Please find below the tax note my colleagueas from UHY Govers have recently prepared.
I would like to thank you for the collaboration in this blog, specially Bas Pijnaker.
On 1 January 2014, a new Decree entered into force, containing the new Dutch substance requirements for financial holding companies. Dutch companies that claim treaty benefits should now declare whether or not the company meets the substance requirements in their Dutch corporate income tax return.
Until 01-01-2014 the regulations were as follows:
Cash-flow companies receiving and paying out interest or royalties to and from other countries only had to fulfil the substance requirements if:
- they want to obtain an advance tax ruling (ATR) or an advance pricing agreement (APA); and/or
- they want to be entitled to tax treaty benefits.
In order to satisfy the substance requirements, companies must assume genuine business risks and must have enough capital in place to cover these risks and functions. In addition, they had to prove that the effective management of these activities took took place in the Netherlands.
Article 8c of the Dutch Corporate Income Tax Act (CIT) provides that interest and royalty payments made by a non-resident cash-flow company are exempt from corporate income tax in the hands of a Dutch recipient company if that company does not assume a genuine risk with respect to such payments. In that case, no relief for double taxation is available. A safe harbour rule provides that where a company’s equity is at least the lower of 1% of its outstanding loans and EUR 2 million, that company is assumed to bear a genuine risk.
The new rules
The new rules will be applicable for fiscal years starting as of 1 January 2014 and the substance requirements should be met on a continuous basis. Details of the new requirements are summarized below. These requirements were introduced to prevent taxpayers with no real presence in the Netherlands from benefitting from the Dutch treaty network. The new Decree applies to resident corporate taxpayers, subject to corporate income tax (the taxpayer) whose activities mainly consist of (in) directly receiving (and paying) interest, royalties, rent or lease payments from (to) non-resident entities that are part of the group to which the taxpayer also belongs. The requirements signifying a real presence in the Netherlands are:
- that at least half of the statutory board members with decision -making powers must reside in the Netherlands;
- these board members possess the required knowledge to, in short, execute their tasks;
- the presence of qualified staff to execute and register the taxpayers’ activities;
- the decisions by the board are taken in the Netherlands;
- the most important bank accounts are held in the Netherlands;
- the accounting records are kept in the Netherlands;
- the address of the taxpayer is in the Netherlands;
- the taxpayer is, to his knowledge, not a tax resident of another country;
- the taxpayer runs a real risk as regards the loans or royalty/rental/lease agreements (see art. 8c CIT above); and
- the taxpayer has an amount of equity corresponding with/regarded sufficient to the real risk he runs.
Such taxpayers must, (at the latest) when they file their tax return, declare that they fulfil all the substance requirements listed above. If the taxpayer does not fulfil all the requirements, the taxpayer must (at the latest) when the tax return is filed:
(i) declare which requirement(s) is (are) not fulfilled;
(ii) provide documentation on the basis of which a determination can be made whether or not the requirements have been satisfied;
(iii) provide an overview of the received interest, royalty, rental and lease payments for which the taxpayer has requested, or couldstill request, application of:
- a provision for the elimination of double taxation (e.g. a tax treaty);
- The Interest and Royalty Directive 2003/49 (amended in 2006); and
- a national provision implementing the Interest and Royalties Directive; and
(iv) provide the names and addresses of the entities from which the payments mentioned under (iii) originated.
Consequences of not meeting substance requirements
In the event a taxpayer does not fulfil the requirements, and (intends to) make use of one of the methods for the elimination of double taxation mentioned under (iii), the Netherlands will spontaneously provide the necessary information about the taxpayer to the relevant treaty partner or EU Member State. Furthermore, the above rules are subject to a penalty provision (with a maximum of EUR 19.500 in case of premeditation or gross negligence). If the taxpayer does not (intend to) make use of one of the methods for the elimination of double taxation mentioned under (iii), then the abovementioned declarations do not need to be submitted.
What to do next
Tax payers who fall under the scope of these new rules need to review carefully whether all substance requirements are satisfied. Please note that the substance requirements should be met on a continuous basis. Therefore, it is critical to carefully review continuous compliance with every requirement. In general, we expect that in most cases simple adjustments of operating protocols should be sufficient to fulfil the requirements.