On 20 June 2016 the EU’s Economic and Financial Affairs Council (“ECOFIN”) agreed on a draft Anti-Tax Avoidance Directive (“ATAD”). Rules in five different fields have been laid down: a) interest limitation rules; b) exit taxation rules; c) general anti-abuse rule (GAAR); d) controlled foreign company (CFC) rules and e) rules on hybrid mismatches. Substantial changes were made to the first proposal of the European Commission in January 2016. The draft will be formally adopted in a forthcoming ECOFIN meeting.
The member states will have to transpose the directive into their national laws and regulations before 1 January 2019, except for the exit taxation rules, which they will have to implement before 1 January 2020. Member States can postpone the implementation of the interest deduction limitation provision until 1 January 2024, subject to certain conditions.
On 28 January 2016 the European Commission (“EC”) presented their new measures against corporate tax avoidance to be implemented in the so-called Anti-Tax Avoidance Directive (“ATAD”). If implemented the ATAD would require all EU countries to introduce restrictions on interest deductibility, controlled foreign company (CFC) rules and an exit charge to prevent companies shifting assets or company residence to low tax jurisdictions. CFC rules are designed to prevent groups from diverting profits to low tax territories to avoid tax.
The EU’s Economic and Financial Affairs Council (“ECOFIN”) held a meeting on 25 May 2016 in which a compromise text of the draft directive proposed by the Dutch Presidency was presented and hoping to agree a general approach to the ATAD. The Dutch Presidency, the Commission, France and Germany backed the revised text, but as other EU countries had reservations in certain areas, agreement could not be reached.
The main disagreements among the EU Member States seem to relate to the scope of the CFC rule and the inclusion of the switch-over clause in the ATAD. Other disagreements include the scope of the hybrid mismatch rule , implementation date of the ATAD rules and the grandfathering provisions under the EBITDA-based interest deduction limitation.
In conclusion as the ECOFIN has not reached an agreement on the ATAD further adjustments are necessary in order to reach a compromise.
The Netherlands Court of Appeal has ruled that a group of companies whose parent company is resident in Israel may not be excluded from forming a fiscal unity (tax-consolidated group).
According to Dutch tax law, only companies (or permanent establishments) resident in the Netherlands whose parent company (or intermediate holding company) is resident in the Netherlands (or in another state in the European Economic Area “EEA”) may form a fiscal unity.
In the case at hand the Court of Appeal ruled that a request for a fiscal unity with three Dutch sister companies and one Dutch grandchild company with a joint ultimate Israeli parent company, had to be granted. This is regardless the fact that Israel is not an EEA state as the Court of Appeal ruled this by invoking the non-discrimination clause of the Israel-Netherlands Tax Treaty ,
The decision does not only have effect on groups with parent companies in Israel as the non-discrimination clause in the Israel-Netherlands Tax Treaty is almost completely in line with the non-discrimination clause of OECD Model Tax Convention. The ruling of the Court of Appeal therefore gives an opportunity to international groups of companies which do not have a joint parent company in the Netherlands, but in a third country, to file a request to form a fiscal unity for corporation tax purposes in the Netherlands with their subsidiaries in Netherlands.
Per 1 January 2016 new Dutch legislation came into force that will implement country-by-country reporting in line with Action 13 of the OECD’s BEPS Project. On basis of the new documentation and reporting requirements, provided that certain conditions are met, a multinational enterprise (‘MNE’) group is required to:
Based on the CbC report, the master file and the local file, the relevant tax authorities are better able to assess the validity and risks related to the (intercompany) transfer prices applied by the MNE Group.
Not complying to the required CbC reporting requirements and documentation requirements is considered a criminal delict which may be penalized or even imprisonment.
On 8 December 2015 the European Council formally agreed to amend Directive 2011/16/EU requiring EU Member States to exchange information automatically on advance cross-border tax rulings and advance pricing agreements starting 1 January 2017.
Cross-border tax rulings are defined broadly, as “any agreement, communication, or any other instrument or action with similar effects, including one issued, amended or renewed in the context of a tax audit” and could therefore also relate to verbal agreements.
Under the agreement, tax rulings issued before 2012 are exempt from the exchange, even if the ruling is still in force when automatic exchange commences on 1 January 2017. There is also no automatic exchange of information on tax rulings issued or amended between 1 January 2012 and 31 December 2013, if the ruling was no longer in effect as of 1 January 2014.
Furthermore, rulings issued after 1 April 2016, can be excluded from the exchange if the group involved has an annual net turnover of less than EUR 40 million. This exemption does not apply to companies conducting “mainly financial or investment activities,” though.
The EU Commission will develop a standard form to be used for the exchange of information and will create a central directory open to all members to access the information. The Commission will not have access to most of the information.
