Quoted March 2015 - Edition 103 Dutch minimum substance requirements Relevant tax and corporate law aspects
In this edition Introduction Service Companies List of minimum substance requirements Analysis of Dutch substance requirements Consequences of not meeting the Dutch substance requirements Final remarks 2
1. Introduction Dutch corporate law does not require board members of Dutch legal entities to be Dutch resident and from a Dutch corporate law perspective Dutch legal entities generally do not have to hold their board meetings in the Netherlands, maintain an office address or their administration in the Netherlands, and neither need to meet any other substance requirements. However, certain companies based in the Netherlands with intra-group financing, licensing or leasing activities (Service Companies) that could apply the Dutch tax treaty network or the EU Interest & Royalty Directive (2003/49/EG) (EU Directive), including national rules for implementation of the EU Directive, should meet a number of minimum substance requirements in order to prevent a spontaneous exchange of information by the Netherlands with relevant foreign tax authorities, as further described below. As per 1 January 2014, the Netherlands codified the then existing Dutch minimum substance requirements in the form of regulations dated 18 December 2013 (Regulations) 1 aimed at a stronger enforcement of these requirements and the accompanying exchange of information with the relevant foreign tax authorities. The Regulations serve to assist source countries in assessing whether Service Companies should properly be entitled to tax treaty or EU Directive benefits. Such benefits would generally consist of lower or no withholding tax on interest, royalty, rent and lease payments. The codification of the Dutch minimum substance requirements is part of the reaction of the Dutch government to initiatives of the OECD on Base Erosion and Profit Shifting (BEPS) and similar initiatives within the European Union. The Netherlands continues to endorse that the BEPS discussion is a multilateral issue, which must be resolved at an international level. Hence, the Netherlands announced that any BEPS measures should be implemented through hard law at an EU or global level rather than stand-alone by individual countries. Nevertheless, due to criticism and pressure from certain non-governmental organisations and Dutch political parties, the Dutch government has decided to focus more on substance, transparency and exchange of information and codified the Dutch minimum substance requirements in the Regulations. The list of minimum substance requirements and guidance thereon were already included in decrees of the Dutch Ministry of Finance, dated 11 August 2004 (Old Decrees), dealing with advance pricing agreements (APA) and advance tax rulings (ATR). The Dutch Ministry of Finance has published updated decrees on 12 June 2014 with guidance on these substance requirements for APAs and ATRs (Updated Decrees). The wording of the Dutch minimum substance requirements in the Regulations and in the Updated Decrees is very similar and these requirements should be interpreted in the same manner. After a brief explanation of the term Service Companies, the Dutch minimum substance requirements are addressed below, followed by an analysis of the consequences of not meeting these requirements. 2. Service Companies 2.1 General Pursuant to the Regulations, the Dutch minimum substance requirements apply to Service Companies (in Dutch dienstverleningslichamen). Service Companies are companies with tax residency in the Netherlands whose activities in a year predominantly (i.e. 70% or more) consist of receiving and on-paying interest, royalties, rent or lease amounts from and to group companies based outside the Netherlands. Dutch NVs and BVs, cooperatives, non-tax transparent limited partnerships (so-called open CVs) and non-dutch law governed legal entities with a similar legal form can qualify as Service Company. 1 Article 3a Implementation Decree International Assistance for the Levying of Taxes Act. 3
2.2 Dutch tax resident companies A company incorporated under the laws of the Netherlands will, in principle, be considered to be a resident of the Netherlands for Dutch corporation and dividend withholding tax purposes. However, such company will not be considered a tax resident of the Netherlands, if another jurisdiction rightfully claims that the company is tax resident in that other jurisdiction under a tax treaty with the Netherlands. Such claim would be based on the circumstance that the place of effective management of the company is located in that other jurisdiction. Similarly, a company not incorporated under the laws of the Netherlands will be tax resident in the Netherlands for Dutch tax purposes if its place of effective management is located in the Netherlands. an entity in which a party has an interest of at least 33 1/3%, while this party also has an interest in the Service Company of at least 33 1/3%; an entity that, together with the Service Company, forms part of a Fiscal Unity. Group guarantees provided for loans obtained from an unrelated party need to be taken into account for determining whether the Service Company engages in intra-group transactions. If the Service Company could not have obtained the loan on