This letter contains the following key elements:
- application of safe harbor rules on substance to group financing/licensing companies, also if no Advance Pricing Agreement (APA) is requested. A tax payer can conclude an APA with the Dutch tax authorities to remove uncertainty about for example an at arm’s length transfer price of a certain good in intra group circumstances. The advantage of an APA is that it will bring tax certainty and it will reduce the risk of double taxation;
- application of safe harbor rules on substance to holding companies that want to conclude an Advance Tax Ruling or an APA. These requests from holding companies will inter alia be taken into account if there is sufficient nexus with The Netherlands.
The Dutch government confirmed in the letter that it will not change the key elements of the Dutch tax regime for international operating companies like the Dutch participation exemption, no Dutch withholding tax on outbound interest and royalty payments, the possibility to obtain tax rulings from the Dutch tax authorities and the extensive tax treaty network of The Netherlands.
However the Dutch government repeated that The Netherlands will actively cooperate with the OECD BEPS Action Plan (see our news item of August 23, 2013 on our website) Any measures in this respect should be taken globally with other EU and other OECD member states to ensure a level playing field between all the different states and enterprises. The Dutch government emphasized that abusive situations must be avoided and substance requirements for Dutch companies can play a role in preventing such abusive situations.
On October 18 the Dutch State Secretary published a Decree stating that companies whose activities in a given year consist primarily of group financing and licensing activities (or similar activities like leasing), must confirm (in their annual corporate income tax return) whether they meet the following requirements for business presence in The Netherlands:
- At least half of the total number of statutory directors of the tax payer with decision power resides or is actually established in The Netherlands;
- The board members residing or established in The Netherlands have the required professional knowledge and skills to properly perform their duties. The duties of the board include at minimum the decision-making on transactions to be entered into by the tax payer and ensuring a proper handling of the transactions entered into;
- The tax payer has qualified employees for proper implementation and registration of the transactions to be entered into by the tax payer;
- The board of directors is actually taking the key (strategic) decisions and is generally doing so in The Netherlands;
- The principal bank account of the tax payer is kept in The Netherlands;
- The bookkeeping is done in The Netherlands;
- The registered business address of the tax payer is in the Netherlands;
- The tax payer is up to date with all Dutch tax obligations and is - to the best of the tax payer's knowledge - not considered a resident for tax purposes in another country;
- The tax payer has appropriate equity-at-risk and runs real risks with respect to its financing, licensing or leasing activities;
These substance requirements are similar, but not identical to the minimum substance requirements that currently need to be met for an intermediary (group) financing or license company in order to be able to conclude an APA with the Dutch tax authorities. The APA requirements, for example, explicitly include the possibility that the company can use employees of a third party for proper implementation and registration of the transactions entered into by the company.
The draft Decree does not contain these clarifications. There are, however, no indications that the State Secretary of Finance intends to deviate from the substance as currently required for obtaining an APA.
If a tax payer cannot confirm that all substance requirements are met, he should (i) indicate which requirements are not met, (ii) provide all necessary information for the tax authorities to determine which of the substance requirements are met, and (iii) provide 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 EU Directive. According to the draft Decree, this information will spontaneously be exchanged by the Dutch tax authorities with the relevant tax treaty partner, who may take this information into account in determining whether the relevant tax payer can apply the benefits of the tax treaty.
Not or not timely disclosing above information is regarded as a violation which could result in an administrative fine of € 19,500 (maximum)
Please do not hesitate to contact us in case you have any question about the above.
Nijmegen, November 4, 2013