Tax Alert November 2016

The international tax system is under significant pressure. Where the OECD started the BEPS project and has published recommendations to reform this system, also the EU with its Anti-Tax Avoidance Package is recommending and adopting measures which try to complement and reinforce the BEPS project. It is within this context that the Netherlands as a member of both OECD and EU is continuously reforming and aligning its domestic tax laws. This Alert describes some recent developments within this context.

Dividend withholding tax
Upon the presentation of the Budget on 20 September 2016 by the Dutch government, a letter has been published by the State Secretary of Finance in which the views on the introduction of new legislative measures with regards to the levy of Dutch dividend withholding tax in case of a Dutch cooperative are set out. It is suggested to amend the Dutch dividend withholding tax act with effective date 1 January 2018.

On one hand, it is proposed to treat a profit distribution by a cooperative that performs a holding function in international corporate structures similar as a dividend distribution by a B.V. and N.V. which generally is subject to a dividend withholding tax.

On the other hand, it is proposed to broaden the scope of the existing exemption for distributions to qualifying recipients. Therefore profit distributions by a cooperative may also benefit from the future broadened exemption, meaning that still no withholding tax would be due.

According to the policy outlines a membership interest in a cooperative should qualify for the broadened exemption if (i) the member holds a so-called substantial interest in a cooperative, (ii) the interest can be attributed to its business enterprise, (iii) the member of the cooperative does not hold its membership right with the main purpose or one of the main purposes of avoiding Dutch dividend withholding tax or a foreign taxation with another person, and (iv) the member is resident in a jurisdiction that has concluded a bilateral tax treaty with the Netherlands.

Since the broadened exemption also applies to N.V.'s and B.V.'s also dividend distributions by these legal entities could be free from any Dutch dividend withholding tax, even if the relevant tax treaty allows Dutch withholding taxes to be levied.

Substance requirements
In today's challenging international tax environment an essential element of any corporate structure is to have sufficient substance in the jurisdiction where a taxpayer is claiming to be a tax resident in order to enjoy tax benefits. In the absence of international consensus on the definition and interpretation of substance, this requires a country-by-country analysis.

In 2014 Dutch tax law has codified several minimum substance requirements that were developed in practice. Financial services companies are under these rules required to confirm in their Dutch corporate income tax return whether all substance requirements are met on continuous basis. Non-compliance may result in the spontaneous exchange of information.

In a letter of 4 November 2016 upon request by several members of Parliament, the Dutch government informed Parliament on possible technical measures to tighten the existing codified rules. In the view of the Dutch government possible measures are:

• to expand the scope of the current exchange of information rules that apply to financial service companies when these are not meeting substance requirements, also to international holding companies, and/or, in the application of the exchange of information rules, to introduce additional substance requirements for international holding companies;

• to introduce additional substance requirements when a taxpayer seeks advance tax clearance;

• to increase or abolish the minimum equity at risk safe harbor of EUR 2,000,000 for taxpayers that predominantly (i.e. 70% or more) are involved in intragroup financing or licensing activities.

Examples of additional substance requirements that are mentioned are (i) a minimum cost level as an indicative factor to determine real presence in the Netherlands, (ii) minimum number of employees and (iii) increase minimum equity (current 15%) for a taxpayer that operates as an international holding company.

In addition the Dutch government indicates that it does not support a solution to include substance requirements in the deemed residence provision of Dutch tax law whereunder entities incorporated under the laws of the Netherlands for Dutch domestic tax purposes are always deemed to be a tax resident of the Netherlands.

It is emphasized that this letter on enhanced substance rules only reflects a preliminary view of the Dutch government on possible technical measures to tighten the existing codified rules that has not been put in a legislative proposal. It merely indicates a possible direction of changes to the codified Dutch substance requirements, but of course requires careful monitoring.