Only a few days ago the Dutch intent to curb tax abuse was put to paper when a draft Decree was sent to Dutch Parliament. As an introduction on August 30th, 2013, the Dutch Secretary of Finance of the Netherlands and the Minister for Foreign Trade and Development Cooperation 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 an 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 nexus to the Netherlands, besides fulfilling the minimum substance requirements, the Dutch government proposes to allow for spontaneously notifying the countries involved about the lack of substance in the Netherlands. This means that if a financial service company has an APA, the nexus to the Netherlands will have to be substantiated.

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

Limited number of companies affected

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

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

Draft Decree Issued

A draft of the Decree effectuating the before mentioned was sent to Dutch Parliament only a few days ago. The rules are scheduled to apply as from January 1, 2014. The current minimum substance requirements are likely to be adjusted slightly. The reporting requirements as well as the conditions under which a spontaneous notification by the Dutch tax authorities will be performed are discussed in the Draft Decree. With regard to the specifics of the Draft Decree, more to follow.

If you would like to know more about the Dutch measures, I refer to the article in the PHCT october newsletter (PDF).