This Tax Alert addresses certain recent developments concerning procedural tax law in the Netherlands. We will discuss some interesting developments with regard to the (revised) Dutch tax ruling practice as per 1 July 2019 and the Tax Ruling Annual Report 2020. We will also discuss recent developments in case law regarding the abuse of law concept (fraus legis), and the possibilities to issue a fine to a taxpayer. Finally, we will also make some comments with regard to DAC6.
Chambers Tax Controversy 2021 Practice Guide
We would also like to draw your attention to our contribution to the Chambers Tax Controversy 2021 Practice Guide. In the Dutch chapter, we comment and elaborate on various topics relating to tax controversy in the Netherlands. The chapter covers (among other themes) developments in tax controversies, tax audits, administrative and judicial litigation and alternative dispute resolution mechanisms in the Netherlands. You can access the guide through the following web link.
(i) Revised Dutch Tax Ruling practice as per 1 July 2019: an update
The Dutch tax ruling practice for tax rulings with an international character was revised as from 1 July 2019 (see also the Q&A on the revised Dutch tax ruling practice in the Tax Alert of 9 March 2020). In short, under the revised ruling policy, an international tax ruling will not be granted if the transaction for which the ruling is requested has the sole or decisive motive to avoid Dutch or foreign taxes. Furthermore, an international tax ruling can only be obtained by companies that have sufficient 'economic nexus' with the Netherlands. International tax rulings will not be granted in respect of transactions that involve companies that are tax resident in a state that is included on the Dutch list of "low-tax jurisdictions" or the EU list of non-cooperative jurisdictions. Another important change under the revised ruling practice is the publication of anonymised summaries of each (request for a) ruling.
Annual Tax Ruling Report 2020
Recently, the Dutch tax authorities (“DTA”) have published the "Jaarverslag 2020" (Annual Report) concerning rulings with an international character. The report contains interesting policy views that can been derived from issued tax rulings, pre-filings meetings and internal discussions. With regard to the ‘sufficient economic nexus’ requirement, the Annual report makes clear that this should be tested by making a comparison between the functionality, the assets held, and the activities performed in the Netherlands, and these same factors within the concern outside of the Netherlands. This should be a fair reflection, also from a qualitative perspective. For example, if a Dutch entity manages certain assets, it is also relevant to understand the magnitude of the assets that are managed outside of the Netherlands, and whether the available functionality in the Netherlands is in proportion to the functionality available elsewhere in the group.
Facts and figures
In 2020 the DTA received 642 tax ruling requests, of which 387 were (fully or partially) granted. According to the key figures from 2020, the remaining requests were rejected (15), revoked (99) or did not have an international character (70). The amount of (fully or partially) granted ruling requests seems to have decreased compared to the numbers prior to 1 July 2019. However, it is unclear whether the numbers of 2020 are representative of the coming years, given the specific circumstances in 2020 (i.e. COVID-19). The DTA notes that a considerable number of requests in 2020 did not result in a tax ruling. As a possible explanation, the DTA relates this to the (not yet well-defined) open norms of ‘economic nexus’ and ‘tax avoidance motive’ in the revised Dutch ruling practice. Most of the anonymised summaries of rulings were published within three weeks on the website of the DTA.
(ii) Limitation of interest deduction due to the financing structure being set up in fraudem legis
On 16 July 2021 the Supreme Court ruled that interest deductions may be limited in cases were the financing structure is set up in fraudem legis (i.e. contrary to the aim and purpose of the law) (ECLI:NL:HR:2021:1152). The case (in brief) concerns the financing of an acquisition by BidCo BV of a target group in 2011. BidCo BV is, together with MidCo BV and ParentCo BV included in a corporate income tax ("CIT") fiscal unity. This means that these entities are considered one single taxpayer for Dutch CIT purposes. The acquisition is indirectly financed by the shareholders of ParentCo BV. The shareholders are four French investment vehicles "FCPRs" of one investment fund. Three of the FCPRs held a 30% interest in ParentCo BV, and one FCPR held a 10% interest. The FCPRs are considered transparent for French tax purposes, but non-transparent for Dutch tax purposes. The FCPRs, in total, provided EUR 135 million to ParentCo (EUR 60,345,000 in respect of convertible instruments issued by ParentCo BV and the remainder in the form of equity). The convertible instruments have a maturity term of 40 years and an interest percentage of 13%. The interest on the instruments in accumulated.
