was the difference between the liquidation payments and the cost of acquiring the participation. For foreign participations to qualify, the parent must have held at least a 25% stake in the liquidated company. To claim the deduction, the parent company must also have held the investment for five years prior to discontinuing the business, in the year of liquidation and during the subsequent years when it received liquidation payments. A company was eligible for a tax deduction for start-up losses from a subsidiary if the parent held at least 25% of the subsidiarys share capital. The parent was allowed to depreciate the book value of the subsidiary in the first five years after acquisition if, and to the extent that, the value of the subsidiary declined below cost price. When the subsidiary became profitable, the write-down had to be reversed up to the original cost of the acquisition. The appreciation could have occurred over the next five years in equal steps, to the degree the depreciation was not reversed during the first five years. For mergers or divisions, any gain that arises from a company acquiring all of the shares or assets of another company in return for shares is generally tax exempt. In any other type of merger or takeover, all of the following conditions must be met to gain a tax exemption: (1) the transfer occurs as part of a merger, (2) the transfer occurs in return for the issue of shares by the other corporation, (3) the shares acquired by the corporation making the transfer are not sold for three years, and (4) later taxation of the profit obtained from the transfer is guaranteed. Toensure this, the transferred operations must be included in the books of the acquiring company and the selling company at the same book value at the time of the merger. Neither corporation may have tax-deductible losses, and the taxable profit of both corporations must be assessed in the same manner. When the above conditions are not met, the transfer profit may be exempted from tax if prior approval has been obtained from the tax inspector. Dividend payments from a Dutch subsidiary to a parent company based in a country in the European Union or European Economic Area (EEAthe EU plus Iceland, Liechtenstein and Norway) are tax free if the parent holds more than 25% of the Dutch companys share capital. The threshold for the eligible holding is due to drop to 15% on January1st 2007 for parent companies within the EU/EEA and then to 10% from January1st 2009 in order to comply with EU Directive 2003/123 on taxation of parent companies and their subsidiaries. Companies must pay a withholding tax of 25% on dividends distributed to individual shareholders and remitted to non-EU/EEA foreign parent companies. A lower rate may be provided for in a double-taxation agreement, and exemptions are available. As many tax treaties already lower the withholding rate to 15%, the government has proposed cutting the tax on dividends to 15%. The reduction is expected to take effect from 2007. A branch in the Netherlands is exempt from withholding tax on distributions of profit to its foreign parent. Dividend tax withheld can be credited against the total corporate income tax due in the Netherlands. This is treated as an advance levy of income tax. Dutch law generally allows withholding tax levied in a treaty country or a listed developing country to be set off against income or corporation tax payable by the taxpayer in the Netherlands if the income item is taxable (which would not be the case where the participation exemption applies). Investment institutions are liable for 0% corporation tax, so they may not make use of this facility. To ensure that persons who invest directly and persons who invest via an investment institute receive equal tax treatment, special arrangements have been made for investment institutions allowing the former to offset foreign withholding taxes against income from securities and claims. Under these arrangements, an investment institution may obtain an allowance from the Dutch tax authorities that amounts to no more than the withholding tax levied abroad. If not all the shareholders in the investment institution are resident or established in the Netherlands, then the allowance is calculated according to the number of shareholders resident or established in the Netherlands. Legislators have tightened requirements on these regulations to prevent companies from claiming a corporate tax exemption on dividends and capital gains received from outside the EU via indirectly held investment vehicles. No withholding tax applies to interest payments, whether made locally or to a foreign party. Banks report their customers interest payments and earnings to tax authorities. Interest payments on debentures and other company debts are classified as expenses and thus deductible from corporate taxable income. Specific anti-abuse regulations may limit interest deductions, as may the thin-capitalisation regulations introduced in 2004. In certain circumstances, foreign companies holding shares in a Dutch taxpayer are liable for corporate income tax on interest income received from it. This would occur when such shares (1) represent a so-called substantial interest (generally 5% or more, held directly or indirectly) and (2) cannot be allocated to such shareholders active business. Typically, a double-tax treaty would prevent the Dutch tax authorities from actually levying corporate income tax. In