a stand-alone basis, the loan is considered to be an intra-group loan. This may be different if the group guarantee serves the purpose of lowering the interest rate due on the loan. 3. List of minimum substance requirements 2.3 Predominantly Relevant factors to determine whether the activities of a company tax resident in the Netherlands predominantly consist of receiving and on-paying interest, royalties, rent or lease amounts based on intra-group transactions, include types of assets and liabilities on the balance sheet, turnover, profits, activities from which the profits are derived and time spent by employees in the Netherlands. Any holding activity of the taxpayer is to be disregarded for this test, as a result of which holding companies that for example perform (marginal) group financing activities also need to meet the Dutch minimum substance requirements if they are not engaged substantially (i.e. 30% or more) in other activities. To determine whether a taxpayer is a Service Company, the activities of all companies included in a tax consolidation for Dutch corporation tax purposes (Fiscal Unity) are to be taken into account. The following entities are considered group companies of the Service Company for determining whether payments are made to and from group companies: an entity in which the Service Company has an interest of at least 33 1/3%; an entity that has an interest of at least 33 1/3% in the Service Company; If a Service Company that has not concluded an APA with the Dutch tax authorities wishes to apply the Dutch tax treaty network, the EU Directive, or national rules for implementation of the EU Directive without spontaneous exchange of information with foreign tax authorities, all of the following requirements must be met (as explained further below in more detail): i) At least half of the total number of directors and other persons with decision-making power qualifies as director tax resident in the Netherlands (Dutch Resident Director). ii) Dutch Resident Directors have the required professional knowledge to properly perform their duties. The duties of the board include in any case the decision-making in respect of transactions to be entered into by the Service Company - on the basis of the own responsibility of the Service Company and within the ordinary course of group involvement - and a proper handling of the transactions entered into. iii) The Service Company avails of qualified employees for proper implementation and registration of the transactions to be entered into by it. iv) The management decisions are taken in the Netherlands. v) The main bank accounts of the Service Company are maintained in the Netherlands. vi) The bookkeeping of the Service Company is conducted in the Netherlands. 4
vii) The office address of the Service Company is in the Netherlands. viii) The Service Company is - to the best of its knowledge - not considered a resident for tax purposes in a country other than the Netherlands. ix) The Service Company runs real risk in connection with the loans and legal relationships and the related borrowings and legal relationships underlying the received and paid interest, royalties, lease and/or rent payments. x) The Service Company has an equity level appropriate to run real risks. The responsibility and required professional knowledge of the Dutch Resident Directors must exceed the daily, local, mostly administrative duties of the Service Company. The Dutch Resident Directors must be able to properly exercise the management duties assigned to them in all relevant respects. The decision-making process should be structured in such way that the Dutch Resident Directors are able to, and in practice do exercise their decision-making power, including their power to represent the Service Company towards third parties. 4. Analysis of Dutch substance requirements 4.1 Board members residency, powers, and professional knowledge The requirement that at least half of the total number of directors and persons with decision-making power of a Service Company is a Dutch Resident Director must be met in form and substance. For the purpose of the minimum substance requirements, the term Dutch Resident Director refers to any board member who is a tax resident of the Netherlands; in the case of an individual, for Dutch individual income tax purposes and in the case of a company, for Dutch corporate income tax purposes, as provided in article 4, paragraph 1 of the General Taxes Act (Algemene wet inzake rijksbelastingen). This means for example that board members who work in an office in the Netherlands on a daily basis, but who are tax resident abroad (e.g. across the border in Belgium), do not qualify as Dutch Resident Directors. For Dutch open CVs the tax residency requirement applies, in principle, to their general partner(s). If a director ceases to qualify as Dutch Resident Director, it should be carefully considered whether the Service Company still meets the overall substance criteria. If not, arrangements should be made as soon as possible to replace the relevant director or take other measures, such as the appointment of an additional Dutch Resident Director. Although it is not necessary that the Dutch Resident Directors have final decision-making power (veto rights are sufficient), in group structures where the central management is