Substantially having Substance

Setting up a company such as a Dutch B.V. obviously requires some red-tape, but is relatively simple to do. Having a Dutch B.V. does not automatically imply that the company can benefit from all tax facilities.

In recent years, many measures have been taken to prevent tax avoidance through treaty abuse. One of the problems was that groups of companies made use of the favorable Dutch tax legislation and the treaty network, without these companies actually having any ties with the Netherlands.

To prevent such abuse, substance requirements have been introduced. Substance is crucial to be able to (continue to) benefit from a jurisdiction’s tax system, tax treaties and eligibility to EU Directives. In short: companies that make use of tax facilities in the Netherlands must conduct an actual business in the Netherlands. Very specific requirements have been introduced.

The requirements for substance in the Netherlands are:

1. At least half of the board members reside in the Netherlands;

2. The members of the Board residing in the Netherlands have the professional knowledge required to perform their duties properly;

3. The (holding) company shall have qualified personnel at its disposal for the proper performance and registration of the transactions to be concluded by the (holding) company;

4. Management decisions shall be taken in the Netherlands;

5. The principal bank accounts of the (holding) company shall be kept in the Netherlands;

6. The books will be kept in the Netherlands;

7. The (holding) company has more than EUR 100,000 in wage costs for its activities in the Netherlands;

8. The (holding) company has at least 24 months access to an office located in the Netherlands:

a) The office is established in a real estate;

b) The office is equipped with the usual facilities for performing the work; and

c) The work is also performed at that office.

Additional requirements for service entities

9. The (holding) company runs a real risk in respect of the money loans or legal relationships underlying the interest, royalties, rent or lease instalments received and paid; and

10. The (holding) company has at least an adequate capital base for the required risk.

Note to 7: if it does not concern a financial service entity, the required amount of EUR 100,000 must be multiplied by the country of residence factor. The country of residence factor differs per country.

These requirements try to prevent that only shelf companies are registered while the actual activities are carried out elsewhere.

If a company does not meet these substance requirements during the entire year in which the benefits of a tax treaty or EU Directive are claimed, the Dutch tax authorities will spontaneously exchange information on the non-compliance with these requirements with local source countries, which may use this information to disallow tax treaty or EU Directive benefits.

White papers: a legal guideline

Ten Holter Noordam advocaten can help you make the right decisions in this process. For a more detailed overview of Dutch legislation on Doing Business in the Netherlands, please request our white paper online.