Amendments to anti-abuse provisions in Dutch tax legislation

18/09/19

Currently, the Dutch Corporate Income Tax Act and Dividend Withholding Tax Act contain several anti-abuse provisions that aim to counter artificial arrangements. In these cases the taxpayer can prove that the arrangement is not artificial if it meets certain relevant substance requirements. Therefore, at this moment the substance requirements serve as safe harbour rules. It is proposed that, as from 1 January 2020, these substance requirements no longer serve as safe harbour rules. The relevant substance requirements will now act as an indication that the arrangement is not artificial.

The 2020 Tax Package and the legislative proposals ATAD2 and DAC6, including some measures for 2021 were adopted by the Senate on 17 December 2019. The adopted legislation and motions do not affect this contribution. As a result, this publication remains up-to-date up to and including 17 December 2019.

What does this mean for you?

The proposed amendments to Dutch tax legislation are a response to recent CJEU case law on tax abuse (the so called 'Danish beneficial ownership cases'). According to the CJEU, Member States are not allowed to apply an exemption of withholding tax if the relevant beneficial ownership requirements aren't met. Member states must also apply the anti-abuse requirements of the Interest and Royalty Directive and the Parent-Subsidiary Directive. Furthermore, the CJEU provided indicators for the assessment of an abusive situation.

The Dutch government considers that the current Dutch anti-abuse provisions that refer to the Dutch substance requirements indicating when there is no abuse, are broadly in line with the abovementioned CJEU case law. Nevertheless, it is decided to amend the following provisions to avoid any possible incompatibility with EU law:

the substantial interest rule in the Corporate Income Tax Act,
the anti-abuse provision in the Dividend Withholding Tax Act, and
the safeguard clause of the Controlled Foreign Company (“CFC”) measure in the Corporate Income Tax Act.

Furthermore, during Budget Day a new conditional withholding tax on interest and royalty payments was proposed, which will enter into force on 1 January 2021. This new withholding tax also contains an anti-abuse provision which is in accordance with the now amended anti-abuse provisions. For more information, please see the PwC-Insights 'Withholding tax on interest and royalty payments to low-tax jurisdictions'.

Amendments to the anti-abuse provisions of the substantial interest rule

Under the substantial interest rule, a foreign entity with a substantial interest (interest of 5 per cent or more) in a Dutch resident entity may be subject to corporate income tax on dividends and capital gains from this entity. This is the case if the substantial interest is held with the main purpose or one of the main purposes to avoid Dutch personal income tax and the structure does not have commercial reasons that reflect economic activity. Under current legislation the substantial interest is deemed to be held with commercial reasons if the foreign entity meets the relevant substance requirements.

Under the proposed amendments, even in cases where the foreign entity with a substantial interest in a Dutch entity fulfils the Dutch substance requirements, the tax inspector can still demonstrate that there is tax abuse based on the specific circumstances and levy corporate income tax. And vice versa, if the foreign entity does not fulfil the Dutch substance requirements, it may still be possible for the taxpayer to demonstrate that there is no tax abuse in which case no corporate income tax is due.

In both cases, the tax authorities and the taxpayer can rely on the indicators of abuse included in the so-called “Danish beneficial ownership cases” of the CJEU. Following these indicators, the presence or absence of economic activities may be based on all facts and circumstances. The following indicators are especially relevant: the management of the company, its balance sheet, to the structure of the costs and expenditure actually incurred, the staff that it employs and the premises and equipment that it has. Furthermore, the economic activities must be relevant in the light of the possession of shares. The mere owning of shares does not classify as economic activity.

Amendments to the anti-abuse provisions of the Dividend Withholding Tax Act

Companies are exempt from dividend withholding tax on qualifying participations in cases where the recipient of the dividends is located in an EU country, or a country with which the Netherlands has concluded a tax treaty containing a dividend article. This is different in cases of abuse, i.e. artificial arrangements with the purpose to avoid dividend withholding tax. Currently, if the recipient meets the relevant substance requirements there is no abuse, because the arrangement will not be considered as artificial.

Under the proposed amendment, if the recipient of the dividend fulfils the Dutch substance requirements, the tax inspector can still demonstrate that there is tax abuse. In that regard, the tax inspector has to demonstrate that a) the interest in the Dutch company paying the dividends is held with the main purpose or one of the main purposes to avoid the payment of dividend withholding tax and b) there are no sound business reasons that reflect economic reality. If the tax inspector demonstrates that these two tests are met, the withholding tax exemption is not applicable.

Vice versa, if the recipient of the dividend does not fulfil the substance requirements, both the payor and the recipient of the dividends may still demonstrate that there is no tax abuse and the withholding tax exemption is applicable.

In both cases, the Dutch tax authorities and the recipient/payor of the dividend can rely on the indicators of abuse included in the so-called “Danish beneficial ownership cases” of the CJEU.

Amendment of the safeguard clause of the CFC measure

As from 1 January 2019 CFC rules apply to CFC in low-taxed jurisdictions with certain passive income. If the CFC rules apply, the passive income is included in the Dutch corporate income tax base. In general, the CFC measure does not apply if the CFC carries out substantial economic activities. The substantial economic activities may be reflected by the relevant substance at the level of the CFC by meeting relevant substance requirements. These substance requirements currently apply as safe harbour rules. Therefore, if the foreign CFC meets these requirements, it is considered that it carries out substantial economic activities and as a result, the CFC rules do not apply.

As a result of the proposed amendment, the relevant substance requirements no longer serve as a safe harbour. Vice versa, even if the CFC does not fulfil the substance requirements, the taxpayer can still demonstrate that he carries out substantial economic activities.

The CJEU cases did not specifically refer to the application of anti-abuse rules for the CFC measure of the Anti-Tax Avoidance Directive I (ATAD I). Nevertheless, the Dutch government decided to change the role of the relevant substance requirements with respect of the CFC rules to bring them in line with the amended anti-abuse provisions and the anti-abuse provision introduced for withholding taxes on interest and royalty payments. In this way, the relevant substance requirements serve the same purpose for each anti-abuse provision.

The new anti-abuse provision will apply for fiscal years that start on or after 1 January 2020.