based outside of the Netherlands, having any decision-making power in the Netherlands often does not fit well in the overall group governance. To align this substance requirement with the group s governance preferences, the constitutional documents of a Service Company often contain provisions that provide for a balance of powers between the Dutch Resident Directors and the non-dutch resident directors for an appropriate control of the group. Typical arrangements include that (i) the legal entity can only be represented by one Dutch Resident Director and one non-dutch resident director, acting jointly, (ii) the number of Dutch Resident Directors in office at least equals the number of non-dutch resident directors, (iii) all decisions of the board are taken in a meeting in which the number of Dutch Resident Directors present equals the number of non-dutch resident directors, or in which the Dutch Resident Directors present or represented can cast a number of votes that equals the number of votes to be cast by the non-dutch resident directors present or represented. These arrangements achieve that no decisions can be adopted or implemented without the cooperation of at least both a Dutch Resident Director and a non-dutch resident director. Another arrangement applied in practice for an appropriate control of the group is a system in which approvals are needed for certain decisions from non-executive board members and from shareholders. An attention point with the various 5
arrangements is that the executive powers of the Dutch Resident Directors cannot be limited to such an extent that they would de facto not have their own say anymore. The substance requirements focus on the executive board members. Board members with only supervisory or non-executive powers are in principle not taken into account, provided they refrain from executive tasks and decisions. Having non-executive board members on the board of a Service Company may therefore allow in certain situations (such as joint ventures) for involvement of non-dutch residents in the non-executive management of the Service Company without having to appoint at least an equal number of Dutch Resident Directors to meet the relevant substance requirement. If the non- Dutch residents would, however, have to be appointed as executive board members, a way to prevent having to appoint at least an equal number of Dutch Resident Directors could be to appoint a legal entity tax resident in the Netherlands as executive board member of the Service Company, which in turn has the various non- Dutch residents as board members. This solution would be feasible, as long as the place of effective management of the board member entity is in the Netherlands and not in another country and provided that there is no ATR. Another practical solution for meeting the substance requirement for Dutch Resident Directors in situations with various non-dutch resident board members is to spin off the activities which make the entity a Service Company (i.e. the intra-group financing, licensing and leasing activities) to a separate entity, tax resident in the Netherlands. In such case the minimum substance requirement for Dutch Resident Directors only needs to be met for the separate entity with the intra-group financing, licensing and leasing activities and not for the entity which continues with the other joint venture activities (such as managing participations). This will work well in situations where the non-dutch residents do not necessarily have to be involved in the intra-group financing, licensing and leasing activities. 4.2 Management decisions 4.2.1 General All important management decisions relevant for the main activities of the Service Company must be taken in the Netherlands. According to the Updated Decrees, this means that board meetings must be held regularly in the Netherlands, with physical presence of the directors. All important board decisions must be discussed and adopted during such meetings in the Netherlands. The proposed decisions may not already have been taken abroad and only be formally ratified in the Netherlands. It is possible that some preparations for the board decisions take place outside the Netherlands, as long as the board members commission, control and valuate these preparations. To support this substance requirement, it is advisable that the minutes of board meetings not only reflect the decisions taken, but also contain a summary of the discussions held during the board meetings in the Netherlands. It is further advisable to include in the minutes of the board meetings the parameters for implementation of the management decisions taken. In practice, board regulations are used to provide guidelines for taking management decisions in the Netherlands plus the implementation thereof and for dealing with board meetings and written board resolutions. 4.2.2 Board meetings Board meetings may be held by means of an assembly of its members in person at a formal meeting or by conference call, video conference or by any other means of communication initiated by the chairperson from the Netherlands, provided that all board members are physically present in the Netherlands during such meeting. Participation from outside the Netherlands should be the rare exception and should only be considered if justified by the urgency of the required decision. A Dutch Resident Director should only give a proxy to another Dutch Resident Director for board meetings. 4.2.3 Board resolutions outside a formal meeting Resolutions of the board may also be adopted outside a formal meeting by resolutions in writing. Such resolutions 6
