The last 12 months have been hectic for tax advisors in the Netherlands.
Pressure from NGOs on Dutch leniency with respect to foreign tax avoidance came to the fore in parliamentary discussions. The professional community has been able to influence the debate and convince the Under-Minister of Finance, responsible for tax policy, not to make drastic changes that could impact on the competition for headquarter services.
The Netherlands will continue to provide a competitive platform for international business while adhering to and following international guidance given by the OECD and European Commission. However, it will not endorse any initiative to deviate from its chosen path.
Developments have mainly been on the international level. New tax treaties have been signed with Ethiopia, China and Germany and the tax arrangement for the Kingdom of the Netherlands (with Curaçao) has been published. New protocols have been signed with United Kingdom and Norway. The tax treaty with Mongolia has been cancelled by Mongolia as it was seemingly being abused by Canadian mining companies.
The general trend is towards the reduction of withholding taxes, alongside the introduction of a kind of ‘Limitation of Benefits’ article. Real economic activity will benefit while efficient tax structuring for passive investment activity will become more difficult.
In order to combat tax evasion more efficiently, the Netherlands has signed a FATCA IGA 1 (reciprocal) with the US Treasury. Whereas the Netherlands’ financial institutions must be transparent with respect to non-US entities in which US persons holds ownership interest of at least 10 per cent, the reciprocity that Treasury can provide is only with respect to bank accounts held in the name of a private person.
With respect to the Delaware companies that hide the true ownership of bank accounts in the USA held by Dutch resident tax payers, the US Treasury cannot provide any information in return, as the domestic legislation in the USA does not provide for that. This double standard set by the USA could shatter the whole FATCA initiative, since reciprocity is obviously an element in the creation of a ‘level playing field’.
The Netherlands follows closely the action plans of the OECD and cooperates in working groups with the OECD so as to maintain maximum influence. As a consequence of OECD action, the Transfer Pricing regulations have been adopted.
In response to base erosion and profit shifting by multinational companies, the European Commission has announced amendments of the Parent-Subsidiary Directive with respect to hybrid loans and has suggested a general anti-avoidance provision to be included in the Directive.
Interest on hybrid loans is deductible in the country of source, while not taxed in the residence state as a consequence of the ‘hybrid conversion’ of debt into equity. The Under-minister of Finance has stated that he will support the Commission’s proposal for an amendment of the Parent-Subsidiary directive on that issue, but that he will not support the proposal for a general anti-avoidance provision in the Directive. Advance tax rulings for hybrid financing structures are therefore still possible.
Tax arbitrage, base erosion and profit shifting have been on the front pages of the daily newspapers. The Dutch government supports solutions for tax evasion, but does not favour unilateral measures. Nevertheless, it will re-examine the existing tax-treaty network and the tax regime for international business. Attention has been given to intermediary and service companies that qualify as ‘intermediary finance companies’ for state-budget purposes.
There will be increased attention from the tax authorities to the observance by the tax payer of the substance requirements for ‘pass-through’ entities. In principle, a ‘conduit’ is a beneficial owner of the received funds, except where the ‘conduit’ is an agent.
A distinction must be made between a company without sufficient substance and a company that is not the beneficial owner of the received funds. Substance is not about beneficial ownership, although the Dutch tax authority takes the position that if the entity lacks substance, it can never be the beneficial owner.
In order to qualify for a reduction of withholding taxes in the applicable tax treaty, an entity receiving a payment must be the beneficial owner of that payment. Most entities in such a position apply for a tax ruling in which the tax authorities of the resident state confirm that the entity is a resident of the Netherlands for tax treaty purposes, but it will never confirm that the entity is the beneficial owner of the received funds (and the entity in the same ruling agrees on the applicable transfer price).
It is for the source country to determine if the entity can also be the beneficial owner of the funds. In principle, information that an advance tax ruling is concluded is exchanged with the source state. For this reason, many service entities do not apply for an advanced tax ruling. This has changed with a new decree that the Under-minister has sent to Parliament: exchange of information may now take place with regards to entities that have not applied for a tax ruling.
The new decree applies to entities:
who are mainly (more than 70 per cent) engaged in inter-company financing and/or licensing activities;
who have received or accrued interest and /or royalty income from foreign group companies;
– and, for which treaty benefits are claimed.
