Last Friday, the Dutch Government submitted a letter to Dutch parliament on the role of the Netherlands in international tax structures and the perceived abuse of the Dutch double tax treaty network (the "Letter"). In the Letter, the Dutch Government stressed that the Netherlands will not amend the main structure and key features of its tax regime: the existence of its participation exemption regime, the extensive double tax treaty network, and the continued availability of advance tax clearance, are not at stake.
In addition, the Dutch Government again expressed its preference to combat tax fraud and tax evasion through internationally coordinated measures at a global level rather than taking unilateral measures that could harm the good Dutch tax climate. The Netherlands will therefore continue to actively participate in the international efforts undertaken in this respect at the level of the EU, the OECD and the G20 (see our 31 May 2013 Tax Alert for further background on these efforts).
The Dutch Government does, however, believe there is room for taking unilateral measures to avoid some of the most blatant examples of perceived abuse of (the combination of) its domestic tax system and extensive double tax treaty network, without harming the good Dutch tax climate. The Letter proposes to:
- expand the relevance of the minimum substance requirements;
- seek to include certain anti-abuse language in the (prospective) double tax treaties with some of the least developed countries1; and
- further tighten the integrity policies applicable to the business conduct of professional trust service providers.
In this Tax Alert, we focus on the measures proposed by the Dutch Government with respect to the Dutch substance rules (and the spontaneous exchange of information by the Dutch tax authorities).
2. Dutch substance rules and spontaneous exchange of information
Measures applicable to conduit companies
Under the current Dutch tax ruling policy, in order for companies engaged predominantly in intragroup financing and/or licensing activities (hereinafter referred to as a "conduit company") to be eligible for advance tax clearance, they need to satisfy the Dutch substance requirements as published by the Dutch Ministry of Finance (see the Annex to this Tax Alert for an overview).
As a first measure, the Dutch Government has proposed that these Dutch substance requirements will become applicable to all conduit companies, irrespective of whether or not such companies already have or have sought advance tax clearance.
If a conduit company seeks protection from withholding taxes in respect of interest or royalties under a Dutch double tax treaty, such company will be required to disclose in its Dutch tax return whether it satisfies the Dutch tax substance requirements. If such requirements were not to be satisfied, the Netherlands will spontaneously exchange information with the relevant source State through which it informs such State of the conduit company and its non-compliance with the Dutch substance requirements. Based on the Letter, at this stage the legal basis for such exchange of information and whether the Dutch tax authorities will do so under all circumstances (or e.g. solely on a reciprocal basis), remains unclear.
The second measure is that the Netherlands will spontaneously exchange information on advance pricing agreements with companies if the activities of their group do not exceed the activities suitable for the Dutch substance requirements (see the Annex to this Tax Alert for an overview).
Measures applicable to holding companies
The third measure is that in order for holding companies to be eligible for advance tax clearance with respect to the applicability of the participation exemption, the group such holding company forms part of will need to have (the intention to obtain) a 'real nexus' with the Netherlands. Based on the Letter, the 'real nexus' requirements that will be set here will be 'similar' to the existing Dutch substance requirements for conduit companies.
In contrast to the exchange of information in case of non-complying conduit companies, the Letter does not state that holding companies have to disclose whether they satisfy the Dutch substance requirements in their tax return. Furthermore, there will be no spontaneous exchange of information in case of non-compliant holding companies either.
The unwillingness to grant advance tax clearance does not imply that said holding companies are no longer eligible for the benefits of the Dutch participation exemption regime: after all, advance tax clearance is not a requirement in order for the Dutch participation exemption to apply.
According to the Letter, the measures with respect to intragroup holding companies are not so much raised because of the risks of abuse of the (combination of the) Dutch domestic tax system and the Dutch extensive double tax treaty network. The time spent on advance tax clearance requests by the Dutch tax authorities' personnel is the issue. The Dutch Government views this as unnecessary use of its capacity in situations where the holding company does not add value to the Dutch economy. On this basis, omitting spontaneous exchange of information in case of non-compliant holding companies may make sense.
Finally, in the Letter the Dutch Government indicates that it rejects the suggestions made by Dutch Parliament to introduce a minimum taxation (such as the one recently introduced by Luxembourg) and/or a fee in connection with the application for advance tax clearance (such as the fee due in case of advance tax clearance applications with the German tax authorities).
In the combat against international tax fraud and tax evasion the Dutch Government prefers internationally coordinated measures at a global level over unilateral measures. It does, however, see some room for unilateral measures against the abuse of (the combination of) its domestic tax regime and extensive double tax treaty network.
The scope of the proposed measures seems limited. Mostly affected will be conduit companies that have not requested advance tax clearance and even these should not suffer an increased Dutch tax burden, but should comply with the Dutch substance requirements or will be the subject of spontaneous exchange of information.
For holding companies, the proposed measures seem limited to the denial of advance tax clearance if certain substance requirements are not satisfied, but without the threat of spontaneous exchange of information.
We will report back once any further guidance as to these measures is available.
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 The countries concerned are Bangladesh, Egypt, Ethiopia, Georgia, Ghana, India, Indonesia, Kenya, Kirgizstan, Morocco, Malawi, Moldavia, Mongolia, Nigeria, Pakistan, Philippines, Sri Lanka, Uganda, Ukraine, Uzbekistan, Vietnam, Zambia and Zimbabwe.