Updated Decrees confirm Dutch APA/ATR procedures and practice

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1 16 June 2014 EY Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date Updated Decrees confirm Dutch APA/ATR procedures and practice Introduction On 12 June 2014, the Dutch State Secretary of Finance issued 5 updated Decrees (the Decrees) outlining the Advance Pricing Agreement (APA) and Advance Tax Ruling (ATR) procedures in the Netherlands. The Decrees replace versions from 11 August 2004 (the 2004 Decrees). The Decrees cover the organizational and procedural aspects of an APA or ATR process. In addition, the Decrees contain specific guidance on substance requirements in dealing with holding entities and financial services companies engaged in intragroup financial service activities. This Alert outlines the main changes with respect to the latter items included in the Decrees compared to the 2004 Decrees and the implications for taxpayers with (or considering) an APA or ATR. The updates generally align the Decrees with already existing Dutch ruling policy. ATR The most important changes with respect to the ATR process are outlined below. The Decree aligns with the already existing Dutch ruling policy by incorporating these changes. The Decrees provide that ATR requests made by stand-alone Dutch intermediate holding companies and top holding companies in international structures will only be processed if (i) either the minimum substance requirements (see below) are met 1 or (ii) the Dutch entity is part of a group which has operational activities in the Netherlands or has genuine plans to engage in these. It is explicitly mentioned that the duration of an ATR is in general four to five years, but can be concluded for a longer period in certain circumstances (e.g., long term contracts).

2 APA The requirements for concluding an APA and the content of an APA remain comparable to the 2004 Decree and the current Dutch ruling policy. The most important changes are outlined below and mainly relate to APAs for financial service companies. The definition of financial service companies has been expanded in line with current practice and now includes not only entities that are largely (i.e., 70% or more) involved in intercompany financing and licensing, but also includes renting and leasing. If an APA involving a financial service company is requested after 13 June 2014, the tax authorities intend to spontaneously exchange information with the relevant foreign tax authorities if the financial service company does not meet the minimum substance requirements (see below) and the related taxpayer s group does not have any other activities in the Netherlands (nor has genuine plans to increase their substance in the Netherlands). The substance requirements also apply to financial service companies without an APA that want to apply the Dutch treaty network or the EU Interest and Royalty Directive. The Decrees confirm that APAs may now apply for a longer period, which is to be determined on a case-by-case basis. Typically a 4 to 5 year period is applied. Substance Requirements The Decrees give guidance on interpreting the minimum substance requirements, which are in line with the substance requirements that were codified as per 1 January 2014, and in line with the existing ruling practice. The minimum substance requirements are summarized below. Unless stated otherwise, no change in substance requirement is intended. At least half of the total number of statutory board members and board members with power of decision reside or are actually established in the Netherlands. It is now explicit that supervisory board members should be excluded in this determination. Board members residing or established in the Netherlands have the required professional knowledge to properly perform their duties. The entity should employ employees that are qualified for execution and registration of transactions entered into by the entity. Qualified employees can still be employees of the entity itself as well as employees hired from third parties. The management decisions are taken in the Netherlands. This requirement entails a material test, meaning that the board meetings must be held regularly in the Netherlands with the physical presence of directors. All important decisions must be made during such meetings and should not entail the mere formalization of board decisions already taken outside of the Netherlands. The main bank accounts of the entity are held in the Netherlands. The Dutch entity should be entitled to the bank account and should have decision-making power and management with respect to the bank account in the Netherlands. It is not required that the account be held with a bank in the Netherlands. The bookkeeping of the company is conducted in the Netherlands. This entails that the key administrative functions should be carried out in the Netherlands. This includes the initial decision on how to account for a particular item, journal entries, data processing and final approval of accounts. Groups that have centralized their administration outside of the Netherlands now fulfill the location requirements for bookkeeping if they have sufficient operational activities in the Netherlands. Whether there are sufficient operational activities in the Netherlands is based on the facts and circumstances, but elements that can play a role in this determination are, among others, number of employees, operational costs and availability of an office space for the group to fulfill the operational activities. The company is compliant with all tax filing obligations in the Netherlands. 2

3 The business address of the company is in the Netherlands. The entity is to the best of its knowledge not considered a resident for tax purposes in another country than the Netherlands. The entity has at least an equity amount that is appropriate for the functions performed, taking into consideration the assets used and risks assumed. In case of ATR requests pertaining to transactions with participations, the Dutch entity should at least be equity funded with 15% of the participations cost price. Conclusion The Decrees confirm a continuation of the current APA/ATR practice and provide for additional guidance for taxpayers in obtaining APAs/ATRs. Groups with stand-alone financial services companies or stand-alone top holding or intermediary holding companies in the Netherlands (i.e., without operational activities in the Netherlands within the group) may find that some conditions have shifted or are now interpreted more strictly, and are advised to review the minimum substance requirements in more detail. Endnote 1. Unless the character of the tax rules for which the ATR is concluded is not reconcilable with this, such as in respect of permanent establishments. 3

4 For additional information with respect to this Alert, please contact the following: Ernst & Young Belastingadviseurs LLP, Amsterdam Eric Westerburgen Ernst & Young Belastingadviseurs LLP, Rotterdam Michiel Swets Ernst & Young LLP, Belgium-Netherlands Tax Desk, New York Dirk Stalenhoef Ernst & Young LLP, Belgium-Netherlands Tax Desk, Chicago Erwin Sieders Ernst & Young (China) Advisory Limited, Belgium-Netherlands Tax Desk, Shanghai Bas Leenders Ernst & Young LLP, Dutch Tax Desk, London Jelger Buitelaar

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