Japanese and Korean corporates enter Europe as operators rather than as capital seeking a home. They come with products, subsidiaries, acquisitions and often manufacturing, and their structuring question is correspondingly practical: how to organize a European footprint that may span several countries under a single, coherent ownership and management layer. For a corporate of this kind, a Dutch holding is less a tax instrument than an organizational one.
A regional layer for a multi-country footprint
A Japanese or Korean group with subsidiaries in Germany, the Netherlands, France, Poland and beyond faces a choice between owning each directly from Asia and interposing a European regional layer. The regional layer, typically a Dutch holding, consolidates ownership, centralizes European financing, and provides a single European counterparty for banks, partners and acquisition targets. The participation exemption, set out in our note on the participation exemption, ensures, where its conditions are met, that consolidating ownership does not create a second layer of tax on profits moving up from the subsidiaries.
What the regional layer changes is where the questions get answered. Owning each European subsidiary directly from Tokyo or Seoul means that every dividend stream, every intra-group loan and every disposal is tested on its own, against the law of the country the money leaves and against whatever treaty that country has with Japan or Korea. Interposing a Dutch holding does not make those questions disappear, but it concentrates them in one place, where one board, one set of accounts and one counterparty carry the analysis.
What the participation exemption actually asks for
The exemption sits in article 13 of the Wet op de vennootschapsbelasting 1969. Its first paragraph leaves out of account, in determining profit, the benefits derived from a participation together with the costs of acquiring or disposing of it, so the relief runs in both directions: dividends and gains are untaxed, and the acquisition and disposal costs that go with them are not deductible. The second paragraph says when a participation exists, and for a company whose capital is divided into shares the test in its first letter is holding at least five per cent of the nominal paid-up capital. The letters that follow deal with funds for joint account, cooperatives and other bodies, and a group holding through anything other than ordinary share capital has to read them rather than assume the five per cent applies unchanged.
The condition that catches operating groups out is not the threshold but the character of the subsidiary. The ninth paragraph withholds the exemption from a participation held as a portfolio investment unless it is a qualifying one, and the tenth deems a participation to be so held in any event where the subsidiary’s assets, viewed on a consolidated basis and counting only interests of at least five per cent, usually consist largely of the interests to which the fourteenth paragraph refers, or where the subsidiary’s function, taken together with the bodies in which it holds at least five per cent, consists largely of directly or indirectly financing the taxpayer or bodies related to it, or of financing or making available assets that they use. The eleventh paragraph sets out the tests under which such a participation nonetheless qualifies.
For a manufacturing or distribution subsidiary this is rarely a live question. For the two entities a regional group tends to create next, the treasury company that lends to the rest of Europe and the company that holds the group’s European intellectual property, it is the first thing to check, and it is better checked before the entity is funded than after the first dividend has been declared.
Acquisitions run through a European platform
Japanese and Korean corporates are active European acquirers, and an acquisition strategy is far easier to execute from an established European platform than from Asia directly. A Dutch holding gives the group a place to raise acquisition finance, to hold targets, and to integrate them, and it presents to a European seller as a European buyer, which matters in competitive processes. Our note on the first ninety days after acquiring a European business deals with the integration that follows.
The same article 13 is why the platform holds targets well. A European business acquired through the Dutch holding sits inside the participation exemption from the day it closes, so a later sale is the disposal of a participation rather than a taxable gain, and the integration and refinancing decisions taken in between are taken by the company that is already the shareholder. The counterpart, which corporate development teams tend to discover at the wrong moment, is that the costs of making and unwinding those acquisitions fall on the same side of the line and are not deductible either.
For an operating group, the holding is not where the tax is planned. It is where the European business is organized, financed and grown. The tax efficiency is a consequence of doing that properly.
Treaty access with genuine functions
Both Japan and Korea have comprehensive treaties with the Netherlands, and for an operating group with real European functions, treaty access is straightforward precisely because the functions are real. The purpose test set out in our note on treaty access and beneficial ownership is far easier to meet for a group that genuinely runs its European business through the holding, which these groups typically do. The efficiency follows from the operating reality rather than being manufactured on top of it.
The two treaties are not built the same way, and the difference decides which entity claims what. The 2010 convention with Japan carries its own limitation on benefits article, and that article is narrower than it first appears. It conditions the benefits granted by article 10(3), by article 11(3) and by articles 12, 13 and 20, and, except as that article otherwise provides, it grants them only to a resident that is a qualified person as defined in its second paragraph and that satisfies whatever further conditions those provisions themselves impose. Listed companies, governments and the other categories in that paragraph qualify on their own terms, and a resident that does not qualify still has the routes the seventh paragraph itself enumerates. Under the third, a company is entitled to the same benefits where shares representing at least seventy-five per cent of its voting power are owned, directly or indirectly, by seven or fewer persons who are equivalent beneficiaries, and where it meets whatever further conditions the provisions invoked impose. The fifth carries the active business test, the sixth the headquarters company route, and the seventh a competent authority determination for a resident entitled under none of the others.
