In 2018, 625 ITRs were issued in the Netherlands (429 in 2017, 539 in 2016). In recent years, the Netherlands has been strongly criticised by other countries, the OECD, the EU, and the public at large for helping multinationals to avoid paying their fair share of Dutch and foreign taxes. The DPD’s changes to the Dutch ITR practice constitute a further step in the Dutch government’s efforts to address this criticism. The key changes introduced by the DPD – see below – are part of a larger move by the Netherlands to shed its reputation as a jurisdiction that facilitates international tax base erosion through aggressive tax planning.
No ITRs without “economic nexus”
Under the new rules, an ITR will only be issued if the taxpayer conducts the operational activities for which the ITR is requested for its own risk and account, and with sufficient relevant staff in the Netherlands (economic nexus). Under the current ITR policy, the taxpayer must meet certain minimum substance requirements (for example, at least 50% of its managing directors being Dutch residents, managing board meetings taking place in the Netherlands, etc), which are less stringent than the new economic nexus requirement.
The DPD contains a number of examples of the economic nexus requirement. One example involves a taxpayer operating a distribution centre in the Netherlands. The taxpayer also receives and pays intercompany interest and/or royalties, an activity for which it has no operational staff available in the Netherlands. The conclusion is that the economic nexus requirement is not met. Although not explicitly stated, this conclusion is presumably reached because the operational activities carried out in the Netherlands (distribution centre) are not in line with the function of the taxpayer (intercompany financing). Another example involves a multinational group with a finance department of 75 FTE, with only two of those based in the Netherlands. Nevertheless, all intra-group cash flows are routed through the Netherlands. In this example, the economic nexus requirement is not met because the number of Netherlands-based FTEs compared to the total number of FTEs in the finance function, combined with the fact that all financial flows are routed through the Netherlands, is disproportionately low.
The list of examples describing the economic nexus requirement will be updated periodically to reflect practical situations. As is often the case with examples included in Ministry of Finance regulations, they describe “clear-cut” situations and often provide little or no guidance in greyer areas.
No ITRs for transactions with sole or decisive tax savings motive
No ITR will be issued under the new rules if the sole or decisive purpose for entering into the transaction is to save foreign or Dutch tax. Under the current ITR policy, an ITR is only denied if the issuance goes against the good faith that should be observed towards treaty partners, for example, when there is a suspicion of money laundering. Also, the interests of foreign tax authorities are, under the current ITR policy, protected by a taxpayer statement that the tax treatment in the Netherlands will be disclosed correctly to other tax authorities if so requested, as well as through the process of exchange of information on ITRs.
The DPD does not explicitly state how to test the presence of a decisive avoidance motive, but it does contain a number of examples. One of these involves an interest-free loan where the Dutch borrower seeks to deduct imputed interest. The imputed interest is not taxed in the hands of the creditor. No ITR will be issued because the principal purpose of entering into the interest-free loan is to save tax. Another example where no ITR would be issued involves a deductible made by a Dutch taxpayer to a reverse hybrid shareholder (this example is inspired by the infamous CV/BV structures used by US multinationals). The payments are not, or not yet, taxed in the hands of the reverse hybrid’s participants. The examples in the DPD will be updated periodically to reflect how the motive test works out in practice.
A member of Dutch parliament has raised questions about the ITR motive test in situations involving informal capital; that is, situations where the tax base in the Netherlands is unilaterally reduced without a corresponding pick-up of the untaxed income elsewhere. In response to these questions, the Dutch State Secretary for Finance has stated very generally that a unilateral downward adjustment of profits in the Netherlands not being picked up elsewhere means that a transaction is deemed to have been entered into for the sole or decisive purpose of avoiding tax. Accordingly, ITRs will no longer be granted in these situations. The absolute wording of this official statement raises the question of whether this applies to all situations involving informal capital, including situations where, for example, a significant capital investment is made in the Netherlands where there is also a strong business reason for doing a transaction apart from a tax reason.
No ITRs for transactions involving tax havens
Regardless of the motive for entering into a transaction, no ITR will be issued if the transaction involves entities established in jurisdictions that are designated as low-taxed by the Dutch Ministry of Finance (click here for the full list of low-tax jurisdictions as per 1 January 2019). This includes structures where a blacklisted country is only indirectly involved with the Dutch tax payer seeking the ITR
Publication of anonymised summaries of ITRs
As of 1 July 2019, all new ITRs will be published in anonymised form. The same applies for ITR applications that have been rejected, in which case the summary will also include the reasons for the rejection. Currently, ITRs are confidential agreements between the Dutch tax authorities and taxpayers. No information is published about rejected ITR applications. These summaries will only provide high-level information about the ITR, including the legal framework and with relevant facts redacted to prevent published information from being traceable to individual taxpayers.
What impact do these key changes have?
Fewer ITRs, no ITRs for informal capital situations
Due to the stricter requirements for issuing ITRs, the number of ITRs issued in the future will decrease. In particular, the condition that an ITR not be issued if the principal purpose for entering into a transaction is to save foreign or Dutch tax, will in practice severely restrict the possibility of obtaining an ITR in the Netherlands. As a result of this condition, informal capital ITRs will no longer be available, unless the informal capital is simultaneously taxed elsewhere, which is typically not the case. It remains to be seen whether this will also be the case for situations involving informal capital where the transaction itself has a strong business reason, for example, where a significant capital investment in the Netherlands is involved.
Renewal of existing ITRs
Taxpayers may continue to rely on existing ITRs until their agreed expiration date. However, in the absence of transition rules, these ITRs will likely need to meet the stricter requirements of the new ITR policy – including the economic nexus requirement and the absence of a tax avoidance motive – if they are up for renewal. Taxpayers with ITRs in place should determine whether their present ITR will be eligible for renewal and, if not, whether measures can be taken to fall within the scope of the DPD. If no new ITR can be obtained, a taxpayer could consider continuing to operate without an ITR, depending on how straightforward the confirmation in the ITR was. The risk is that, going forward, the tax authorities may challenge the tax treatment of a transaction after the ITR’s expiration date.