The EU Commission has released details of infringement proceedings it has launched against the Netherlands concerning the scope of the limitation on benefits (LOB) clause contained in the Netherlands/Japan double tax treaty. The Commission is requesting the Netherlands to amend the terms of the LOB clause to make it compatible with EU fundamental freedoms.
The Commission’s infringement proceedings throws into sharp relief the difficulties that Member States may have in implementing the OECD’s recommendations on treaty abuse in a way that remains compatible with fundamental EU principles.
The Netherlands/Japan double tax treaty entered into force on 01 January 2012. The treaty provides for a lower or 0% rate of withholding tax on certain investment income, such as dividends, interest and royalties. However, the treaty includes an LOB clause and anti-conduit provisions. The LOB clause limits the availability of certain treaty benefits (including the 0% withholding tax rates on dividends, interests and royalties) to “qualifying persons”.
The Commission takes the view that, on the basis of ECJ case law such as Gottardo (Case C-55/00) and Open Skies (Case C-466/98), a Member State concluding a treaty with a third country cannot agree better treatment for companies held by shareholders resident in its own territory, than for comparable companies held by shareholders who are resident elsewhere in the EU/EEA. Similarly, a Member State cannot agree better conditions for companies traded on its own stock exchange than for companies traded on stock exchanges elsewhere in the EU/EEA. To do so is in breach of the fundamental freedoms.
However, the Commission notes that under the current terms of the LOB clause, some entities are excluded from the benefits of the tax treaty in a discriminatory fashion. This means that they suffer higher withholding taxes on dividends, interest and royalties received from Japan than similar companies with Dutch shareholders or whose shares are listed and traded on the Dutch stock exchange (this is the case even though the current LOB clause also recognizes certain foreign stock exchanges, which include a number of EU and even third-country stock exchanges).
The Commission’s request takes the form of a reasoned opinion. In the absence of a satisfactory response within two months, the Commission may refer the Netherlands to the ECJ.
On 5 October 2015 The OECD presented the final package of measures for a comprehensive, coherent and co-ordinated reform of the international tax rules. The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low/no tax environments, where little or no economic activity takes place.
Undertaken at the request of the G20 Leaders, the work to address BEPS is based on the 2013 G20/OECD BEPS Action Plan, which identified 15 actions to put an end to international tax avoidance. The plan was structured around three fundamental pillars: introducing coherence in the domestic rules that affect cross-border activities; reinforcing substance requirements in the existing international standards, to ensure alignment of taxation with the location of economic activity and value creation; and improving transparency, as well as certainty for businesses and governments.
The final package of BEPS measures includes new minimum standards on: country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises; treaty shopping, to put an end to the use of conduit companies to channel investments; curbing harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings; and effective mutual agreement procedures, to ensure that the fight against double non-taxation does not result in double taxation.
On basis of the Netherlands Civil Code (NCC) Dutch legal entities (such as public or private limited liability companies) have to meet several requirements with respect to publication, audit and disclosure of financial statements. These requirements vary depending on the size of the company concerned.
Dutch companies are classified by size using three criteria: the total assets as recorded in the balance sheet, net turnover and the average number of employees. For a parent company, the value of the total assets and net turnover for this purpose consist of its own figures and also include those of its group companies (i.e on consolidated basis). The average number of employees includes the employees of group companies.
Depending on the size, the company is required to have its financial statements audited by a registered auditor (i.e. in principle an auditor registered in the Netherlands). If a company qualifies as ‘small’ then this audit is not obligatory. Currently the criteria to be classified as ‘small’ are: total assets below EUR 4.4 million, net turnover below EUR 8.8 million and average number of employees below 50. Note that a company only has to meet 2 out of the 3 of the criteria for two consecutive years in order to meet this classification.
On basis of a Directive (2013/34/EU) adopted by the EU parliament, the Netherlands has increased abovementioned thresholds for small companies to respectively: EUR 6 million, EUR 12 million and 50 employees. These adjustments come into force per 1 January 2016.
On 10 September, the Dutch House of Representatives approved for ratification of the pending Tax Arrangement Netherlands- Curacao (‘TANC’) which will replace the existing Tax Arrangement with the Kingdom. The TANC is expected to enter into force as per 1 January 2016.
The TANC introduces a 0% dividend withholding tax rate, albeit under strict conditions. It further includes a beneficial transitional rule under which shareholdings of at least 25% may apply a reduced 5% dividend withholding tax rate (currently 8.3%) until 31 December 2019.
On 2 September 2015, the CJEU rendered its judgement in the case Groupe Steria (C-386/14). The CJEU decided that the freedom of establishment is violated when a full exemption on dividend income is only granted when such income is received from a company that belongs to the same tax-integrated group (i.e. fiscal unity).