The headquarters route is the one written for a structure like this, and it is demanding. Among its conditions are that the resident provides a substantial portion of the overall supervision and administration of the group or provides financing for it, that the group consists of companies resident in and carrying on business in at least five countries each generating at least five per cent of group gross income, and that the resident has and exercises independent discretionary authority to carry out those functions. Our note on the limitation on benefits article describes how clauses of this family work in practice. The convention with Korea has no qualified person test, and the article it titles a limitation of articles 10, 11 and 12 does something much narrower, denying the reductions to international organisations and to third-state diplomatic and consular personnel whose income is not subject to income tax where they are present. Neither treaty carries a principal purpose test of its own that denies benefits, while the purpose wording in the seventh paragraph of the Japanese limitation on benefits article works the other way, granting, on a competent authority determination, the benefits that article conditions, and the consolidated texts published by the Dutch government do not add one, because those texts do not incorporate the Multilateral Instrument. Both conventions are covered agreements under it. The Netherlands listed each of them in the position it deposited on 29 March 2019, Japan listed the Dutch convention in its position deposited on 26 September 2018, Korea listed it in its position deposited on 13 May 2020, and none of the three reserved article 7. The purpose test therefore applies to both relationships, and in the Japanese case it applies alongside the limitation on benefits article rather than in place of it.
Getting profits back to Tokyo and Seoul
Dutch dividend withholding tax is fifteen per cent of the proceeds under article 5 of the Wet op de dividendbelasting 1965, and for a parent in a treaty state the domestic route out of it comes before the treaty. The second paragraph of article 4 of that act switches the withholding off where the recipient is a body resident in a state with which the Netherlands has a double taxation convention providing for dividends, and holds an interest in the Dutch company that would attract the participation exemption if the recipient were established in the Netherlands. The third paragraph lists the situations in which that relief falls away, among them an interest held with the avoidance of tax at another person’s level as a main purpose within an artificial arrangement, and the fourth applies the relief only to proceeds for which the recipient makes it plausible that it is the beneficial owner.
Where the domestic exemption is unavailable the treaty ceilings apply, and they are not symmetrical. The Japanese convention caps the Dutch tax at five per cent where the beneficial owner is a company that has owned, directly or indirectly, shares representing at least ten per cent of the voting power for the period of six months ending on the date entitlement to the dividends is determined, and at ten per cent in all other cases, while its third paragraph takes the rate to nil where the holding reaches fifty per cent of the voting power over that same six months, or where the beneficial owner is a pension fund, on the conditions the convention sets for it. That nil rate is one of the benefits the limitation on benefits article conditions; the five per cent rate is not. The Korean convention offers no nil rate: ten per cent where the recipient company, the capital of which is wholly or partly divided into shares, holds directly at least twenty-five per cent of the capital of the company paying the dividends, and fifteen per cent in all other cases, and its protocol displaces the ten per cent rate, in the direction running from Korea to the Netherlands, where the Dutch company suffers Netherlands company tax on the dividends it receives.
The holding period is where reading the consolidated treaty alone would mislead, although not in the direction one expects. The Netherlands notified both dividend articles under article 8(4) of the Multilateral Instrument, which would have imposed a 365 day ownership requirement on the reduced rates. Japan and Korea each reserved the entirety of article 8, and a reservation by either party is enough to keep it out. The six month period written into the Japanese article stands unchanged, and the Korean article still carries no minimum period at all, only its twenty-five per cent capital test. Our note on Dutch withholding tax on dividends, interest and royalties sets out the domestic machinery in full.
Substance is usually present already
Where many entrants struggle to provide substance, an operating Japanese or Korean group usually has it in abundance: real European management, genuine decision-making, and a presence that is anything but a mailbox. The requirement set out in our note on Dutch substance requirements is met by the ordinary operation of the business. The task is to ensure the holding itself, as distinct from the operating subsidiaries, has the decision-making and management that its role requires, rather than assuming the subsidiaries’ substance covers it.
The question is not whether the group has people in Europe but whether the company claiming the relief is the company that decides. The beneficial ownership condition in the domestic dividend withholding exemption and the beneficial owner wording in the Japanese dividend article point at the same entity, and an operating subsidiary’s headcount two levels down does not answer either of them on its own. The Korean convention words its dividend article around the recipient company rather than the beneficial owner, which changes what has to be demonstrated but not where the decisions have to be taken. What a bank or a tax authority looks for at holding level is a board that meets and resolves where the company is established, accounts and contracts that reflect decisions actually taken there, and a reason for the company to exist that survives being stated without reference to tax.
The Pillar Two overlay
Japanese and Korean corporates are typically large enough to fall within the global minimum tax, and the Netherlands and Japan are among the jurisdictions that have legislated for it. The European structure has to be modelled for top-up tax exposure, as we set out in our note on Pillar Two and the Netherlands. For these groups the analysis is a compliance and modelling exercise rather than a threat, but it is one that has to be done at the design stage rather than discovered in the first reporting cycle.
The Dutch charge sits in the Wet minimumbelasting 2024, whose article 2.1 applies it to group entities, other than the excluded entities of article 2.2, belonging to a multinational or domestic group whose consolidated revenue reached at least 750 million euro in at least two of the four reporting years immediately preceding the year in question. Japan has built the same threshold into its own corporate tax. Article 6-2 of the Corporation Tax Act charges the tax on the international minimum taxable amount on a domestic corporation that is a constituent entity of a specified multinational enterprise group, article 82 defines that group by revenue of at least 750 million euro in two or more of the four covered fiscal years immediately preceding, and article 6-3 adds the charge on the residual amount.
Montclare runs a dedicated Asia desk, structuring the corporate, tax and holding architecture for groups and families entering Europe through the Netherlands. Our services are set out on our services page.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.