A Topical Tax Practice Note by Dr Rijkele Betten Tax Consultant
On 30 August 2013, the Netherlands Under Minister of Finance sent a letter to the Netherlands’ Parliament on the position of the Netherlands in international tax planning and on the effects of tax treaties concluded between the Netherlands and developing countries.
In this note, we focus on substance requirements for royalty companies. Such companies are often used for receiving royalty income from countries with which the Netherlands has concluded a tax treaty that limits the royalty withholding taxes in the source countries. The Netherlands’ company typically has concluded a sublicensing agreement with the holder of the Intellectual Property (often located in a low tax territory) and is subject to Netherlands’ tax on the spread between the payments received from its sub-licensees and the fees due to its own principal. These arrangements are particularly relevant to Sports Licensing and Merchandising Agreements, amongst others.
The Under Minister proposes that the Netherlands will introduce certain measures to avoid the use of tax treaties by taxpayers without sufficient links to the Netherlands.
The relevant measure, that is listed in the letter to avoid the abuse of tax treaties, includes that minimum substance requirements for obtaining an ATR/APA for certain financing/royalty companies will also apply for such companies without an ATR/APA. The substance requirements include the following:
– At least 50% of the members of the board of directors, with a right to make decisions, lives or is factually residing in the Netherlands;
– The directors residing in the Netherlands have sufficient knowledge to perform their activities in their capacity as a director of the Dutch company. The company has adequate personnel (either of its own or from third parties) for the adequate execution and registration of the transactions;
– The (most important) board decisions are made in the Netherlands;
– The (main) bank account of the Dutch company is in the Netherlands;
– The bookkeeping of the Dutch company takes place in the Netherlands;
– The Dutch company (at least, up to and including the moment of filing the APA/ATR) has complied with all its tax obligations;
– The Dutch company has its registered address in the Netherlands, while the company is, according to its best knowledge, not (also) a resident of another jurisdiction for tax purposes;
– The Dutch company’s minimum equity is adequate in relation to the functions performed (taking into account the risks assumed and assets used).
If these minimum substance requirements are not met, the Netherlands will spontaneously exchange information with the source state; the Netherlands will also exchange information under APA’s with financing/royalty companies, if the group, of which the respective financing/royalty company forms part, does not have any other activities in the Netherlands than the activities performed by the respective company, even if the minimum substance requirements are met.
Finally, the Under Minister has also announced that the supervision on professional service providers (Trust companies) will become stricter.
It will be interesting to see what the outcome of the Parliamentary proceedings will be, in due course. In the meantime, concerned taxpayers are anyhow advised to closely follow the developments; review their current situation; and where necessary take appropriate further steps.