Facts of the cases at hand
Both cases concerned Belgian holding companies that received dividends in 2018 from a Dutch company (‘BV’) acting as a feeder for a private equity fund. These feeders held interests in a limited partnership (the fund), which in turn held diversified investments and was managed entirely by the private equity firm. The Belgian companies had no control over the policy of this fund.
The first case concerned a Belgian BVBA with a 38.71% interest in the Dutch feeder. The BVBA was originally set up as the holding company of a Belgian energy company, but after its sale in 2011, it had no assets other than the interest in the feeder and two classic cars. It had no staff, no office space, and did not carry out any activities.
The second case concerned a Belgian NV with a 24.39% interest in a similar Dutch structure. The NV also held sixteen other participations and had the active management of that portfolio carried out by family members through their management companies. The management costs, including cost for personnel and office space, were charged by these management companies to the NV.
In both cases, 5% Dutch dividend tax was withheld on the dividend distribution by the BV. The Belgian holdings filed an appeal and requested application of the withholding exemption, but the inspector refused on the grounds of alleged abuse. In that context, the court had to assesswhether this was an artificial construction aimed at avoiding this Dutch dividend withholding tax.
Supreme Court judgement: clarification of the EU anti-abuse test
In both cases, the Supreme Court upheld the ruling of the Amsterdam Court of Appeal and followed the conclusion of Advocate General Wattel. The Supreme Court ruled that the taxpayers had insufficiently refuted the assumption of abuse, as a result of which the withholding exemption did not apply.
The Supreme Court specifically observed the lower court’s assessment that the Belgian holding companies were not involved in the management of the investments of the Dutch BVs and that, since they did not have their own staff or offices, they held no relevant substance. The fact that one of the holding companies operated a material business (consisting of the active management of its investments in 16 other subsidiaries) did not make this any different, as the shareholding could not be attributed to that business because the interest in BV was held passively and there was no functional connection with the other investments. Finally, the Court observed that the shareholders of the Belgian holding companies could decide entirely at their own discretion whether or not to have the profits distributed by the BV paid out to themselves and that, therefore, the holding companies could not freely dispose of those dividends.
The Supreme Court further confirmed that the national concept of abuse must be interpreted in line with EU law. Both the purpose of the structure and whether the structure is classified as artificial structure must be assessed. These so-called subjective and objective tests are cumulative. The tax inspector carries the burden of proof in this regard, but only needs to make it plausible that abuse has occurred. The taxpayer can refute this with business and economically substantiated counterarguments.
Lastly, the Supreme Court emphasizes that even a structure that was originally set up for business reasons can become artificial, if the structure is continued after economic justification ceases to exist or if new steps or parts are added to the structure over time.
Key takeaways
It is important to note that the assessment of whether abuse has occurred is a double test. This means that both the subjective and objective tests must be met. Although the rulings mainly focus on the assessment whether there is an artificial construction (objective test), the structure must also have as (one of) its main objective(s) to avoid taxation of another party (subjective test). This involves application of the so-called ‘wegdenkgedachte’ (hypothetical removal approach), which involves a comparison with the fictitious situation without the holding company and assessing whether the interposition of the holding company leads to a more advantageous tax position.
With regard to the objective test, we consider the following elements of the ruling to be especially relevant for practice:
- Substance remains important but not decisive: A holding company without its own staff, office, or involvement in its participating interests runs the risk of being classified as artificial. At the same time, the presence of substance by itself is insufficient to rule out such classification.
- Assessment is made per participation: The test must be carried out for each separate interest. Genuine activities and the presence of an operational business at the level of a holding company are not sufficient, if a specific interest cannot be functionally attributable to those activities or to such business.
- Existing structures can become artificial in a later stadium: A structure that was once set up for business reasons may still be considered artificial due to changed circumstances if its economic function has ceased to exist.
- UBO influence and governance are taken into account: If the actual control over dividends lies with the ultimate shareholders rather than with the holding company, this indicates a conduit company without a function of its own.
- Documented business motives are essential: Motives such as risk diversification or reinvestment must be documented and tailored to the specific interest. A general structuring consideration is insufficient.
- The burden of proof lies primarily by the Dutch tax authorities, but the taxpayer should not underestimate its own responsibility: The inspector must make it plausible that abuse exists. If successful, the taxpayer must provide convincing counterevidence that there are valid business reasons for the structure.
Broader relevance for international holding structures and Dutch tax law
Whilst the rulings discussed above relate to the application of the anti-abuse test under the Dividend Tax Act, they have a significantly broader scope. Dutch tax law applies the same double test (subjective and objective test) to determine a possible Dutch corporate income tax liability for foreign holding companies (Section 17(3)(b) of the Corporation Income Tax Act 1969) as well as to establish whether interest, royalties or dividends paid (directly or indirectly) to recipients in low tax or non-cooperative jurisdictions are subject to Dutch conditional withholding tax.
Whilst the rulings have further sharpened the subjective and objective tests, their application remains complex. This makes careful consideration of their potential impact on international holding structures even more important. If you have any questions or would like an assessment of your specific situation, please do not hesitate to contact your trusted Dirkzwager advisor.
