Dutch Substance Requirements

An overview of frequently asked questions relating to Dutch substance is provided below.

Substance can be defined as real or actual presence. If a company has a lack of substance, the company thus lacks real or actual presence. The Netherlands is one of the few countries which has substance requirements. The substance requirements need to be observed in specific situations. We hereby provide you with the answers to the following questions relating to substance:

 

What are the Dutch substance requirements?

The Dutch Ministry of Finance published the substance conditions under which an APA can be concluded. As per January 1st, 2014 it would be likely that the substance conditions under which an ATR can be concluded would be similar. The substance list is generally referred to as the Dutch substance requirements. However, there are different kinds of substance requirements in the Netherlands for different purposes.

  1. The inclusion of a company in a Dutch fiscal unity for corporate income tax purposes;
  2. Ability to apply for a Dutch advance pricing agreement (APA); or,
  3. Ability to apply for a Dutch advance tax rulings (ATR);
  4. Ability to apply Dutch tax treaties.

1. Inclusion in a Dutch fiscal unity for corporate income tax purposes

In order to be included in a Dutch fiscal unity for corporate income tax purposes, a company needs to be effectively managed and controlled in the Netherlands. The location of the place of effective management and control is determined by various facts and circumstances. From Dutch case law it can be derived that most importantly when taking all relevant facts and circumstances into consideration regarding the decision-making process, the conclusion can be justified that the effective management and control of the company takes place in the Netherlands.

2. Ability to apply for a Dutch APA

The Dutch Ministry of Finance published the conditions under which an APA can be concluded. In the Annex to the APA Decree (11th August 2004 IFZ2004/126M) a list of minimum substance requirements is provided which need to be met in order to conclude an APA:

  • At least 50% of the members of the board of directors, with a right to make decisions, live or is factually residing in the Netherlands;
  • The directors residing in the Netherlands have sufficient knowledge to perform their activities in their capacity as a director of the Dutch company. The company has the adequate personnel (either of its own or from third parties) for the adequate execution and registration of the transactions;
  • The (most important) board decisions are made in the Netherlands;
  • The (main) bank account of the Dutch company is in the Netherlands;
  • The bookkeeping of the Dutch company takes place in the Netherlands;
  • The Dutch company has (at least up to and including the moment of filing the APA/ATR complied with all its tax obligations;
  • The Dutch company has its registered address in the Netherlands, while the company is, according to its best knowledge, not (also) a resident of another jurisdiction for tax purposes;
  • The Dutch company’s minimum equity is adequate in relation to the functions performed (taking into account the risks assumed and assets used).

3. Ability to apply for a Dutch ATR

It would be likely that as per January 1st, 2014 the list of minimum substance requirements also would likely be applicable to ATR’s. In Q3 and Q4 2013, more information will become available in this respect.

4. Ability to apply Dutch tax treaties

Based on the Dutch corporate income tax act 1969 (DCTA), a company incorporated under the laws of the Netherlands is generally considered subject to Dutch corporate income tax for its worldwide profits. We use the phrase “generally” because exceptions for i) certain types of entities, and ii) certain elections which can be made. Therefore, a company will “generally” be considered a Dutch tax resident when it is incorporated under Dutch Civil Code (DCC). As such, no additional requirements need to be met in order to receive tax treaty benefits. Please note that a change in policy might change the before mentioned. In Q3 and Q4 2013, more information will become available in this respect.

For companies which are not incorporated under DCC, the facts and circumstances might lead to the conclusion that the company is effectively managed and controlled in the Netherlands. If a company is effectively managed and controlled in the Netherlands, the company would be subject to Dutch corporate income tax for its worldwide profits and as such can be considered a Dutch tax resident for tax treaty purposes.

 

What are the drawbacks of not meeting Dutch substance requirements?

The drawbacks of not meeting the Dutch substance requirements are:

  1. An APA or ATR request could be denied;
  2. An APA or ATR already agreed upon might not be applicable;
  3. The Dutch tax authorities might spontaneously inform foreign tax authorities about the structure.

Irrespective whether or not the substance requirements are not met, a Dutch resident company needs to be managed and controlled in the Netherlands in order to be included in a fiscal unity for Dutch corporate income tax purposes. Please note that an APA or ATR is typically drafted in such a way that the tax residency is a fact on which the APA or ATR is based. In case the Dutch substance requirements are not met, then the application of the APA or ATR might be denied, based on a misrepresentation of the facts by the taxpayer.

 

Is a company eligible for a Dutch residency certificate if the Dutch substance requirements are not full-filled?

Based on DCTA, a company incorporated under DCC is generally considered subject to Dutch corporate income tax for its worldwide profits (Article 2 paragraph 1 and 4 DCITA). Not meeting the substance requirements, should not result in a denial of a Dutch residency certificate.

 

What guidance is available regarding Dutch substance requirements?

Dutch case law is important to derive guidance regarding the place of effective management and control of a company. From case law it could be derived that it is important that the overall picture of the decision-making process leads to the conclusion that the effective management and control of the company takes place in the Netherlands.

 

What recommendations do we have regarding Dutch substance?

We advise to determine which level of substance is needed. Based on Dutch domestic regulations and in relation to the overall structure. Then determine what the consequences are if this level of substance is not met. If a certain level of substance is needed, then we advise to prepare a manual from which follows how the required level of substance would be maintained. Such a substance manual would include:

  •  fulfillment of the substance requirements relating to day to day management;
  • board meeting attendance, iii) internal decision-making process; and
  • the activities performed in relation to functions and risks.

 

Please reach out to us if you would like us to assist.