Increased Attention to Substance Requirements and Spontaneous Exchange of Information
The Netherlands is a firm supporter of spontaneous exchange of information. The Dutch government believes that informing the government of the source state will contribute to the spirit of the tax treaty and sees a spontaneous exchange as an act of ‘good faith’ that a treaty partner is obliged to perform under art 26 of the Vienna Convention on the Law of Treaties. In a position paper to Parliament in 2004, the Government announced that no advance tax rulings would be given in those cases where providing certainty in advance of the transaction would conflict with the requirement that treaties should be performed in ‘good faith’. In accordance with that announcement in 2004, the practice of informing the source country of the content of the advance tax ruling has continued.
The turmoil over the tax avoidance structures of Google, Starbucks and Amazon, where royalties deducted at the source in the UK have been channelled through the Netherlands to no-tax jurisdictions such as the Bahamas and Bermuda, has forced the Dutch government to take a restrictive approach with respect to the issue of treaty shopping. While unjust, the public perception was that the Netherlands was an active promoter of tax treaty abuse. Having been previously labelled as a ‘tax haven’ by the USA, the government was obliged to act.
In order to silence the crowd, the government made a prominent statement that substance requirements would be increased and that the source country would be informed, spontaneously, in cases were the new substance requirements were not being fulfilled. The government was applauded by the European Commissioner for this initiative in combatting tax avoidance and the storm blew over. But things did change.
For the tax year starting in 2014, tax payers will be obliged in their respective tax returns for corporate income tax, to disclose whether or not the tax payer fulfils the substance requirements. The tax authority has reserved the right to inform the source state spontaneously with respect to the non-fulfilment of the substance criteria. The question here is whether or not the position taken by the government with respect to the spontaneous exchange of the substance information has sufficient legal basis.
In general the government must preserve the confidentiality of the information provided by the tax payer for purposes of enforcement of the tax code. The spontaneous exchange of information provided by the taxpayer is an infringement of that confidentiality. Such an infringement is only justified if it has a basis in an international obligation (treaty or EU directive) and when necessary for the purposes of fulfilment of that obligation (it must also have a basis in the law). In accordance with the international standard, any information can be exchanged if it is foreseeably relevant for the enforcement of the tax code. For information that will be exchanged spontaneously the test is more relevant, because the other State has not asked for it.
What test must be applied by the State that wishes to make the exchange? When is any information foreseeably relevant?
The module 2 on Spontaneous Exchange of Information of the OECD Manual on the Implementation of exchange of information provisions for tax purposes does provide some guidance. The relevant item that I have selected from that guidance is the general example ‘that there are grounds for suspecting that there may be a significant loss of tax in another country’.
In order to substantiate those grounds, the Dutch tax authority, wishing to make a spontaneous exchange of information request, must be convinced that, if the source state tax authority was aware of the substance of the company that has benefitted from a reduced withholding tax rate, that source state would not have granted the reduced tax treaty rate. It thus requires a thorough research of law and jurisprudence by the Dutch tax authorities of the conditions under which the source state could have refused the reduced withholding tax.
Without such research, the Dutch authorities would never be in a position to justify the ‘grounds’ for suspicion that the reduction of withholding tax would be contrary to the domestic law of the source state. This is the principle of ‘Equivalence’. It is the position of the Dutch tax authority that if the entity has insufficient substance; it could not have qualified for the reduced withholding tax rates under the treaty. In my opinion, the Dutch tax authority oversteps its position here.
The privacy of the tax payer, as protected by the Constitution, can only be infringed if it is necessary and for urgent reasons. A spontaneous information exchange is often neither urgent, nor necessary. The intention of the government is to exchange information on whether or not the substance requirements are met, alongside the exchange of the fact that a new tax ruling has been entered into law as from 1 Jan 2014. In my opinion, this spontaneous exchange is lacking a sound legal basis and is thus a violation of the privacy of the tax payer.
 The substance requirements are: a/ at least 50% of the statutory directors of the Dutch entity should be residents of the Netherlands b/ the Dutch resident directors have the required professional skills to perform their duties and should exercise their duties on discretionary basis and should take responsibility for the implementation of transactions c/entity should have qualified personnel to fulfil and administer the transactions entered into by the entity d/decisions of the board should be taken in the Netherlands e/ important bank accounts must be maintained in the Netherlands f/ bookkeeping must be carried out in the Netherlands g/registered address in the Netherlands h/ entity not also being resident of another country i/ entity must bear genuine economic risk and j/ entity should have sufficient equity in consideration of assets and operating risk.
Leo Neve LL.M
Owner & Managing Partner