Dutch tax law has no specific provisions for the taxation of cloud computing, so any interpretations should be based upon the existing Dutch tax framework. Dutch tax rules should apply equally to public and private cloud computing.
For a resident cloud service provider, it is relatively straightforward to determine the tax consequences of providing cloud services. The cloud service provider's worldwide income would be subject to Dutch corporate income tax; the net income arising from such transactions would be subject to tax in the Netherlands at the ordinary tax rate of 25 percent.1 Specific incentives such as the innovation box system with a reduced effective tax rate of 5 percent may be available as well as accelerated depreciation, subject to certain requirements.
However, for non-resident Cloud service providers, the taxability would generally be dependent on a taxable presence in the Netherlands. The Netherlands has no royalty withholding tax, and foreign-based cloud service providers are in principle only subject to Dutch corporate income tax if they have a specific source of Netherlands income. Consequently foreign-based cloud service providers would only trigger Dutch corporate income tax if they have a permanent establishment or permanent representative in the Netherlands.
Where the foreign cloud service provider carries on business in the Netherlands through an office or permanent representative, it may constitute a permanent establishment (PE) in the Netherlands. In a cloud scenario, where customers across the globe can store and access their data and applications from virtually anywhere in the world, the degree of control over the server and location of the server would need to be evaluated, when determining whether a transaction involves a PE.
As of 1 January 2012, the above-mentioned expressions PE and "permanent representative" (PR) are defined in the Dutch Corporate Income Tax Act and are in line with the Organisation for Economic Co-operation and Development (OECD) model tax treaty. Also, the Dutch courts tend to interpret cases in the light of the definitions contained in tax treaties and the OECD commentary.
The Netherlands has entered into tax treaties with various countries. If the cloud service provider is a tax resident of a country with which the Netherlands has entered into a tax treaty, the tax consequences of the transaction would need to be determined based on the provisions of the relevant tax treaty.
Through careful tax planning, the taxable presence and the profit to be attributed to such presence may be optimized.
Related party transactions
The taxability of a transaction could also be affected by Dutch transfer pricing provisions, which are generally in line with OECD guidelines. This is particularly relevant where multiple corporate entities combine efforts to provide cloud services to customers.
According to article 8b of the Dutch Corporate Income Tax Act, related parties have to deal with each other on an arm's length basis. In addition, inter-company pricing must be substantiated with transfer pricing documentation which must show why the pricing used is at arm's length.
The Netherlands do not levy royalty withholding tax.
The Netherlands levies Value Added Tax (VAT) on the supply of goods and services. The applicability of VAT should be reviewed on a case-by-case basis, as exemptions and reversed charge provisions may apply.
Customs duties typically apply upon the import of goods.
Transfer of business issues
In event of a business transfer or restructuring, it's important to carefully review whether any assets, functions or risks are transferred abroad. If so, corporate income tax would typically be due on any goodwill and hidden reserves (deemed) realized. Also, it should be reviewed where costs should be borne.
Other issues or planning opportunities
Each structure must be carefully reviewed and there may be tax planning opportunities. Furthermore, especially for new structures it is possible to conclude a tax ruling with the Dutch tax office. Such a tax ruling will confirm the Dutch tax implications and provide certainty in advance on issues such as the income attributable to the Dutch activities and whether certain tax incentives may be obtained.
1The first EUR200,000 of taxable income is subject to 20 percent corporate income tax.