The Dutch Ministry of Finance issued a legislative proposal on September 15, 2015 to implement certain amendments to Dutch law as a consequence of the amended EU Parent Subsidiary Directive. The amended EU Parent Subsidiary Directive requires EU Member States to implement a "de minimis" general anti abuse rule ("GAAR") into national law ultimately by December 31, 2015. The Netherlands will be implementing a GAAR with respect to certain income (capital gains and dividends) earned by (EU and non EU) parent companies. Please note that the Netherlands decided not to implement a GAAR in the participation exemption regime, which provides for an exemption of qualifying dividends and capital gains received by a Dutch holding company.
The new Dutch rules will require foreign intermediate holding companies, which fulfill a linking role between the ultimate parent company's business enterprise and the business held by the Dutch company, to satisfy minimum substance requirements that will be further discussed below, as of January 1, 2016. If these requirements are not satisfied, foreign intermediate holding companies may become subject to Dutch tax by way of assessment (at a rate of 25%) or withholding (at a rate of 15%). Until now, advance tax rulings ("ATRs") could be obtained for foreign intermediate holding companies that do not meet these minimum substance requirements. These ATRs will in principle terminate as of January 1, 2016 due to this change of law, unless minimum substance is established before April 1st, 2016. For those structures without an ATRs, minimum substance should be established before January 1st, 2016.
Non-resident Corporate Income Tax
Under the revised non-resident corporate income tax provision as of January 1, 2016, a foreign shareholder with an interest of 5% or more in a Dutch company will be subject to Dutch corporate income tax derived from its investment if: (i) the foreign shareholder owns the interest with the main purpose or one of the main purposes to avoid the levy of Dutch income tax or Dutch dividend withholding tax; and in addition thereto (ii) the structure can be considered an artificial arrangement or part of a series of artificial arrangements. A structure is considered artificial if it is not “established on the basis of business reasons that reflect the economic reality”.
The Ministry of Finance has previously clarified that the business reasons requirement will be satisfied if the interest in the Dutch company can be attributed to a business enterprise carried out by the shareholder itself. A business enterprise is defined as "a durable organization of capital and labor that participates in the economy with the aim to realize profit". If the shareholder is the top holding company with substantial management involvement in the group activities, the structure is considered to have a business reason as well.
Furthermore, a business reason is also considered to be in place if a foreign intermediate holding company that does not carry out a business enterprise itself, has a linking function between the business enterprise of the indirect parent company of the Dutch company and the business enterprise of the Dutch company’s subsidiaries. However, as a new requirement as of January 1, 2016, such foreign intermediate holding company needs to satisfy certain minimum substance requirements, in order to be considered to have a business reason for the structure. If these minimum substance requirements are not satisfied, the foreign intermediate holding company may become subject to Dutch non-resident tax on income derived from its Dutch investment, unless tax treaty protection is available. If the foreign intermediate holding company becomes subject to tax due to this change, a step up in basis to fair market value will be available per January 1, 2016.
Profit Distributions by Cooperatives
Profit distributions by cooperatives are in principle not subject to Dutch dividend withholding tax. However, under the revised anti abuse rule, profit distributions by a cooperative will be subject to Dutch dividend withholding tax if: (i) a cooperative owns a participation with the main purpose or one of the main purposes to avoid the levy of Dutch dividend withholding tax or foreign (withholding) tax; and (ii) the structure can be considered an artificial arrangement or part of a series of artificial arrangements. A structure is considered artificial if it is not established on the basis of business reasons that reflect the economic reality.
The Ministry of Finance has clarified that there will be a business reason if the cooperative carries out a business enterprise itself. Furthermore, the business reason requirement will be met if the interest can be attributed to a business enterprise of the member itself or if the member fulfills a linking function as explained above.
As of January 1, 2016, a member in a cooperative that is considered to have a business enterprise on the basis of its linking function as a foreign intermediate holding company, must satisfy certain minimum substance requirements in order to continue to benefit from an exemption of dividend withholding tax.
Impact on existing ATRs
On October 16, 2015, the Ministry of Finance clarified that the new rule which requires foreign intermediate holding companies to satisfy certain minimum substance requirements as of January 1, 2016, also applies to structures for which taxpayers have concluded an ATR. ATRs that have been concluded on existing structures where the foreign intermediate holding company does not satisfy these minimum substance requirements, will in principle terminate as of January 1, 2016, due to the change of law. However the Ministry of Finance has confirmed that these structures will be allowed a grandfathering period until April 1, 2016, to satisfy the minimum substance requirements at the foreign intermediate holding company level. Such companies must notify the Dutch tax authorities before January 1, 2016, in order to continue to rely on their tax ruling. In the meantime, if the foreign intermediate holding company receives income from its Dutch investment between January 1, 2016, and April 1, 2016, that income will not benefit from the ATR if the required minimum substance is not yet in place.
Minimum substance requirements
Based on the guidance provided, the following minimum substance requirements should be satisfied by the foreign intermediate holding company ("FIHC")
- At least 50% of the FIHC's statutory board members that are authorized to represent the company should be local residents;
- The local resident board members should have sufficient professional expertise to properly fulfill their duties;
- The foreign intermediate holding company should have qualified personnel to execute and administer its transactions (not necessarily employees on the payroll, these functions can also be performed by the board members);
- Board meetings should be held in the country of residence of the FIHC;
- The main bank accounts should be held in the country of residence of the FIHC;
- The bookkeeping should be prepared and maintained in the country of residence of the FIHC;
- The business address of the FIHC should be in the country of residence of the intermediate holding company;
- The intermediate holding company should not, to its best knowledge, be considered a tax resident in another country than its country of residence;
- The foreign intermediate holding company must finance the equity investment in the Dutch company with at least 15% equity.
What should you do?
If your corporate structure could potentially become subject to these new rules, or if you have concluded an ATR relying on the “linking function” of the foreign intermediate holding company, we strongly recommend analyzing the potential impact of the revised rules with your tax counsel and take appropriate actions, taking into account the tight January 1, 2016, and April 1, 2016, deadlines.