In the relevant tax years, the CIT fiscal unity deducted the interest on the convertible instruments from its taxable income. The interest income, however, was not taxed in France, as the FCPRs are considered transparent from a French tax perspective. This structure as such resulted in a deduction, non-inclusion mismatch.
The Dutch tax authorities argued that the interest should not be deductible for several reasons, including that the setup of the financing structure was in fraudem legis; the main argument was that the financing structure was set up in this manner to get around a Dutch anti-abuse rule which limits interest deduction on loans from affiliated entities in respect of certain "tainted transactions". In this case, all conditions to apply this anti-abuse rule were met, except that the convertible instruments were not issued to 'affiliated entities', as the definition of 'affiliated entity' at that time covered only affiliations (direct or indirect) concerning at least a one-third interest.
The Dutch Supreme Court ruled, in line with the ruling of the appellate court (ECLI:NL:GHAMS:2019:1504) and in line with the advisory opinion of Advocate General Wattel (ECLI:NL:PHR:2020:102), that the financing structure was set up in fraudem legis. In short, the court stated that the aim and purpose of the law is to prevent the levy of CIT becoming arbitrarily and continuously obstructed through bringing together the profits of a business on the one hand (i.e. through forming a CIT fiscal unity) and artificially creating interest charges on the other (profit-drainage), by using legal acts which are not necessary to the achievement of the commercial objectives of the taxpayer and which can only be traced back to the overriding motive of producing the intended tax benefits.
In this specific case the fact that, at the level of the FCPRs, equity was converted into (intra-)debt resulting in artificially created interest expenses, which were offset within the CIT fiscal unity against business profits, may have played an important role. In other cases, the Supreme Court also values the freedom of choice to (debt-)finance an entity. Currently, several other cases concerning the deductibility of interest expenses on intragroup-loans and applicability of anti-abuse rules are pending before the Dutch Supreme Court which are expected to give further guidance on this topic.
(iii) Imposing an administrative penalty on a VAT fiscal unity
Recently the Dutch Supreme Court delivered judgment about the legal question whether it is possible to impose an administrative penalty on a VAT fiscal unity. The answer to this question was the topic of various discussions in tax literature, as the text of the law was unclear at this point. In its ruling of 9 April 2021 (ECLI:NL:HR:2021:508) the Dutch Supreme Court settled the issue by deciding that an administrative penalty can indeed be imposed on a VAT fiscal unity.
For VAT purposes, under certain circumstances several VAT entrepreneurs are considered as one VAT entrepreneur, a "VAT fiscal unity". The qualification as a VAT fiscal unity has several tax consequences, including that the VAT fiscal unity in principle files one VAT return for all the VAT entrepreneurs together.
The case concerned the following issue: a VAT fiscal unity submitted a VAT return, but did not pay the amount of VAT due on time. Therefore, the tax inspector imposed an additional VAT assessment with a penalty for late payment (verzuimboete) to the VAT fiscal unity. Article 5:1 of the General Administrative Law Act (Algemene wet bestuursrecht), which article was introduced in 2009 and is also relevant for tax cases, contains an overview of the categories of offenders to which a penalty can be imposed. The provision refers to a legal person but not a fiscal unity as such. In this case, the Dutch Supreme Court ruled that there is no indication that the legislator, when introducing article 5:1 of the General Administrative Law Act in 2009, intended to exclude certain categories of taxpayers, such as a fiscal unity, from the scope of the penalty provisions that are included in the General Tax Act. The Dutch Supreme Courts followed the conclusion from Advocate General Ettema (ECLI:NL:PHR:2020:1207) and decided that it is possible to fine a VAT fiscal unity, whereby it is relevant to note that such a fine can in principle also be collected from an entity belonging to the VAT fiscal unity provided the incurring of the fine was due to that entity.