order to further improve conditions for foreign companies establishing a holding company in the Netherlands, the government has proposed a group interest income box. Expected to take effect from 2007, this allows a company to opt for a tax rate of 5% on all net interest income. This must then be applied to all subsidiaries and group companies subject to Dutch corporate tax. No withholding tax applies to royalties and fees, but they are generally subject to value-added tax, which was raised to 19% in 2001 (from 17.5%). Exceptions to this rule sometimes apply. Under a corporate tax reform that will take effect from 2007, businesses may opt for the so-called patent box (octrooi box) for royalties received, rather than subject the income to the full corporate tax rate. Any income generated from patented assets, such as royalties and licence fees, minus the associated costs and depreciation, is then subject to a flat tax rate of 10%. The regime also applies to such income received from subsidiaries and companies associated with the same parent group. The maximum income subject to the 10% rate is four times the capitalised development costs for the relevant assets. Royalties on patents, trademarks, know-how and similar rights are deductible from the licensees taxable income. Fees and commissions are deductible if the amounts and recipients are clearly specified and documented. Commissions are treated as a deductible expense if they are not unusual and do not exceed amounts or percentages commonly paid in the particular trade or industry. Interest and royalty payments by a subsidiary to its parent company are generally deductible, whether or not the parent itself must make similar payments to third parties. Thin-capitalisation rules and anti-abuse provisions may limit interest deductions. The Netherlands has double-tax treaties with most industrialised countries and many developing countries. It also has conventions for avoiding double taxation on estates and inheritances with Finland, Israel, Sweden, Switzerland, the United Kingdom and the United States. Withholding-tax rates on dividends under Dutch double-tax treaties, 2005*Country of recipientGeneral (%)Reduced (%)Country of recipientGeneral (%)Reduced (%)Argentina1510Malta150/5Australia1515Mexico150Austria150Morocco2510Bangladesh1 510Netherlands Antilles155/7.5/8.3Belarus150/5New Zealand1515Belgium150/5Niger1512.5Bosnia155Norway150Brazil1515Pakistan2010Bulgar ia155Philippines1510Canada155Poland150/5China1010Portugal100/10Croatia150Romania 150/5Czech Republic100Russia155Denmark150Singapore150Egypt150Slovakia100Estonia155Slovenia1 55Finland150South Africa155France150South Korea1510Georgia150/15Spain155Germany150Sri Lanka1510Greece150Surinam207.5/15Hungary155Sweden150Iceland150Switzerland150Indi a1510Thailand255Indonesia1010Tunisia200Ireland150Turkey205Israel155/10Ukraine150 /5Italy( )150/5/10United Kingdom150Japan155United States( )150/5Kazakhstan150/5Uzbekistan155Kuwait150Venezuela100Latvia155Vietnam155/7/10L ithuania155Yugoslavia155Luxembourg150Zambia155Macedonia150/15Zimbabwe2010Malawi1 50Other countries25Malaysia150* Where multiple rates are shown, these apply to different levels of share ownership or to different classes of recipients. Source: Deloitte Touche Tohmatsu.There are no specific restrictions on transactions between a Dutch company and its foreign affiliates. A Dutch companys transfers of expense charges to a foreign affiliate are tax deductible if the expenses are associated with normal business operations. In general, however, rules on determining taxable income require the elimination of profit distortions caused by any group relationship. The EU Directive on Royalty and Interest Payments, which took effect on January1st 2004, aims to avoid double taxation of intercompany payments among EU-based parents and affiliates. For tax purposes, intercompany charges should be conducted at arms length. The tax authorities may scrutinise tax-avoidance schemes and may ignore artificial transactions without economic substance or replace them with transactions reflecting real market values. Under certain conditions, a parent company may form a fiscal unitya tax consolidated group with one or more subsidiaries. For corporate tax purposes, this means that the parent company is considered to have absorbed the subsidiaries. The main advantages of fiscal unity are that the losses of one company may be offset against the profit from another and that fixed assets of one company may be transferred to another without tax implications. This type of tax consolidation is possible only between a parent company and its wholly owned subsidiaries (in practice, 95% ownership is sufficient). Other conditions for a fiscal unity are that the parent company and the subsidiaries have the same financial year and are subject to the same corporate tax rules. A request to form a fiscal unity must be submitted to the tax inspector on behalf of all the companies involved. The group must meet the standard conditions drawn up by the Ministry of Finance, which cover many technical aspects of consolidation. The fiscal unity can be terminated upon request; it will be terminated automatically if any conditions are not met. The Tax Consolidated Groups Decree, a revision of the Corporation Tax Act, took effect on January1st 2003. It set new criteria for the conditions and rights of a tax consolidated group. One of the most important changes was the lowering of the ownership