- Will the revised GAAR affect your Dutch structure?
Under the revised general anti-avoidance rules (or GAAR), tax-driven structures involving Dutch companies may no longer work as of 1 January 2016 if the main purpose, or one of the main purposes, is to obtain certain tax advantages and the structure lacks genuine economic reality.
Should I be concerned about the revised Dutch GAAR?
Yes, you should be concerned about the revised GAAR. But feel free to skip this Q&A if:
- the direct shareholders or members of your Dutch entity are running an active business in their country of residence and the investment in the Dutch company is attributable to that business;
- the direct shareholder or member of your Dutch entity is the top holding company of your group and is performing substantial managerial, strategic or financial functions for the group;
- your structure relies entirely on tax treaty protection against Dutch taxation.
In all those cases, the new Dutch GAAR will not directly affect your Dutch structure. But keep an eye out for new developments following the BEPS initiatives by the OECD/G20 and the European Union. If you are in doubt whether your structure falls within the above categories or have other concerns, please read this Q&A carefully as your Dutch structure may be affected by the revised GAAR.
How does the new Dutch GAAR work?
The revised Dutch GAAR is implemented through changes to the existing anti-abuse rules in two sets of Dutch tax legislation:
- the non-resident substantial interest rules in the Dutch Corporate Income Tax Act; and
- the rules for distributions by cooperative associations (or coops) in the Dutch Dividend Withholding Tax Act.
Non-resident taxation – under the revised GAAR, a non-Dutch resident company holding an interest of 5% or more of the equity (or a class of equity) of a Dutch company becomes subject to Dutch non-resident taxation if:
- the main purpose, or one of the main purposes, of the non-Dutch resident company holding the equity interest in the Dutch company is to avoid Dutch income tax or Dutch dividend withholding tax; and
- there is an artificial arrangement or series of arrangements.
Dividend withholding tax for coops – the revised GAAR extends the existing anti-abuse rules against abusive coop structures. Traditionally, coops were fully exempt from Dutch dividend withholding tax, unlike other Dutch companies like BVs, NVs and certain CVs. Under the revised GAAR, distributions of a coop will be subject to Dutch dividend withholding tax (15%) if:
- the coop holds equity interests in one or more Dutch or foreign companies with the main purpose, or one of the main purposes, of avoiding Dutch dividend withholding tax or foreign tax; and
- there is an artificial arrangement or series of arrangements.
When is an arrangement artificial?
According to the EU Parent-Subsidiary Directive revisions on which it is based, an arrangement is artificial if it is “not genuine having regard to all relevant facts and circumstances.” Arrangements are artificial to the extent that they are not put into place for valid commercial reasons which reflect economic reality. Quite subjective and not very descriptive, indeed.
However, the official commentary to the bill states that an arrangement is not considered artificial (and is thus outside the scope of the Dutch GAAR), if:
- the direct shareholder of the Dutch company is running an active business and the investment in the Dutch company is attributable to that business;
- the direct shareholder of the Dutch company is the top holding company of the group and as such is performing substantial managerial, strategic or financial functions for the group; or
- the direct shareholder of the Dutch company provides a “link” between that Dutch company and a company as mentioned in (a) or (b) above, and the direct shareholder also has sufficient substance in its home jurisdiction. The existing substance rules applicable to Dutch holding companies will play a critical role in determining the substance at the level of the Dutch company’s direct shareholder.
In addition, for the coop GAAR, a Dutch coop is not considered artificial if it runs an active business with its own offices and staff on the payroll.
That sounds similar to the old rules. What has changed?
Indeed, a lot of new words, but not much has actually changed. According to the official commentary, most changes are intended to align the existing GAAR with the language of the revised EU Parent-Subsidiary Directive but without substantive changes to the interpretation of the rules.
Based on the latest official commentary, the two main changes seem to be that:
- a direct shareholder without an active business but providing a “link” (i.e. shareholders in category (c) above) has to satisfy certain substance requirements; and
- Dutch coops running an active business themselves seem to be outside the scope of the GAAR in the Dutch dividend withholding tax act.
My Dutch company has a tax ruling from the Dutch tax authorities. Is my Dutch company safe from the new GAAR?
