At the end of last year, the Dutch State Secretary of Finance published a (draft) decree in which two additional substance requirements are introduced for qualifying financing (and royalty) companies in the Netherlands.
Qualifying financing (and royalty) companies are companies whose activities in a given financial year consist primarily (i.e. for at least 70%) of group financing and licensing activities (or similar activities such as leasing activities). In order to establish whether or not the “70%-test” is met, any holding activities conducted by such company should not be taken into account.
It is intended that the additional substance requirements will come into force as per 1 January 2021.
Background – existing substance requirements
In order to avoid the unintended use of tax treaties by financing companies without sufficient substance in the Netherlands, qualifying financing (and royalty) companies must, as per 1 January 2014, comply with the following substance requirements during the entire financial year:
- 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 board members resident in the Netherlands have the required professional knowledge to perform their duties adequately. The duties of the board include at the minimum the decision-making on transactions to be entered into by the company and ensuring a proper handling of the transactions entered into;
- the company has adequate personnel for the adequate execution and registration of the transactions;
- the board decisions must be taken in the Netherlands;
- the (principal) bank account of the company is held in the Netherlands;
- the books are kept in the Netherlands;
- the company’s address is in the Netherlands;
- the company is – to its best knowledge – not (also) considered a resident of another jurisdiction for tax purposes;
- the company runs real risks with respect to its financing, licensing or leasing activities; and
- the company has at the minimum an appropriate equity with regard to the functions performed by the company.
FY 2021 – additional substance requirements
In addition to the above (existing) substance requirements, as per the financial year starting on or after 1 January 2021, Dutch resident qualifying financing (and royalty) companies must also comply with the following two substance requirements:
- the company must incur wage costs of at least EUR 100,000 per annum; and
- the company must have its own office space at its disposal (for at least 24 months) which is used to carry out its financing and royalty activities.
Consequences not complying with the substance requirements
Qualifying financing (and royalty) companies must state in their annual corporate income tax return whether they meet all of the above substance requirements. If they cannot confirm that all substance requirements are met during the entire financial( year, it must:
- indicate which requirements are not met;
- provide all information necessary for the Dutch tax authorities to determine which of the substance requirements are met; and,
- provide an overview of all interest, royalty and/or similar payments for which a reduction of (withholding) tax has or could be claimed under any tax treaty or EU Directive.
The information provided to the Dutch tax authorities will be spontaneously shared with the relevant authorities of the source state, who may take this information into account in determining whether the relevant company can apply the benefits of the relevant tax treaty or EU Directive.
Not or not timely disclosing the above information is regarded as a violation which could result in an administrative fine of up to EUR 21,750 (based on 2020 figures).
Should you require any further information, please contact us.