When facilitating cross-border investment via the Netherlands, a company may face a spontaneous exchange of information between the Dutch Revenue Service and foreign tax authorities if the company does not have a minimum level of substance in the Netherlands.
New measures are being introduced requiring facilitating entities to have a minimum level of substance in the Netherlands. A facilitating entity is a Dutch company receiving interest and royalties from foreign members of the group and paying interest and royalties to other foreign members of the group.
The Netherlands is generally attractive for cross-border investment because of the absence of withholding taxes on outbound interest and royalty payments. The Netherlands also has an expansive network of tax treaties that generally reduces the withholding taxes levied by foreign jurisdictions on inbound interest and royalty payments. Yet, the Netherlands' attractiveness as a tax jurisdiction creates the risk of improper use of tax treaties. The measures announced are intended to reduce this risk.
These measures concern the minimum level of substance that facilitating entities are required to have in the Netherlands for advance tax ruling purposes. For example, the entity must have a minimum amount of equity and be effectively managed in the Netherlands. The substance requirements which previously only applied to facilitating entities requesting an advance ruling from the Dutch Revenue Service will now apply to all facilitating entities, regardless of whether they request an advance ruling.
Also, whenever a servicing entity in filing its tax return with the Dutch Revenue Service applies for the benefits of a double taxation treaty concluded between the Netherlands and another country, it will have to indicate whether it satisfies the substance requirements. In cases where the servicing entity does not satisfy the substance requirements and claims treaty benefits, the Dutch Revenue Service intends to exchange information on the servicing entity involved with the revenue authorities of the treaty partner.
The Dutch Undersecretary of Finance has recently released a draft order in council which lists the substance requirements for servicing entities. These include that the executive decisions of the entity must be made in the Netherlands and the entity must have qualified personnel for adequate execution and documentation of its transactions. Whether a company may be considered a servicing entity and whether it satisfies these substance requirements is fact-intensive.
We advise consulting Dutch tax counsel on these issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
