Dutch State Secretaries of Finance: Non-attendance of board meetings due to COVID-19 pandemic should not affect tax residency of Dutch companies and Dutch substance requirements

On 15 June 2020, the Dutch State Secretaries of Finance replied to questions raised in Dutch Parliament regarding the effects of traveling restrictions in view of the COVID-19 pandemic on:  

• The determination of tax residency for tax treaty purposes;
• The Dutch substance requirements; and
• The recognition of a permanent establishment.

 
In line with the guidelines published by the OECD on 3 April 2020 (1), the Dutch State Secretaries of Finance expressed that they endorse these OECD guidelines. In more detail, the following is noted.
 
Determination of tax residency for tax treaty purposes
The place of effective management is often the decisive criterion to determine the tax residency of dual resident companies under the application of Dutch tax treaties. As a result of the travel restrictions concerns arose whether or not due to the incapability of executives/directors to travel and as a result working from home abroad would lead to that the company’s residence shifts to another country or the company would be regarded as a dual resident.
 
The Dutch State Secretaries agree with the OECD that it would be unlikely that as a result of the COVID-19 measures a company’s tax residency would change. When determining a company’s place of effective management all relevant facts and circumstance should be examined and not only those that pertain to an exceptional and temporary period such as the COVID-19 pandemic.

From a Dutch corporate law perspective, reference is made to our earlier newsletter for the applicable rules and solutions regarding board meetings during the COVID-19 pandemic .  

Substance requirements
In line with the OECD guidelines, the Dutch State Secretaries confirmed the travel restrictions resulting from the COVID-19 pandemic will be taken into account when enforcing substance requirements that are included in national laws and regulations. 

Examples of these substance requirements are substance requirements for intra-group financing companies, and substance requirements for intermediate non-resident holding companies of Dutch companies and companies subject to the CFC rules. For these rules, it is (inter alia) relevant that at least 50% of the board members are tax resident in the same jurisdiction as the relevant company and that the important decisions are taken in that jurisdiction during physical board meetings.  

Permanent establishment
As a result of the travel restriction employees in cross-border businesses might have to work from home. Therefore, concerns arose whether or not these employees might create a permanent establishment in other countries. The State Secretaries agreed with the OECD that employees working from home as a result of the COVID-19 pandemic travel restrictions should not create a permanent establishment because the home should generally not be at disposal of the company and due to the presumed lack of permanency.

Take away
It seems that the Dutch government takes a willing approach that travel restrictions imposed due to the current COVID-19 pandemic should not affect the tax residency of companies, the recognition of permanent establishments and the application of substance requirements. If you would have any questions or comments regarding the above, we would be pleased to assist you.

(1)  https://read.oecd-ilibrary.org/view/?ref=127_127237-vsdagpp2t3&title=OECD-Secretariat-analysis-of-tax-treaties-and-the-impact-of-the-COVID-19-Crisis