requirement to 95% (from 99%). It also became possible to include Dutch permanent establishments of foreign groups in a tax consolidated group, but it is no longer possible to include companies incorporated under Dutch law but resident outside the Netherlands. The Netherlands has many regional headquarters companies, which have grown out of sales or manufacturing operations based in the Netherlands. Headquarters companies that engage only in co-ordinating activities and make no profit should negotiate their taxation with the Dutch authorities before establishment. These types of operations are usually taxed on an imputed-cost plus 515% basis at the corporate rate. Research-and-development centres generating profits from technical services rendered to related firms also may qualify for a cost-plus agreement. The taxation of regional management companies follows OECD guidelines, but the key principle is that this type of company is taxed on its arms-length income. Under this principle, its income should be equal to income if the transactions were performed with outside parties. It is then taxed on corporation income on a net basis; a tax-free zero-rate situation is not permitted. Value-added tax (VAT, or BTW in its Dutch acronym) is levied at each stage in the chain of production and distribution of goods and services in the Netherlands. A general rate of 19% applies on the supply of goods, the rendering of services, the acquisition of goods by businesses and the import of goods. A reduced VAT rate of 6% applies to the supply, import and acquisition of certain listed goods and services, such as food and medicines. Other goods and services subject to the lower rate include the following: water; art; books, newspapers and magazines; materials required by the visually handicapped; artificial limbs; certain goods and services for agricultural use; passenger transport; hotel accommodations; and entrance fees for museums, cinemas, sport events, amusement parks, zoos and the circus. Certain labour-intensive services also are eligible for the lower rate under an EU agreement of October 1999. There is a zero rate intended primarily for exported goods, seagoing vessels and aircraft used for international transport, gold destined for central banks and any activities that occur within bonded warehouses or their equivalent. There is also a zero rate for goods transported to another EU member state on which VAT is levied. Exemptions from VAT include, among others, educational services, medical services, banking and insurance transactions, postal services, non-commercial broadcasting and the services of journalists, composers and writers. A business registered for VAT in the Netherlands must normally file a VAT return and make a payment to the tax administration on a monthly basis. The return and payment must be received by the end of the following month. The filing can be made quarterly if VAT due does not exceed 7,000 per quarter, or annually if the amount due is less than 1,883 per year. There are penalties and interest charges for late filing or payment. Since January1st 2005, all VAT returns must be submitted electronically; however, companies based outside the Netherlands may still file paper returns. Excise duty is levied on the ultimate use or consumption of the following: beer (5.5031.40 per hectolitre, depending on alcohol content); wines and spirits (15.04201.24 per hectolitre, depending on alcohol content); juices and mineral waters (4.135.50 per hectolitre); cigars (5%); cigarettes (72.97 per 1,000 cigarettes, plus 20.52% of the retail price); tobacco (30.48 per kg, plus 14.51% of the retail price); diesel (364.91 per 1,000 litres); and unleaded petrol (668.10 per 1,000 litres). Excise duties are included in the price consumers pay, and the manufacturers and importers of goods liable for the duty remit the tax. If the goods are exported, the tax is usually refunded. Import duty is levied as a percentage of the value of the goods being imported. Various rates apply, which the European Union determines. The rates are usually lower for minerals or raw materials and higher for finished products. Import duty applies on goods that are imported from countries outside the European Union, with the revenue going into the EU purse. Transfer tax applies on the acquisition of property in the Netherlands. The rate is 6% of the market value of the property. Insurance tax at a rate of 7% applies on insurance premiums, but life, accident, medical, invalidity, disability, unemployment and transport insurance are exempt. Motor-vehicle tax is paid on all vehicle ownership. The amount depends on the type and weight (sometimes gross) of the vehicle and, for private cars, the type of fuel the vehicle uses. The amount for private cars depends on the province where the owner resides or is established and, from July1st 2006, the amount of carbon-dioxide emissions the car generates. The tax on heavy vehicles (known as the eurovignette) applies on vehicles with a gross weight of at least 12,000 kg. The tax is levied for the use of motorways in Belgium, Denmark, Germany, Luxembourg, the Netherlands and Sweden, and it must be paid before the vehicle uses the motorway. There are two rates of tax, depending on the number of axles of the vehicle; one rate is for three axles or fewer, the other is for four axles or more. The tax may be paid daily, weekly, monthly or annually. Copyright 2006 Economist Intelligence Unit |