Licensing, like leasing, is an area which almost invariably attracts withholding taxes. These are usually so steep (25% on average) that cross-border licensing is prohibited: one would need to make 80% net profit on the underlying transactions, with a home-country tax rate of, say, 30%, to be able to credit the foreign withholding tax!
Putting a Dutch entity in the loop, and dividing the licensing agreement into two separate parts (an exploitation license which is granted to the Dutch entity and a user license which is granted by the Dutch entity) has traditionally always been legally fully acceptable, but also a practically workable way to reduce foreign withholding taxes in the vast majority of cases. The Netherlands is famous for its favourable tax treaty network in this respect.
In 2001 the Dutch Ministry of Finance issued new guidelines – based on ”harmful tax competition” discussion with the European Commission in Brussels – to avoid what other EU countries saw as improper use of the Dutch tax treaties. When the dust cleared, which took till early 2006 due to a 5 year “grandfathering” rule, it became apparent that the traditional Dutch trust sector has been quite adversely affected by the new Dutch ”beneficial ownership” requirements that future royalty conduit companies are facing in order to escape an international exchange of tax information from the Dutch tax authorities to their foreign peers. The new rules were restricted to royalty conduit companies that do business with affiliated companies, however. Our ”third party” royalty conduit solution remains unaffected.