The Dutch State Secretary of Finance sent a letter to the Dutch Parliament on February 26 2019, answering questions raised by members of the House of Representatives on the proposed changes to the Dutch tax ruling practice, and announced introduction of a conditional withholding tax (WHT) on intra-group, outbound interest and royalty payments.
The letter provides additional guidance to the letter of November 22 2018, when the State Secretary outlined the proposed changes to the Dutch tax ruling practice.
By way of context, the Netherlands is one of the world's largest destinations of foreign direct investment (FDI). This is the result of a very attractive open economy, in addition to an international-focused tax system that aims to avoid double taxation on business profits through full participation exemption, extensive treaty networks and a well-established tax ruling practice.
Several politicians and NGOs have noted that the downside of the Netherlands' tax system is that people and companies abuse the Netherlands as a flow-through jurisdiction to avoid (double) taxation.
The State Secretary has made maintaining the attractiveness of the Dutch investment as well as attacking tax abusive structures one of his key policy points. As a result, the Netherlands will ratify the OECD's multilateral instrument (MLI), and as a result, most of its bilateral tax treaties will be modified in line with the MLI to make it more resistant to treaty abuse, largely by implementing a principal purpose test.
In addition, the Netherlands will change its tax ruling practice and most likely introduce a conduit WHT for certain payments to low-tax jurisdictions (jurisdictions that have a statutory tax rate of 9% or less), or jurisdictions listed on the EU's blacklist.
Also, anti-abuse measures will be implemented to tackle artificial arrangements re-routing these payments to low-tax jurisdictions, or jurisdictions listed on the EU's blacklist. It is expected that the conditional WHT will be effective from 2021.
Recently, the OECD and European Commission explicitly welcomed the proposed changes in the Netherlands.
Ruling practice changes
The proposed changes in the tax ruling practice relate to: (i) transparency, (ii) process, and (iii) the content of the Dutch tax rulings.
The State Secretary aims to have these changes effective from July 1 2019. This would mean that all new tax rulings, including renewal of an existing tax ruling, concluded on or after July 1 2019, are subject to these changes. The proposed changes include:
- Dutch tax authorities will publish an anonymous summary of each tax ruling issued on a publicly available website. This will only be a summary of the ruling itself and not of the underlying documents;
- The ruling process will be centralised through one team within the Dutch tax authorities;
- The conditions regarding eligibility for a tax ruling will be further tightened. In particular:
- Companies will need to have an economic nexus in the Netherlands, meaning that its presence needs to relate to economic/operational activities that are carried out for the benefit and the risk of the Dutch corporate taxpayer. These activities need to fit with the function of the Dutch corporate taxpayer. For example, consideration must be given to whether the company employs enough people in relation to its overall size and/or its activities in the Netherlands. The operational costs incurred must also be in proportion with the company's activities/business in the Netherlands;
- There will be a more strict assessment of the purpose of the tax structure. In cases where the structure is primarily aimed at the avoidance of Dutch or foreign taxes, then no ruling will be granted; and
- The Dutch tax authorities will develop a 'black list' of jurisdictions. These jurisdictions include jurisdictions that are on the EU's blacklist or have a statutory tax rate of 9% or lower.
Dutch tax outlook
The Dutch government maintains that the Netherlands is a very attractive jurisdiction for companies that have operational activities, or are planning to set up operational activities in the Netherlands, as a result of Brexit for instance.
These companies should be able to benefit from the full participation exemption, domestic withholding exemption on outbound dividends (in most cases absent of WHT on outbound interest and royalty payments), extensive treaty networks and a well-developed ruling practice.