By means of a tax ruling, the Dutch Tax Authorities provide advance certainty to taxpayers about the tax consequences of their planned actions. The Dutch tax ruling practice has become a topic of much debate recently however. In February of this year, the goverment announced his intention to review the current ruling practice with an international character in order to safeguard the quality of the Dutch ruling practice for companies with real economic activities in the Netherlands. In a letter to the Lower House of 22 November 2018, the Dutch State Secretary of Finance, Mr Snel, outlined his plans in more detail. The changes relate to more transparency, centralisation of the practice and stricter requirements for issuing rulings with an international character, particularly to companies with little presence in the Netherlands, so-called letterbox companies.
The following changes are proposed:
- An anonymous summary of every issued ruling with an international character will be made public;
- The Tax and Customs Administration will publish an annual report that relates to rulings with an international character;
- Periodical research with independent experts will be continued.
The information to be published will address important issues that have arisen during the year so that they are made widely known. Extra attention will also be paid to cases where a ruling request has been submitted but for which no ruling has been granted.
Analogous to the Belgium ruling practice, a summary for each ruling issued by the Dutch Tax Authorities with an international character, will also be published in the Netherlands. This way the need for more transparency per ruling will be achieved without the information being traceable to an individual taxpayer, according to Mr Snel.
Within the Tax and Customs Administration the process of issuance of tax rulings will be further centralised and coordinated. Rulings issued with an international character require double signatures and the persons responsible for the sign-off will be centralised in a new to be formed team, the so-called “College Internationale Fiscale Zekerheid”.
The Dutch government has declared the battle against international tax avoidance, an important spearhead of the Dutch tax policy. That is why the government has reconsidered issuing rulings to internationally operating companies with a limited presence in the Netherlands. (Letterbox-) companies, that establish in the Netherlands mainly on paper and for tax purposes, will no longer be granted advance tax certainty. ‘We issued rulings on structures that ended in a tax haven. We do not want that anymore ‘, says State Secretary Menno Snel van Financiën in an explanation of his plans.
The following measures will be taken:
- Taxpayers should meet stricter criteria when requesting a tax ruling with an international character. The current list of substance criteria that needs to be met will be replaced by a new ‘economic nexus’ requirement, that a group must meet in the Netherlands.
- The tax authorities will look more closely at the purpose of the specific structure for which the ruling is requested. If the decisive motive of the taxpayer is to save either Dutch or foreign tax, no ruling will be granted.
- Rulings with an international character are issued for a maximum term of 5 years; in exceptional cases this period can be extended to a maximum of 10 years.
- There will be a fixed format for all rulings with an international character, this is also for exchange of information purposes within the EU.
In the future, the Tax and Customs Administration will only issue a ruling for activities of internationally operating companies involving ‘economic nexus’ with the Netherlands. These must be business, economic or operational activities actually performed at the expense and risk of the company established in the Netherlands. These activities must match the function of the company within the group. For those activities, sufficient qualified personnel must be available in the Netherlands at group level and the number of personnel employed in the Netherlands must be in proportion to the total staff of the group. The level of the operational costs must also match the activities carried out. This concept will be further elaborated and provided with examples published in a policy decision. This notice will be further updated on a regular basis with new examples that occur in practice. Some examples has already been published as an appendix to the letter.
The inclusion of the ‘economic nexus’ concept goes a step further than the raising of the minimum substance requirements as previously announced. It is therefore heavier, more effective and better focused on the specific circumstances of the case. This way a motion adopted by the House which asks for the substance requirement to be made more dependent on the size and content of the company’s activities, will also be honoured. The concept of ‘economic nexus’ means that in all cases the threshold for obtaining certainty will be increased comparing to the current substance criteria.
In parallel with more stricter substance requirements, the tax authorities will also take into consideration the purpose of the specific structure for which the ruling is being requested. The Tax and Customs Administration will not give a ruling if tax saving is the sole or decisive reason for the structure or transaction, irrespective whether it is domestic or international tax that is at stake. Furthermore, rulings will no longer be issued on transactions with entities established in countries on the EU list of non-cooperative jurisdictions for tax purposes or that are qualified as low-tax countries (i.e. effective tax rate of 7%).
Another amendment proposed is an adjustment of the maximum duration of rulings. All new rulings issued with an international character (not limited to APA’s and ATR’s), will have a maximum term of 5 years, unless the facts and circumstances permit an exception, for example if there are long-term contracts, then the maximum is 10 years. An interim revaluation test is also built in, e.g. after 5 years, an amendment of law or a relevant change of facts and circumstances.
The current format of rulings will also be redesigned. At present, a ruling is basically free of form. In the future rulings will only be concluded in the form of a settlement agreement in a fixed prescribed format. As a result, each agreement will contain the agreed necessary elements and not only the Tax Authorities but also taxpayers are explicitly bound by what has been agreed. A fixed format is also desirable in order to simplify the exchange of information with other tax authorities.
The substantive changes will be elaborated further in policy rules next year be and supplemented by examples. The policy rules and examples will be published on a regular basis so that they are accessible and clear to everyone. All these changes should lead to a renewed Dutch tax ruling practice.
These changes will be introduced simultaneously, starting 1st of July 2019. The Lower House will be informed on the progress in the Half-year Report of April 2019.