No, tax rulings become invalid after a relevant change in law. Depending on the basis of your existing ruling, the revised GAAR could be a relevant change in law that would invalidate your ruling.
In practice, many structures currently benefiting from a tax ruling will remain effective. For example, if you have a ruling confirming that a direct shareholder runs an active business to which its investment is attributable, it is unlikely that the company will be considered artificial (as described in para. 3 (first bullet) above).
If having a formal tax ruling is important, then you should request an update from the Dutch tax authorities.
Will implementation of the GAAR affect the Dutch participation exemption?
No, contrary to the specific anti-hybrid rule, the GAAR will not affect the participation exemption.
What should I do?
Some firms would say that no action is required because the Dutch government did not intend to fundamentally change the existing rules. While that may be true, it is never a good tax strategy to wait and hope that nothing will change. In fact, if your Dutch structure is potentially affected by the revised GAAR, it is critical that you take action before year-end. Even more important is to follow the actions taken in response to the final BEPS (base erosion and profit shifting) reports published by the OECD on 5 October 2015.
We would be happy to explore whether any of the following steps may improve your structure as of 1 January 2016:
- distributing retained earnings before the end of this year; if this creates liquidity issues, the member or shareholder may contribute or lend the funds back to the Dutch entity
- increasing the substance of the Dutch entity’s direct shareholder;
- replacing the direct shareholder by an entity with more substance;
- replacing the direct shareholder with tax treaty-protected entity; or
- eliminating your Dutch structure entirely.
Where is this coming from?
In the context of the international BEPS/tax avoidance debate, the EU adopted new anti-abuse measures in the in the EU Parent-Subsidiary Directive in December 2014. Although these EU measures only require implementation of the GAAR in respect of dividend payments by an EU subsidiary to an EU parent, the Dutch government has decided to apply the new GAAR without any geographical restrictions.
Do you expect the bill to be amended? Will it pass?
This bill will very likely pass and enter into force as of 1 January 2016 without material amendments. We do expect more clarification on the interpretation of the new rules as well as guidance from the Dutch tax authorities before 1 January 2016.
- Will the new anti-hybrid rule affect your structure?
The new anti-hybrid rule addresses certain mismatches in how payments on hybrid instruments are treated, i.e. deduction in source country and non-inclusion in country of recipient. Under the new rule, payments on these hybrid instruments received by a Dutch corporate taxpayer will no longer be exempt under the Dutch participation exemption.
When should I be concerned about the new anti-hybrid rule?
You may be affected if one or more of your Dutch corporate taxpayers hold a hybrid instrument issued by another group company resident within or outside the EU.
The new anti-hybrid rule does not address all hybrid mismatches. For example, deductions/non-inclusion mismatches resulting from hybrid treatment of entities and double deduction situations are not affected.
Which hybrid situations are covered?
The new anti-hybrid rule targets instruments that give rise to deduction/non-inclusion outcomes: the dividend or coupon payment under the instrument is tax deductible for the party making the payment, while the recipient does not include the payment in its taxable profit. Hybrid instruments typically take the form of long-term debt instruments with profit sharing elements or cumulative preference shares.
The new anti-hybrid rule targets hybrid instruments on which the payments can be deductible in the source country. However, the new rule does not require that the payment results in an actual reduction of corporate income tax payable by the issuer of the hybrid instrument. For example, an interest payment under a hybrid instrument can be covered by the anti-hybrid rule even if generic restrictions on interest deductions in the source country – such as thin cap or earnings stripping rules – in fact restrict the deductibility of that interest payment. Similarly, timing differences between deduction by the issuer and receipt of the relevant payments by the holder do not prevent application of the anti-hybrid rule. Consequently, the anti-hybrid rule can result in effective double taxation.
The anti-hybrid rule is not restricted to hybrid instruments issued by direct subsidiaries of Dutch group companies but also covers instruments issued by other related companies.
How does the new anti-hybrid rule work?
A Dutch corporate taxpayer can no longer claim the participation exemption in respect of payments under (and certain other benefits derived from) the hybrid instrument if the payments under that instrument are deductible in the source country. As a result, such payments are included in its taxable profits. Payments received on or after 1 January 2016 will be taxable under the new rule even if these relate to the period prior to 1 January 2016.