(iv) Required clarity in communication regarding administrative penalties
If the tax inspector imposes an administrative penalty on a taxpayer, the inspector must formally inform the taxpayer. This is based on the "notification obligation" (mededeling) of section 67g of the General Tax Act. According to this provision, the inspector needs to inform the taxpayer about the details for imposing the administrative penalty, at the latest by means of the penalty ruling (boetebeschikking). The aim of this provision is, in short, to make the details of administrative penalty clear to the taxpayer, so that he can adequately defend himself against the penalty, in light of the right to a fair trial.
Recently, the Dutch Supreme Court decided on the question how to deal with unclear communication to the taxpayer in this regard. The case (ECLI:NL:HR:2021:704) concerned the following issue: in a tax audit report, the tax inspector announced two penalties: (i) one penalty due to intentionally not having paid all required taxes, and (ii) one penalty due to a breach of a "disclosure obligation" towards the Dutch tax authorities. However, on the actual back-tax assessment issued, reference was made only to the first penalty (and not the second one). The Dutch Supreme Court decided that as a result it was unclear for the taxpayer on which (legal) basis the penalty was actually based. According to the Dutch Supreme Court, the consequence of this is that in these type of situations only the information that is included on the back-tax assessment is relevant, effectively meaning that the taxpayer was not fined for being in breach of the disclosure obligation. Ultimately, this meant that the taxpayer did not face a penalty at all, as there were insufficient grounds to uphold the penalty relating to intentionally not having paid all taxes.
(v) DAC 6: facts & figures for DAC6 in the Netherlands
The EU Mandatory Disclosure Directive ("DAC6") has introduced a disclosure requirement for intermediaries and taxpayers. DAC6 requires the reporting of certain cross-border tax planning arrangements that are perceived to be aggressive. Due to deferral of the reporting deadlines by six months due to COVID-19, cross-border arrangements needed to be reported to the Dutch Tax Authorities ("DTA") per 1 January 2021 (see also our COVID-19 update in our Tax Alert of 8 July 2020). The DTA have introduced a digital ‘Portal’ on their website to facilitate the disclosure.
Update: DAC6 reports made to the DTA
Recently the DTA published facts and figures of DAC6 reports in the Netherlands for the first quarter of 2021. In total, the DTA received 4,561 DAC6 reports. Most of these reports relate to the period prior to 1 January 2021. More specifically, 3,254 reports (71% of the total) relate to the DAC6 period of retrospective effect (25 June 2018 – 30 June 2020). Regarding the DAC6 transition period (1 July – 31 December 2020) 1,042 reports were made (23% of the total). Regarding the new period beginning 1 January 2021, the DTA have received in total 265 reports (6%). Most DAC6 reports (75%) were made by intermediaries (such as tax advisors), while a smaller part (25%) of the reports were disclosed by taxpayers. The reporting obligation may be borne by the taxpayer in case there is no (EU-) intermediary involved in the arrangement (such as in-house design), or when an involved intermediary invokes a legal privilege (such as lawyers and notaries).
Facts and figures: hallmarks
DAC6 reports may relate to different types of arrangements. Whether a cross-border arrangement needs to be reported under DAC6 depends on whether it qualifies under at least one of the "Hallmarks" (in some cases combined with the ‘main benefit test’). Most reports made to the DTA relate to arrangements with intra-group restructuring: in total 1,621 arrangements concern this type (Hallmark E3). Another commonly reported type of arrangement relates to conversion of income under Hallmark B2: in total 745 arrangements. Furthermore, the DTA received a relatively large number of reports on Hallmark C1, which relates to certain cross-border payments between related entities: in total 1,323. Arrangements can trigger multiple Hallmarks at the same time.
Information in the DAC6 reports will be exchanged with the competent authorities of EU Member States. According to the DTA’s MDR Team, the Netherlands work together with all EU Member States and the European Commission ("Fiscalis") on a ‘joint opinion’ regarding DAC6. Hopefully, this joint opinion will provide more guidance relating to the Hallmarks. Further developments in this respect need to be awaited. We will keep you updated.