Dutch substance changes 2014

On 30 August 2013, the Dutch Secretary of Finance and the Minister for Foreign Trade and Development issued a letter declaring the government’s intent to curb tax abuse while preserving the attractiveness of the Dutch investment climate.

In addition to large consumer base, availability of highly skilled labor and proximity to airports and seaports, investors are attracted to the Netherlands’ competitive Dutch tax framework and the availability of investment protection agreements. International companies choose the Netherlands because they are able to align their business models with the Netherlands’ tax-effective corporate structure.

Dutch tax framework

The competitive Dutch tax framework consists of sophisticated Advance Pricing Agreement and Advance Tax Ruling, (APR / ATR) regulations, a solid participation exemption as well as a competitive expanding tax treaty network. Furthermore, companies are not subject to a minimum tax nor are there any fees or duties when applying for APR / ATR.

In the letter, the Dutch government expressed its desire to combat tax fraud and tax evasion through bilateral measures, but also proposed unilateral measures that would strengthen the  substance requirements  and regulatory practices.

First, if a financial service company has an APA, but does not have any other third party to the Netherlands, besides the minimum requirements for the substance, the Dutch government proposes that the countries are not involved in the Netherlands. This means that if a financial service company has an APA, the nexus to the Netherlands will have substantiated.

Second, the letter proposes to increase the threshold for applying for ATR. In order to apply for the ATR, a company would have to fulfill the minimum substance requirements.

Limited number of companies affected

It is likely that the limited number of companies will be affected by these changes in policy. The larger expense to create substance could outweigh the tax benefits for small business. But larger companies will probably want to increase their level of operational substance in the Netherlands or prepare a business plan in the Netherlands.

Curbing tax treaty abuse while not affecting the Dutch investment climate is difficult, especially if we do not have global cooperation. The main question is if other countries will follow the Netherlands by introducing or increasing substance requirements or increasing them?

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