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The Tax Cuts and Jobs Act of 2017 (TCJA) passed in late 2017, and more recently the restrictive immigration policies of the Trump Administration, appear to have caused Dutch controlled ventures to alter strategy and create more substance in their U.S. subsidiaries.

Dutch companies doing business through a U.S. domiciled subsidiary, often balance various legal, tax, commercial and human resource management interests when deciding how they will operate. On one side of the scale, business developers want to optimize market potential in the U.S. by going ‘all-in’ and creating a substantial local presence. On the other side of the scale, their colleagues responsible for legal matters and international tax optimization are more concerned with the potential legal and financial exposure this creates for the parent company.


Pre TCJA Implementation

Before the TCJA took effect, Dutch companies often ‘balanced’ the above interests by using the U.S. subsidiary as a sales and marketing office. They relied upon transfer-pricing studies to generate slim profit margins in the United States while the services and/or goods were provided overseas. Dutch parent companies would allocate as much of the profits to the Netherlands as possible to avoid the high U.S. Federal Corporate Income Tax rates (usually about 35% not including state and local income taxes). Companies relied upon ‘cost of goods sold’, management fees, product development fees, intellectual property or licensing fees etc. to allocate as much of the U.S. revenues to the Netherlands. This was largely because prior to these changes the Dutch Vennootschapsbelasting was substantially more favorable than the U.S. tax rates.


Post TCJA Implementation

As Federal Corporate Income Tax rates were reduced to about 21% in the U.S., Dutch companies reevaluated whether they still had the balance that they desired.  From a research poll conducted by TABS earlier this year entitled‘Dutch Ventures in the U.S.’ involving more than 200 Dutch ventures, it is apparent that a majority of Dutch companies have indeed shifted their strategy and are creating more substance in their U.S. subsidiaries. Though TCJA may have contributed to this shifting landscape, it appears that other changes, including the immigration policies, also contributed significantly.

One of the reasons that parent companies increased the substance of their U.S. entities in recent years was to qualify for an ‘investor visa’ (E) or an ‘intracompany management visa’ (L) for its Dutch staff. Under the Trump Administration more restrictive immigration policies, foreign parent companies have to show that investments in the United States are substantial (i.e. that the subsidiary is hiring U.S. labor, that it has contracts with clients based in the United States and that it is not simply a ‘pass through’ entity). The threshold of what constitutes ‘substantial’ has increased over the years, and with that the reason to increase the size of the team on the U.S. payroll.


Increase in Both Importance and Complexity of State and Local Taxes

Another potential consideration in the balancing act is how various states have reacted to the effects of the TCJA and their need to replace lost revenues. Previously corporate income taxes paid on the state level was partially deductible for Federal income tax purposes. After TCJA this was no longer the case which created a loss in tax revenues for individual States. To make up for that loss of revenue, and supported by the U.S. Supreme Court’s Wayfair Decision in June 2018, States have become more aggressive in arguing that Corporations have a tax presence (nexus) in their state, and therefor may need to collect sales tax and pay corporate income tax in that state. Keeping up with these various taxing authorities and jurisdictions has become quite difficult and the possibility of non-compliance (despite honest efforts) has grown substantially. In order to be able to collect and remit sales tax, companies were required to register in an increasing number of States. Although it is technically still possible to register a B.V. in a state for the collection of Sales Tax, various Dutch companies saw this too was becoming more difficult and created a reason to let the sales transactions go through the U.S. entity going forward rather than via the B.V.


Uncertainties around U.S. Customs Duties

Another reason for increased substance in the U.S. subsidiary as a direct result of the Trump Administration’s trade policies was the ongoing uncertainty about customs duties that was lingering over many international exporters’ heads. As a result of numerous ongoing trade disputes that Trump escalated during his term, and helped by the low interest rates, many Dutch companies decided to increase their inventory held by the U.S. subsidiary. This would allow for absorption of temporary duty rate increases on targeted products by U.S. Customs.


‘Buy American’ and other trends against internationalization

Finally, although not directly a result of the Trump Administration, the more nationalistic movement in the U.S. in the past years has led many Dutch companies to set up a subsidiary in the U.S, although it has been at different levels throughout the country, and while it has varied by industry. Selling through a U.S. entity has developed an increasing number of advantages. Some are very practical.  Such as shorter delivery-times that can be expected when originating from a U.S. based warehouse and locally based customer service support and maintenance teams. Others are more bureaucratic.  Notorious is the complicated Form W8BEN-E that most B2B buyers now demand from suppliers with a foreign entity and then there is the reluctance of U.S. companies to send money to foreign bank accounts.  Although there are Dutch companies that have such a unique product or service that they can convince clients to overcome some of these reluctances, most are trying to break into such a competitive environment that they can not afford to let these obstacles stand in the way of market success and growth.

In summary, one can conclude that the Trump Administration’s policies have directly and indirectly resulted in a significant increase of substance in the U.S. for Dutch owned U.S.-subsidiaries, and with that, increased tax revenues from these companies. Both on corporate income tax (more profits were left in the U.S.), payroll tax (more staff was hired), and sales tax levels for the states. Interestingly enough the Dutch Ventures in the U.S. research suggests that the Dutch companies that went ‘all-in’ and put more substance in their U.S. subsidiary in recent years, fared significantly better than those who remained on the sideline and tried to benefit from the U.S. market potential with no, or a minimal presence in the U.S.


More information

USA Update – Webinar on Tuesday November 17th

Interested in finding out how Biden’s election may impact the next 4 years? There will be a seminar on November 17th in cooperation with the Rabobank and Wuersch & Gering. Register here.


Accelerate your Tech Startup in the U.S. – Webinar on Wednesday November 18th

During this session, TABS will share their insights from the Dutch Ventures in the United States research project on how to successfully expand to and build your business in the U.S. market. This will be followed by a panel of experienced Tech entrepreneurs who will share their practical experiences on how to enter the Life Science & Health market and accelerated digital transformation during the COVID-19 pandemic. Register here.

 

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