Initial guidance from the Dutch State Secretary of Finance on the "Danish Cases" relating to beneficial ownership

NL Law
On 26 February 2019 the European Court of Justice ("ECJ") ruled in various cases regarding the interpretation and non-application of the Parent-Subsidiary Directive ("PSD") and Interest and Royalties Directive ("IRD") in the context of tax avoidance and beneficial ownership (the so-called "Danish Cases").

On 14 June 2019 the Dutch State Secretary of Finance (the "State Secretary") has responded to various questions raised in Dutch Parliament on the interaction between the Danish Cases and Dutch tax legislation applicable to (intermediate) holding companies, which responses give some important initial guidance on the State Secretary's interpretation of the cases and the perceived implications thereof for Dutch corporate tax practice.

The Danish Cases

In the Danish Cases, Danish companies were owned by other companies which were resident of the EU (for example Luxembourg and Cyprus). In their turn, these EU companies were owned by companies which were resident in a third country jurisdiction (i.e. outside of the EU). In these cases, in short, the Danish companies paid interest and distributed dividends to the EU companies, taking the position that the interest and dividend payments were not subject to Danish withholding taxes because of the applicability of the IRD and PSD respectively. This view, however, was contested by the Danish tax authorities arguing that the EU companies should not be considered the beneficial owner of the dividends and interest respectively. The Danish High Court, referred questions in this respect to the ECJ.

From the Danish (interest) Cases it can be derived that a beneficial owner under the IRD is an entity that actually economically benefits from the interest and accordingly has the power freely to determine the use to which it is put. The Danish Cases further make clear that under the EU anti-abuse principle, the benefit(s) of the IRD and PSD need to be denied to a taxpayer in abuse of rights situations (irrespective whether the EU member state has implemented specific anti-avoidance in its domestic legislation). The assessment whether a structure is abusive should be made by making an analysis of all relevant factors of an individual case.

Dutch dividend withholding tax exemption

According to current legislation, in short, the following conditions (amongst others) need to be met to apply the Dutch domestic dividend withholding tax ("DWT") exemption:

  1. the beneficiary to the income – which should be the beneficial owner – is a corporate body, which according to the tax laws of the foreign jurisdiction, is a resident of an EU/EEA member state, or a state that has concluded a double tax treaty with the Netherlands and which contains a dividend provision;

  2. at the time of the distribution, the beneficiary to the income has an interest in the Dutch company paying the dividends to which the participation exemption or participation credit regime would have been applicable, had it been a tax resident of the Netherlands; and

  3. the beneficiary to the income does not hold the interest in the Dutch company with the main purpose or one of the main purposes of avoiding Dutch DWT in the hands of another person (the "subjective test") or there is not an artificial arrangement or transaction or series of artificial arrangements or transactions that have not been put into place for valid commercial reasons reflecting economic reality (the "objective test").

With respect to intermediate holding companies, the objective test should be met if the relevant company performs a linking function within the group structure between a business higher up the corporate chain and a business lower down the chain and meets the so-called "relevant substance" requirements (which amongst others requires the availability of an office space for at least 24 months and adequate payroll substance pertaining to the linking function of at least EUR 100k).

Similar "subjective and objective tests" need to be applied when determining whether non-Dutch parties holding 5% or more of the shares of a Dutch company are subject to Dutch corporate income tax ("CIT") based on the substantial interest rules.

Questions and responses in Dutch Parliament regarding the impact of the Danish Cases

On 2 and 8 May 2019 various questions regarding the Danish Cases and the impact thereof on Dutch tax legislation/policy were raised in Dutch Parliament. Please find below the main but preliminary takeaways that can be derived from the responses of the State Secretary to these questions. The Dutch Government is currently still reviewing the cases, leaving the exact implications yet unclear.

Dutch domestic DWT exemption – relevant substance requirements

According to the State Secretary, the current Dutch domestic DWT and CIT anti-abuse rules appear to be generally in line with EU law and the interpretation thereof by the ECJ. Nonetheless, the Danish Cases (and in particular the factual and case-by-case approach of the ECJ) give cause to some modifications of the Dutch domestic anti-abuse rules. For example, the current substance requirements will be functioning as mere indicators for the non-abusive character or nature of a specific situation. This, since it cannot be excluded that in certain situations, a structure that meets the relevant substance requirements – based on all facts and circumstances – must nevertheless be considered as 'abusive' according the ECJ's interpretation as set out in the Danish cases. Therefore, certain changes in the DWT and CIT anti-abuse rules will be implemented. These changes will be addressed in connection with the proposal of the new Dutch conditional withholding tax on interest and royalty payments, expected to be published on Budget Day in September later this year. As a result of these changes, the character of the current substance requirements will change as per 1 January 2020; these requirements will now become relevant in respect of the division of the burden of proof between the taxpayer and the tax authorities. Following these changes the Dutch tax authorities will be able to challenge situations that are perceived abusive, even if the substance requirements are met. This revised domestic legislation will – in line with current practice – apply in respect of both EU and non-EU intermediate holding companies.

