Revised tax ruling practice announced in the Netherlands
The Dutch ruling practice for tax rulings with an international character has been one of the cornerstones of the Dutch investment climate for a period spanning more than 50 years. Often tax legislation contains vague language and ambiguous terms increasing the need for advance consultation of the competent tax authorities and binding agreements often referred to as ‘tax rulings’. What the public opinion often tends to forget is that such rulings are (or at least should be) fully in line with the applicable tax laws in force. To avoid ‘shopping practices’ the ruling practice was concentrated in a specialized team in Rotterdam. Both tax payers and tax authorities were generally pleased with the way this advance ruling practice worked in practice.
More recently, the Dutch tax ruling practice was heavily criticized. This is partially due to public statements of the EU Commission that certain rulings were in their opinion not in line with the applicable laws (Ikea, Starbucks). Another reason is the changed perception in society what tax payers should do and to what extent countries should facilitate such behavior. This in particular applies to artificial structures involving Dutch companies with minimal substance in the Netherlands, often referred to as ‘letterbox companies’. This has already led to changes in ruling policy in recent years. In a letter dated 22 November 2018 announced a thorough revision of the ruling practice, which rules should apply as of 1 July 2019.
To increase transparency, the Dutch tax authorities will publish an anonymized version of each tax ruling dealing with international affairs. In view of the legal obligation to treat information confidential, care will be taken to ensure that the summaries published cannot be traced back to individual tax payers.
To ensure the quality and uniformity of the rulings issued, all international rulings also need to be signed-off by a newly established team called the Team International Tax Certainty. The Dutch tax authorities will closely examine the principal purpose of the specific structure for which a ruling is requested. A ruling will be denied if the sole or decisive motive is to avoid Dutch or foreign taxes.
The most important topic of the letter is the introduction of the requirement for Dutch companies to have an ‘economic nexus’ in the Netherlands in order to obtain a tax ruling. This new concept will replace the current ‘safe harbor’ criteria used to establish whether a company has sufficient substance. Economic nexus concerns operational activities that are performed for the risk and account of the company in the Netherlands. Such activities should be in line with the company’s function within the group. There should be sufficient personnel relevant for the tasks performed in the Netherlands and the number of employees should be proportional to the overall employees available within the group. The level of costs should also be proportional to the activities carried out within the group. Further guidance will be provided through examples in a Ministerial Decree to be published.
The addendum to the letter already contains four examples which shed a light on the way the nexus will be interpreted. From these examples it is clear that the level of presence should not be underestimated. An example which exemplifies this is a large multinational which is envisaging to set up a financial department in the Netherlands with 2 fulltime employees through which most financial transactions in the group are routed, in a situation where the group has a treasury department of 75 employees. It is stated that a ruling request will be denied due to lack of sufficient economic substance and the fact that it is likely that the principal purpose of the structure is to avoid foreign withholding taxes. Another example states that a Dutch sub holding company should also demonstrate its active involvement in the management of its participations.
The question is how the international tax practice will be affected by these measures. Although existing rulings and situations where no ruling has been or will be requested will not be directly affected, the expectation is that international groups with a ‘letterbox presence’ will no longer remain present in The Netherlands. Fear exists that political pressure may lead to a policy which may also affect the attractiveness of the Netherlands in a negative way for international groups with a real operational presence, thus putting The Netherlands at a disadvantage compared with certain other EU countries. In the coming months interested parties will undoubtedly see to it that their legitimate interests are taken into account and the announced steps only affect those who should be affected.