New Substance Requirements Tackles Tax Avoidance Schemes

The Netherlands offers a solid combination of a stable economy, a reliable tax regime and a sophisticated, internationally oriented infrastructure. In addition, the Dutch economy is noted for its stable industrial relations and plays an important role as a European transportation hub. The Dutch government strongly supports that the legal and economic environment remains attractive for multinational companies to locate their (regional) headquarters in the Netherlands.

On 30 August 2013, the Dutch minister of Foreign Trade and Development Cooperation and the Dutch State Secretary of Finance sent a letter to the Dutch Parliament explaining the position of the Netherlands in recent international tax planning debates.

In order to strengthen its position in the international tax context the Dutch government has decided to take some pro-active measures against the abuse of Dutch conduit companies.

The Dutch government emphasizes the importance of maintaining an attractive fiscal regime to guarantee its key position for international investments. It will not alter the most important elements of the Dutch tax regime, such as the tax treaty network, the possibility to obtain advance tax rulings and the participation exemption.

In addition the Dutch government favours a coordinated and international approach for addressing the issues of international tax planning. The Dutch government believes solutions should be binding for all states, safeguarding a level playing field between states and companies. Decisions in this respect should be taken at e.g. OECD and EU.

However, the Dutch government states that improper use of Dutch entities should be avoided. Therefore, it has been proposed to codify certain minimum substance requirements that have been in place for more than 10 years for conduit companies that applied for a ruling. Substance requirements for Dutch companies can play a role in preventing improper use of Dutch companies in international structures.

The minimum substance requirements will apply to all resident companies mainly performing intercompany financing and / or licensing activities in the Netherlands. The substance requirements are met when a company established in the Netherlands meets all of the following conditions mentioned below:
– At least half of the directors of the company should be resident of the Netherlands.
– The Dutch resident directors should have the professional knowledge and skills to properly perform their duties. These duties at least include the decision making process regarding the company’s transactions and follow-up.
– The company will have adequate support to run its business.
– The (most important) board decisions are made in the Netherlands.
– The principal bank account is kept in the Netherlands.
– The bookkeeping of the Dutch company must take place in the Netherlands.
– The business address of the company is in the Netherlands.
– The Dutch company must comply with all its tax obligations in the Netherlands and is not treated as a tax resident of another country.
– The company runs a real risk with respect to its financing, licensing or leasing activities.
– The company has an equity at risk that corresponds to the functions performed.

The company must account for these substance requirements on an annual basis in its corporate tax return.

If a company does not meet the substance requirements, the company must indicate which specific requirements it does not meet. In addition the taxpayer should provide all necessary information and an overview of all interest, royalty and similar payments for which a reduction of (withholding) tax has or could be claimed under any tax treaty or the European Interest & Royalty Directive to the tax authorities.

This information will be exchanged spontaneously to the relevant source country by the tax authorities.

The Dutch tax authorities will only consider ruling requests of holding companies (ATR and/or APA) to the extent such a company has sufficient nexus with the Netherlands. The nexus requirements will be fulfilled if the aforementioned substance requirements are met.

In conclusion, the substance requirements should not impact the majority of Dutch resident financing or licensing companies. These requirements are already standard practice. However, we recommend Dutch resident holding, financing or licensing companies to review their level of Dutch substance. If necessary, the level of substance should be adjusted to the new requirements as soon as the new rules have come into force.

Compliments of Houthoff Buruma, an EACCNY member.