In short, the case concerns a French company that received dividends from its subsidiary located outside of France. Under the French Tax Code, 5% of the amount of dividends is added to the taxable base of the French parent company (the remainder (i.e. 95%) is exempt from tax). However, if subsidiaries of the French parent company are inserted into a tax-integrated group, then 5% of the amount of dividends is ‘neutralised’ and does not affect the taxable income of the group. Basically, these dividends are 100% exempt from tax.
Like most Tax Codes across the EU, the French Tax Code only allowed domestic subsidiaries to be added into a tax-integrated group (when certain conditions had been met). As a result, non domestic subsidiaries were by means excluded from this regime. The CJEU has now ruled that this restriction to the freedom of establishment cannot be justified. It also elaborated on the X-Holding case (C-337/08) in which the CJEU ruled that a cross-border tax integrated group did not have to be allowed if losses may be imported. According to the CJEU’s view, the X-Holding case seems to set out that it is incompatible with EU law to treat domestic and foreign companies differently if the subsidiary does not carry any losses.
Now that the Steria case has been judged, one can conclude that Member States will have to carry out a case by case study each time as to assess whether precluding a company from being inserted into a tax-integrated group is justified. Consequently, it seems that the Netherlands will have to assess whether its regulations result into a benefit that is only granted to a tax-integration group. If so, then that benefit should also be granted to subsidiaries that cannot be inserted into a tax-integrated group as they are located abroad.
In recent combined court cases (C-108/14 and C-109/14) the CJEU ruled that VAT incurred on costs relating to the acquisition and holding of subsidiaries can be fully reclaimed (without apportionment), provided that the holding company involves in their management. The holding company then carries out an economic activity due to these management services which is regarded to relate to the general costs. The VAT deduction on these costs may be limited for those costs relating to subsidiaries to which the holding company does not provide mentioned management services to (against a consideration).
This court case finally brings certainty to holding companies and clearly rules no VAT deduction restriction should apply to those holding companies providing (management) services to its subsidiaries. This can be seen as a huge benefit considering that in the past tax payers often had discussions with the Dutch Tax Authorities to which extent a holding company is involved with its subsidiaries, whether it provides (management) services, particularly when the costs of the acquisition are relatively high compared to the service fees charged to the subsidiaries by the holding.
On 23 June 2015, the Dutch House of Representatives approved a bill that might prohibit board members to manage legal entities for a maximum period of five years if certain events have ocurred.
The purpose of the bill is to avoid bankruptcy fraud more efficiently. The measure will take effect if the board member is in ‘default’ during a period of three years prior to the bankruptcy of the entity managed by the designated board member. The board member will be deemed to be in default if (i.a.) the judge rules that the board member can be held liable for ‘improper management’ of the entity. Improper management will be deemed when the board member does not fulfill certain administrative requirements, such as not publishing the annual account in time. Another event of default will occur if the board member does not comply with requests for more information or co-operation by the curator. If the (bankrupt) entity or the designated board member have been fined for negligence which is irreversible and cannot be argued, an event of default will also exist. A fine for negligence can be imposed if the bankrupt entity or the board member have intentionally filed an incorrect or incomplete tax return.
Due to the above, it has now become more vital to file correct and complete tax returns by the legal entity and its board members. Should an event of default arise within a period of three years prior to the bankruptcy of a legal entity, the board member may be prohibited to manage other legal entities in the Netherlands for a maximum period of five years. As a result, we advice you to have your tax returns filed by professionals in this field.
The Dutch Supreme Court overturned a verdict by the Dutch High Court in which it limits the accountability of the limited partner (“Commanditaire Vennoot”) of a partnership (“Commanditaire Vennootschap”) in case the limited partner violates the management restrictions, as the management activities are solely reserved for the general partner (“Beherend Vennoot”).
When the management restrictions are violated (i.e. the limited partner acts as if it was the general partner), the Dutch Commercial Code dictates that the limited partner should be held accountable to all creditors of the partnership, even if the liabilities cannot be linked to the breach (for example, even if the liabilities already existed before the breach). The Supreme Court ruled that the sanction imposed should be in proportion with the breach. The accountability should therefore be limited to the liabilities of the partnership that are linked to the breach.
On 20 May 2015, the European Parliament adopted the Fourth Money Laundering Directive. This directive obligates EU member states to adopt a UBO-register of corporate and legal entities. Such register should include at least the name, the month and year of birth, the nationality and the country of residence of the UBO, and additionally, the nature and extend of the beneficial interest held by the UBO. The register should be accessible to the respective tax authorities, obliged entities (for example banks, lawyers and notaries, as they have to perform KYC procedures) and the public if they have a “legitimate interest”.