shall be effected by written statements from all board members then in office and executed while being in the Netherlands. It is advisable to confirm in the board resolution that each board member executed the resolution in the Netherlands. Execution of written statements outside the Netherlands should be the rare exception and should only be considered if justified by the urgency of the required decision and if such decision does not relate to the core business of the entity. In addition it is advisable to ratify the board resolutions in a subsequent board meeting held in the Netherlands. 4.3 Real risk and appropriate equity amount The Regulations require the Service Company to run real risks within the meaning of Section 8c of the Dutch corporation tax act in connection with the loans and legal relationships underlying the received and paid interest, royalties, lease and/or rent amounts. This means that the Service Company must have sufficient equity available to be able to cover the real risks in connection with its financing and licensing activities. For this purpose, the amount of equity actually available for creditors is decisive. The equity amounts included in the commercial accounts are generally used as starting point. Hidden reserves and goodwill not shown in the commercial accounts can be taken into account as well. The amount of equity according to the tax accounts of the Service Company is not decisive. If the Service Company is part of a Fiscal Unity, the equity amount at risk is, in principle, tested for the Fiscal Unity. For financing activities, it is required that the Service Company has an equity amount of at least the lower of (i) 1% of the outstanding intra-group loan receivables and (ii) EUR 2 million. Different criteria generally apply to licensing, renting and leasing activities. In principle, the Service Company must in respect of such activities have an equity amount at risk of at least the lower of (i) 50% of the annual royalties, rent or operational lease installments received and (ii) EUR 2 million. Financial leases generally fall under the equity criteria for financing activities. These equity amounts at risk are considered to be the appropriate equity amounts for Service Companies without an APA. If an APA is to be obtained, the Dutch tax authorities may require higher amounts of equity at risk. This is to be discussed with the Dutch tax authorities on a case-by-case basis during the APA application procedure and depends inter alia on the volume of the activities. 4.4 Office address, bank accounts, bookkeeping and employees Apart from the substantive minimum substance requirements, the Service Company must also meet certain Dutch minimum substance requirements of a more operational nature: The office address of the Service Company must be in the Netherlands, which means that it must have a Dutch address where it is registered. The main bank accounts of the Service Company must be operated and controlled from the Netherlands, but may be held with a bank abroad. This means in practice that the Dutch Resident Director(s) should have authority over the main bank accounts. A cosignatory system with a non-resident director is acceptable, but a non-resident director should not be allowed to sign for bank transfers alone unless on the basis of a specific power of attorney from the full board. The requirement that the bookkeeping is conducted in the Netherlands entails that the bookkeeping must be physically present in the Netherlands and that the transactions must be accounted entirely in the Netherlands. Whether or not the bookkeeping is considered to be conducted in the Netherlands depends on the relevant facts and circumstances. For example, it is not sufficient that the transactions are administered throughout the year by the foreign head office and that once a year the financial accounts are prepared in the Netherlands. It should, however, be sufficient if the required information is collected abroad and thereafter sent to the Netherlands and that subsequently the book entries into the general ledgers are physically made in the Netherlands. The Updated Decrees provide that the Service Company does not need to conduct its bookkeeping in the Netherlands, if the corporate group of the Service 7
