INSIGHT: Netherlands Adopts Stringent Requirements for Issuing Tax Rulings

On June 28, 2019, the Deputy Minister of Finance in the Netherlands published a policy statement elaborating on the revised policy for issuing rulings with an international character.

This policy statement took effect on July 1, 2019 and replaces three ruling policy statements dated June 3, 2014. The revision is aimed at further safeguarding the quality of the ruling practice for businesses with activities of substance as well as enhancing its robustness. There are more stringent requirements for issuing Dutch rulings and greater transparency.

The Dutch Deputy Minister had already outlined the main features of the new ruling practice in a letter to the Lower House on November 22, 2018, and on April 23, 2019 a draft of the policy statement was published. The final policy statement is almost the same as the draft policy statement.

What follows is an overview of the main features.

New International Tax Certainty Board

In future all international tax rulings applied for as of July 1, 2019 or not yet issued on that date, will be sent to one central team for assessment: the new International Tax Certainty Board (College Internationale Fiscale Zekerheid; IFZ).

A request for preliminary consultation about an international tax ruling will, however, must first be sent to the tax inspector. In the case of specifically described issues, the tax inspector will engage the new IFZ Team (Behandelteam IFZ), which will then hold the preliminary consultation with the tax inspector.

In all cases, the ruling will subsequently be presented to the IFZ Board.

In situations involving prospective foreign investors, a request for preliminary consultation must be addressed to the International Investors Desk (Aanspreekpunt potentiële buitenlandse investeerders; APBI).

A request to conclude a bilateral or multilateral Advance Pricing Agreement (APA) must be addressed to the Directorate of International Affairs and Consumer Taxes (Directie Internationale Zaken en Verbruiksbelastingen; IZV) of the Ministry of Finance.

It will, in principle, continue to be possible to have a pre-filing meeting with the Dutch tax authorities preceding a ruling request.

With regard to the APA request, small enterprises can receive help from the Dutch tax authorities in providing comparable figures for independent market parties.

Transparency

An anonymous summary of every new international ruling will be published.

A summary of all cases where a ruling was not issued will also be published, including the reason why.

The annual report of the Dutch tax authorities will in future cover all international rulings and not only APAs and Advance Tax Rulings (ATRs).

Rulings Prohibited Because of Economic Nexus and/or Motive Requirement

In order to obtain advance certainty, as of July 1, 2019 the list of substance requirements will be replaced by a requirement of an economic nexus with the Netherlands: the company submitting the request must be a member of a group that carries on commercial operating activities in the Netherlands and the commercial operating activities must be performed for the account and risk of that company for which at the group level there is sufficient relevant personnel in the Netherlands.

The November 22, 2018 letter already included four explicit examples and the April 12, 2019 letter includes eight explicit examples of when a ruling will not be issued:

1. an interest-free loan with an arm’s length interest deduction in the Netherlands (based on the informal capital doctrine), but which is not taxed outside the Netherlands (motive).
2. a multinational/enterprise with a large finance department outside the Netherlands and two financial staff/FTEs in the Netherlands, whose main task in the Netherlands obviously is a conduit finance function so that foreign tax can be reduced (motive and possible economic nexus).
3. a multinational/enterprise headquartered abroad has sufficient staff in the Netherlands to manage the participations, but the interest in this Dutch holding company is owned by an entity that for Dutch tax purposes is treated as transparent but by the headquarter country abroad as non-transparent (hybrid mismatch and motive).
4. an operating entity that has a distribution centre in the Netherlands also has an interest/royalties conduit function without there being an economic nexus with the Netherlands for the latter function (no nexus, no ruling on conduit function).
5. a multinational/enterprise headquartered in a low taxed country has 100 staff. It also has a participation in a Dutch operational company with 25 staff. No ruling on the Dutch tax treatment on any dividends of the Dutch company. No payments to low taxed countries appearing on the Dutch blacklist (low-taxed states and non-cooperative jurisdictions).
6. a multinational/enterprise headquartered in the Netherlands has a participation in a company in a low taxed country with 100 staff. It also has a participation in a Dutch operational company. No ruling on the Dutch tax treatment of the headquarter services charges coming from abroad. No payments to low taxed countries appearing on the Dutch blacklist (low-taxed states and non-cooperative jurisdictions).
7. a company established abroad has a permanent establishment in a low taxed country, which exploits group intangibles, which a Dutch group company is also licensing and using. No ruling on the Dutch tax treatment of the royalties payments of the Dutch company. No payments to low taxed countries appearing on the Dutch blacklist (low-taxed states and non-cooperative jurisdictions).
8. a multinational/enterprise headquartered abroad has a Dutch subsidiary with 15 staff and they sell group products in Europe and the Middle-East. No ruling on the Dutch transfer pricing compensation if a substantial part of the turnover is generated by low taxed countries. No payments to low taxed countries appearing on the Dutch blacklist (low-taxed states and non-cooperative jurisdictions).

Situations When Rulings Will be Granted

The April 12, 2019 letter also includes four explicit nexus examples for when a ruling may be issued:

1. a multinational/enterprise headquartered abroad has sales and distribution activities in the Netherland in several local Dutch entities. All staff in the Netherlands are employed by one Dutch payroll company and the costs are recharged to the mentioned Dutch entities (nexus);
2. a multinational/enterprise headquartered abroad designs, produces and manufactures clothes abroad and incorporates a Dutch entity with 2 sales persons (nexus);
3. a multinational/enterprise headquartered abroad has a distribution centre in the Netherlands with 50 staff, but only 5 staff are on the Dutch payroll (nexus);
4. a multinational/enterprise headquartered has a Dutch subsidiary with back to back licensing activities, which has 100 staff and the Dutch activities are the exploitation of author rights. Nnexus and assuming no payments to low taxed countries appearing on the Dutch blacklist (low-taxed states and non-cooperative jurisdictions).

So besides the cases that do not comply with the requirement of a Dutch economic nexus, advance certainty will also not be given in cases where:

• the sole or decisive reason for performing the transactions is to save Dutch and/or foreign tax (motive); and/or
• the requested advance certainty relates to transactions with entities established in countries appearing on the Dutch blacklist (low-taxed states and non-cooperative jurisdictions).

Furthermore, in future all international rulings will, in principle, have a maximum term of five years. Only in exceptional cases (for example, in the case of long-term contracts) can this be extended to 10 years. According to the policy statement, in that case an evaluation will have to take place mid-term.

In all cases, an international ruling will be laid down in a settlement agreement (vaststellingsovereenkomst; VSO), which is a legally binding agreement.

Author Comments

Groups that only establish themselves in the Netherlands for tax reasons and have no further economic nexus with the Netherlands will no longer be able to obtain a ruling from the Dutch tax authorities.

The ‘economic nexus’ concept most likely means that the threshold for obtaining advance certainty will in all cases be higher than was the case based on the list of substance requirements.

The Dutch Deputy Minister had moreover previously confirmed that, given that the Dutch tax law will not change as a result of the new policy, the fact that rulings will no longer be concluded for certain arrangements does not mean that these arrangements will disappear. Rulings issued before July 1, 2019 do not fall under the new policy. Finally the authors expect an increase in bi- and multilateral APAs also for the Netherlands.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

By Jens Karreman, partner, and Eduard Sporken, director, KPMG Global Transfer Pricing Services with Meijburg & Co in Amstelveen, the Netherlands; based on a July 2, 2019 memo by its Tax Knowledge Centre.