However, according to the State Secretary there is an overlap between the current substance requirements applicable in the Netherlands and the guidance provided on perceived tax avoidance by the ECJ in the Danish Cases in the context of the IRD and PSD. Therefore, going forward, the State Secretary does not expect that structures meeting the current substance requirements could be successfully challenged as abusive situations under the new rules much more often than under the current rules. On the other hand, the State Secretary also states that certain borderline cases in which the substance requirements are formally met, may be nonetheless challenged before court if the substance may considered to be insufficient in view of the ECJ's approach in the Danish Cases. For example, where EUR 100k of payroll substance for activities performed in relation to the subsidiary is not appropriate from an at arm's length perspective ("in zakelijke verhoudingen") in view of the amounts of dividends, interest and royalty's received/distributed or where funds are being distributed very soon after receipt by the intermediary (holding) company.

Dutch tax rulings in principle terminate upon a relevant change in legislation. Whether there is such a relevant change in legislation in certain situations strongly depends on the specific facts and circumstances of the case. Rulings granted in situations where the structure meets the substance requirements, but which structure would qualify as abuse under the new legislation, will in principle terminate as from the date of entering into effect of the new legislation (expected 1 January 2020). However, if also after the new legislation there is no abusive situation, there should be no relevant change in legislation as result of which the ruling should remain valid.

Further to the statement of the State Secretary that he does not expect currently substance-compliant structures to be challenged much more often than under current law (because of the overlap of the current substance requirements with the guidance provided on perceived tax avoidance by the ECJ in the Danish Cases), in his view this also justifies grandfathering of rulings as a result of which taxpayers can in principle rely on existing rulings until the Dutch tax authorities would explicitly indicate that the ruling lapses (this also ties in with the general (new) burden of proof for perceived abuse, resting with the Dutch tax authorities). In this reassessment of rulings, the Dutch authorities will again focus on borderline cases. Under the new ruling policy that will enter into force per 1 July 2019 (we also refer to our Tax Alert of 25 April 2019), the Danish Cases will be taken into account to determine whether a ruling will be granted.

Tax treaty protection

Furthermore, in Parliament questions were raised whether – in short – taxpayers, within the EU context, would still be entitled to tax treaty protection where a structure would considered to be abusive under the EU anti-abuse principles. The State Secretary responded that, based on the Danish Cases, EU Member States only have the obligation to challenge abusive use of tax benefits derived from EU law. According to the State Secretary this does not mean that taxpayers would no longer be entitled to (similar) benefits under double tax treaties.

We note that such treaty protection may nevertheless be limited or denied by invoking the Principal Purpose Test ("PPT") as introduced in most Dutch tax treaties following the Multilateral Instrument ("MLI") initiative as effectively applicable in most cases as from 1 January 2020. The State Secretary indicates that the Danish Cases may also influence the interpretation of the PPT.

Dutch participation exemption

Furthermore, the question was addressed whether the application of the Dutch participation exemption on dividends received from EU subsidiaries, in the context of the PSD, could be affected by the Danish Cases. The PSD in principle also provides for an exemption from taxation (or a tax credit) at the level of the parent company on dividends received from an EU subsidiary. According to the State Secretary, the Danish Cases only pertain to the withholding tax exemption for subsidiaries and do not regard the application of the EU anti-abuse principle to parent companies. Whether (and if so, to what extent) these ECJ cases have an impact on the application of the Dutch participation exemption can therefore not be directly derived from these cases. The State Secretary stated that he is therefore still examining the potential interaction and he noted that this may require additional case law. In addition, the State Secretary noted that he intends to take this into account in the context of the earlier announced (general) review of the Dutch participation exemption regime (findings thereof are expected to be published in the course of 2020).


The exact impact of the Danish Cases is still unclear, and the cases are still being reviewed by the Dutch Government. Nevertheless, the current responses from the State Secretary already give some insight and initial guidance on some important topics, in particular for parties with an existing tax ruling. Legislative proposals regarding the DWT and CIT amendments are expected to be published in September 2019. We recommend to review the potential impact of the Danish Cases on existing Dutch structures on a case-by-case basis.