Company has centralized its bookkeeping activities outside of the Netherlands and this group has sufficient operational activities in the Netherlands. For determining whether there is a corporate group, the threshold for affiliation is 33 1/3%. The Service Company must avail of qualified employees for proper implementation and registration of the transactions to be entered into by it. The qualified employees needed for the Service Company can be on the payroll of the Service Company or may be hired from third parties. i) declare in its Dutch corporation tax return which substance requirements are not met; ii) provide information to the Dutch tax authorities to determine which of the substance requirements are met; iii) provide an overview of all interest, royalty, rent and lease amounts received for which a reduction of (withholding) tax has or could be claimed under any Dutch tax treaty or the EU Directive; and iv) provide details on the foreign entities from which these payments are received. 5. Consequences of not meeting the Dutch substance requirements 5.1 Exchange of information The Service Company must explicitly state in its annual Dutch corporation tax return whether it meets the Dutch minimum substance requirements. If the Service Company does meet all substance requirements and so declares in its corporation tax return, or if the Service Company does not claim any tax treaty or EU Directive benefits 2 for interest, royalty, rent and lease amounts, no spontaneous exchange of information by the Netherlands with the relevant foreign tax authorities will take place (this can be different in APA situations as set out below). Benefits of a tax treaty or EU Directive are generally claimed at the moment that withholding tax becomes due under local law in the source country. It is possible that this happens various years after the intra-group financing, licensing and leasing activities have been put in place. A Service Company that cannot confirm that all substance requirements are met, but does claim the benefits of the Dutch tax treaty network or the EU Directive for interest, royalty, rent and lease amounts, would be required to do the following: Pursuant to the Regulations, the Dutch authorities would spontaneously provide the information submitted to them by the Service Company to the relevant treaty or EU Directive partner. These partners may take this information into account when assessing whether they will grant benefits of a tax treaty or EU Directive to the relevant taxpayer. This may or may not have any consequences, depending on the facts of the situation and the source states involved. The Dutch tax authorities will generally refrain from actions other than supplying information to the relevant tax treaty or EU Directive states. Please note that the Dutch substance requirements are meant to be a specific set of rules to be distinguished from tax residency and beneficial ownership, which would need to be assessed separately. If a Service Company erroneously declares in its tax return that it complies with the substance requirements, this will count as an offence (overtreding). This could result in an administrative fine of up to EUR 20,250. 3 5.2 Impact on ATRs and APAs Not meeting the Dutch minimum substance requirements can also have consequences for ATRs and APAs. 2 It is not relevant whether the Service Company applies the Dutch tax treaty network or the EU Parent Subsidiary Directive in respect of dividends. 3 This amount has been determined on the basis of Section 11, paragraph 2 International Assistance Levying of Taxes Act in combination with Section 23, paragraph 4, of the Dutch Criminal Code as per 1 January 2014 and can, in principle, be adjusted every other year. 8
The Updated Decrees provide that intermediate holding companies and top holding companies in international structures that seek an ATR need to either meet the minimum substance requirements or be part of a group with operational activities in the Netherlands or genuine plans to engage in such activities. It further follows from the Old Decrees and the Updated Decrees that Service Companies wishing to conclude an APA must comply with the Dutch minimum substance requirements. in principle, be determined by the foreign tax authorities. However, there can also be consequences for ATRs and APAs. In addition, even if the minimum substance requirements are met, the Netherlands intends to spontaneously exchange information with the relevant foreign tax authorities on any APA requested after 13 June 2014 involving Service Companies, if the related corporate group does not have any other activities in the Netherlands nor has genuine plans to engage in such activities (i.e. stand-alone structures). For determining the corporate group relationship, a threshold of 33 1/3% applies for affiliation. 6. Final remarks Service Companies that could claim benefits under the Dutch tax treaty network, the EU Directive or national rules for implementation of the EU Directive are required to meet a number of Dutch minimum substance requirements. These requirements affect the composition of the board of the Service Company (i.e. require the appointment of Dutch Resident Directors) and entail that certain office, banking and administrative requirements have to be met in the Netherlands. In principle, all decisions of the board should be adopted while all directors are physically present in the Netherlands. An alternative decision-making process of the board should be limited to urgent matters in exceptional cases and should be carefully considered and documented. Meeting the substance requirements is in principle only relevant for Service Companies that could claim benefits under the Dutch tax treaty network, the EU Directive or national rules for implementation of the EU Directive. Such Service Company will have to report its compliance or non-compliance to the Dutch tax authorities who in their turn will inform the relevant foreign authorities of any noncompliance. The consequences of non-compliance will, 9
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