New Substance Regulations for Financial Service Companies in the Netherlands

Companies established in the Netherlands receive some benefits, such as the reduction of tax rates, but also the Dutch tax treaty network.

The changes, which have now been included in the draft Implementation Decree of IALTA [1], were first announced by the State Secretary of Finance and the Minister of Foreign Trade and Development Cooperation in August. The changes in the list of substance requirements that need to be with each year.

Overview Dutch substance changes

Before benefitting from the Netherlands’ tax benefits, financial services and licensing entities must disclose that they measure certain substance requirements in their annual Dutch corporate income tax returns. The substance requirements in the 2014 Draft Decree are similar to the substance requirements that have been published in the 2004 Annex to the APA Decree (11th August 2004 IFZ2004 / 126M). Moreover, because the purpose of the 2014 Draft Decree and the 2004 Annex to the APA Decree is different, the substance requirements can both apply simultaneously. I expect that alignment of the substance requirements would be a matter of time. Although there are minor differences between Dutch companies and individuals, Dutch tax advice is needed, two are highlighted below.

First, the 2014 Draft Decree requires companies to show that “board decisions are tasks in the Netherlands.” The 2004 Annex states that “the (most important) board decisions should be made in the Netherlands.” This change is probably due to the fact that board decisions are in fact in the Netherlands. Moreover, there is no distinction between the most important and other board decisions. Therefore, the 2014 Draft Decree is more restrictive than the 2004 Annex.

Second, under the 2004 Annex a Dutch company must show that its minimum equity is adequate in relation to the functions. Whether this was a stand-alone requirement in addition to the requirement in Article 8c of the Dutch Income Tax Act (DICTA) has been unclear. The 2014 Draft Decree, however, includes the 2004 Annex and makes a reference to the relevant DICTA provision. This implies that the 2004 Annex criterion was indeed an additional, stand-alone requirement. While this is the position that tax authorities have regular tasks, their position is now christal clear.

Dutch disclosure regulations

If the company does not meet the substance requirements, it must specify which requirements it does not meet and provide an overview of all interest and royalty payments for which a reduction of withholding tax is claimed under any tax treaty or European Union Directive. The provided information can be spontaneously provided to a treaty partner, that can take this information into account when the company applies for benefits of a tax treaty.

The changes in IALTA impact Dutch companies that need to determine if their substance manuals are up to date and revise them as necessary. There may be additional changes to the Draft 2014 Decree so it is important to stay informed. An experienced Dutch tax advisor can help if any of these changes apply to your situation. For the Dutchies, there is also a BLOG in Dutch.

[1] IALTA, (Dutch) International Assistance Levy Tax Act

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