Are all benefits derived from hybrid instruments covered by the anti-hybrid rule?
No. The general rule is that only payments made on a hybrid instrument are excluded from application of the participation exemption. Accordingly, capital gains, including forex gains, on the hybrid instrument continue to be exempt.
However, if a Dutch corporate taxpayer acquires a hybrid instrument in respect of which dividend or coupon has accrued, this dividend or coupon will be subject to Dutch corporate income tax upon receipt, regardless whether it reduces the tax book value of the relevant instrument. Furthermore, substitute and similar payments received by a Dutch corporate taxpayer holding a hybrid instruments in lieu of its entitlement to dividend or coupon payments on the hybrid instrument will also be subject to tax. Clarification and guidance is needed on the capital gains tax treatment because the rules could arguably result in double taxation of the same profits.
What should I do?
Waiting is not an option if your structure has hybrid instruments in place. We would be happy to assist you in analysing the potential impact of the anti-hybrid rule and explore alternatives to your current structure as of 1 January 2016. Especially in the short term, alternatives that mitigate the impact of these new rules continue to be available. But, it is important to keep a close eye on the actions taken in response to the final BEPS (base erosion and profit shifting) reports published by the OECD on 5 October 2015. These will have a much wider impact on group financing structures and need to be considered when exploring any changes to your current group financing structures.
If it appears impossible to restructure the hybrid instrument, you should at least make sure that any accrued dividend or coupon regarding the period up until 31 December 2015 will not be captured by the new rule, e.g. by way of early recognition.
Where is this coming from?
Similar to the GAAR discussed above, this comes from amendments to the EU Parent-Subsidiary Directive. The decision to introduce an anti-hybrid rule in the EU Parent-Subsidiary Directive was adopted in June 2014.
The anti-hybrid rule applies regardless whether the issuer is resident within or outside the EU and whether the relation between the holder and the issuer is direct or indirect.
Do you expect the bill to be amended? Will it pass?
This bill will very likely pass and come into force as of 1 January 2016 without material amendments. We do expect more clarification on the interpretation of the new rules as well as guidance from the Dutch tax authorities before 1 January 2016.
- What does country-by-country reporting mean for your company?
Where does country-by-country reporting come from?
Transfer pricing documentation and country-by-country reporting (CbCR) is one of the actions of the OECD BEPS (base erosion and profit shifting) project.
The OECD proposals are aimed at enhancing transparency by multinational enterprises (MNEs) towards tax administrations. This enables tax authorities to identify whether MNEs have engaged in transfer pricing and other practices that have the effect of artificially shifting profits to tax attractive jurisdictions. The proposals include model legislation for implementation in domestic law and model treaties for the exchange of the relevant reports prepared in accordance with the proposals. The legislative proposals contained in the 2016 Dutch Tax Bill are largely based on this model legislation.
What do I need to do? Do I need to prepare country-by-country reports?
A company must prepare a country-by-country report if:
- it is resident in the Netherlands;
- it is the ultimate parent of an MNE group; and
- that MNE Group had a total consolidated gross revenue of EUR 750 million or more in the preceding fiscal year
Even if the Dutch company is not the ultimate parent of the MNE group, the same obligations apply to a Dutch group company of a qualifying MNE group if the ultimate parent of the group is resident in a jurisdiction:
- where it is not obliged to submit a country-to-country report, or
- that the Netherlands has not (yet) concluded an arrangement with for the automatic exchange of country-by-country reports. These arrangements are not yet in place but will likely be negotiated and concluded in the short term
A report must be submitted annually within 12 months after the end of each fiscal year starting on or after 1 January 2016.
Should investment funds be concerned about country-by-country reporting?
Yes. An MNE group includes any group of entities which includes at least two entities that are tax resident in different countries, or an entity that has a permanent establishment in another country than its home country. Subject to meeting one of these tests and the criteria referred to in the preceding answer, investment funds will also have to comply with these documentation and reporting requirements. Careful structuring may avoid or mitigate application of these new rules.
