CMS Expert Guide on substance issues across Europe in the Netherlands

Introduction

Both the tax residence and substance of Dutch companies are frequently scrutinised by foreign tax authorities. Prior to the transposition of ATAD 3 (once adopted), specific statutory substance rules need to be observed by resident financing and licensing conduits. These substance conditions also apply for Dutch dividend withholding tax purposes (and, in certain cases, Dutch corporate income tax purposes), which may require non-resident shareholders to observe the same rules in order to secure a reduction or exemption of such tax.

Tax residence criteria

Companies incorporated under Dutch law are deemed to be residents of the Netherlands for most Dutch corporate income tax purposes, and are treated as resident withholding agents for dividend withholding tax purposes (‘incorporation fiction’).

A company is also considered a Dutch tax resident if it is actually situated in the Netherlands based on the facts and circumstances (of which the place of effective management is the most important factor).

'Substance' criteria

Dutch entities qualifying as intra-group financing and licensing conduit companies must meet the Dutch substance criteria if they want to benefit from a double tax treaty, or EU Directives. If not, they are exposed to the risk of exchange of information by the Dutch tax authorities and may, under certain circumstances, not be eligible for a Dutch tax credit for foreign withholding taxes.

For non-resident corporate shareholders of Dutch companies, meeting the Dutch substance criteria causes the burden of proof concerning the existence of an abusive intent of avoiding a liability to Dutch dividend withholding tax (and sometimes, Dutch corporate income tax) to shift to the Dutch tax authorities.

General requirements

  • At least 50% of the statutory board members with (equal) decision-making powers must reside in the Netherlands
  • The resident board members must have the necessary professional knowledge and skills to perform their duties, including decisions regarding transactions and follow-up
  • The company must have qualified human resources for adequate implementation and registration of its transactions
  • Board meetings must take place in the Netherlands and the important board decisions need to be made in the Netherlands (no ‘rubberstamping’); and
  • The bookkeeping must take place in the Netherlands

Activities

Resident financing and licensing conduits must observe increased substance requirements, including having sufficient equity at risk for their financing or licensing activities.

Employees

Resident financing and licensing conduits must incur annual personnel costs of at least EUR 100,000 relating to the human resources used for their financing or licensing activities.

Premises

Resident financing and licensing conduits must dispose of their own sufficiently equipped and actually used office space. The term of the relevant lease or similar agreement must be at least 24 months.

Bank account

The principal bank account needs to be managed out of the Netherlands, which does not mean that the bank account is also kept with a Dutch bank.

Substance reporting obligations?

Currently, resident financing and licensing conduits benefitting, in any given year, from a tax reduction or exemption pursuant to a double tax treaty or EU Directive must confirm, in their Dutch corporate income tax return for that year, whether they did meet the substance requirements. If not, then the Dutch tax authorities may exchange information about this lack of substance with the tax authorities of the source states. This may cause such source states to deny the reduction of exemption.

Substance criteria applied to a foreign entity?

For certain dividend withholding tax and corporate income tax purposes: same as those applied to resident financing and licensing conduit, except that the 'EUR 100,000 personnel expenses' requirement may be lower due to the country of residence's COLA (Cost-of-Living Adjustments) index.

ATAD 3

The transposition of ATAD 3 into Dutch domestic tax law will likely result in the current substance framework being replaced.