What is a country-by-country report? What data should be included?
A country-by-country report must contain:
- for each country in which the MNE group operates, whether through a local subsidiary or otherwise: the income, profits before tax, income and withholding tax paid, income tax accrued in the annual accounts, paid-up capital, accumulated earnings, number of employees, and tangible assets other than cash or cash equivalents
- an identification of each group company in the MNE group (including tax identification number) and a description of the nature of the main business activities
The Ministry of Finance has announced it will issue detailed requirements on the form and contents of the report at a later stage. According to the official commentary, these will be based on the model template report and instructions issued by the OECD.
What other administrative obligations will be introduced?
In addition to country-by-country reporting, the 2016 Tax Bill is introducing more stringent transfer pricing documentation requirements for qualifying groups.
A company must maintain a “master file” and “local file” if:
- it is subject to tax in the Netherlands, either as a resident or as a non-resident; and
- it belongs to an MNE Group with a total consolidated revenue of EUR 50 million or more in the preceding fiscal year.
The company has to keep these files in its administration and is only required to share them with the Dutch tax authorities at their request. These files must be prepared and updated by the submission deadline for the corporate income tax return for the relevant fiscal year.
What is a master file and what is a local file?
A master file contains standardised group information, including:
- an overview of the MNE group’s business, including the nature of its global business operations
- its overall transfer pricing policies
- its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk.
A local file contains information referring specifically to material transactions of the local taxpayer, including:
- information relevant to the transfer pricing analysis related to intra-group transactions involving the Dutch taxpayer and supporting compliance with the arm’s length principle as reflected in Dutch statutory law
- information supporting the allocation of arm’s length profits to permanent establishments.
Requirements relating to form and contents of the report will be further detailed in a decree by the Ministry of Finance. According to the official commentary, this will be based based on a quite extensive list of documentation requirements issued by the OECD.
How will the Dutch tax authorities use these CbC reports and files?
The Dutch tax authorities may use country-by-country reports for assessing significant transfer pricing risks and other base-erosion and profit-shifting risks, and for economic and statistical analysis. Specific transfer pricing adjustments may not be based solely on country-by-country reports.
Moreover, the Netherlands will exchange country-by-country reports with other jurisdictions on the basis of competent authority agreements for the automatic exchange of the country-to-country reports. These agreements are not yet in place but will likely be negotiated and concluded in the short term. The OECD has issued model agreements with similar appropriate use restrictions as described above applying to the receiving jurisdiction.
The Dutch tax authorities may use the master files and local files for ordinary tax audit purposes and, hence, for issuing (re-)assessments and making adjustments. These files could also be exchanged by the Dutch tax authorities, spontaneously or on request, on the basis of ordinary exchange of information provisions in tax treaties or EU directives as implemented in Dutch domestic law.
Will the information become public? How will confidentiality be safeguarded?
In principle, country-by-country reports will not become public.
The Dutch tax authorities are subject to a duty of confidentiality in relation to the country-by-country reports they receive from taxpayers. Foreign tax authorities will be subject to the confidentiality obligations and appropriate use restrictions included in the treaties which form the basis for the competent authority agreements pursuant to which the reports will be exchanged.
However, while we are relatively comfortable that the Dutch tax authorities will adhere to their confidentiality obligations and the appropriate use restrictions, it remains to be seen how well other receiving jurisdictions will live up to these restrictions. Unfortunately, under the current Dutch legal framework, a Dutch company has limited legal remedies against the exchange of information by the Dutch authorities, even if there are justified concerns about the confidentiality of information being exchanged.
International banks are already required to make country-by-country reports public pursuant to the European Capital Requirements Directive (CRD IV), as implemented in local law, in respect of fiscal years starting on or after 1 January 2014. Finally, a requirement on all MNEs to disclose country-by-country reports to the public is being considered within the EU context.
What if a group falls outside the scope of the new rules, e.g., because the thresholds are not met?
Dutch taxpayers that fall outside the rules continue to be subject to the existing rules on transfer pricing documentation.
When does it become applicable?
In accordance with the recommendation set out in the OECD report, the new documentation requirements will become applicable for fiscal years starting on or after 1 January 2016.