Navigating Dutch substance requirements: what you need to know

If you're a foreign business expanding to the Netherlands, one of the first things someone will say to you is: “Have you thought about the substance requirements?". Although it is a term that is often brought up as a necessity, the question one should ask is in what situations these requirements are actually relevant.

In essence, the substance requirements ensure that companies have a genuine presence in the Netherlands and aim to prevent tax planning with letterbox companies. With recent updates to international tax laws, substance is more important than ever to avoid issues like denied treaty benefits or additional tax scrutiny.

When are the substance requirements relevant?

From a foreign perspective, Dutch companies may need to have sufficient (relevant) substance in order to be considered the beneficial owner of a payment and have access to a reduced withholding tax rate on that payment. This has become increasingly more important with developments such as the adoption of principal purpose tests in tax treaties. This is different from meeting the list of Dutch substance requirements people generally have in mind when asking aforementioned question. Although there may be overlap, the level of Dutch substance required from a foreign perspective has little to do with the substance requirements as applied by the Dutch tax authorities. So when is this list relevant?

Dutch resident companies

If a company is incorporated under Dutch law, it will be deemed tax resident in the Netherlands for corporate income tax and dividend withholding tax purposes. However, companies qualifying as financial service company (i.e. a company of which its activities in a fiscal year consist for 70% or more of directly or indirectly receiving and paying interest, royalties, rent or lease instalments, to or from non-resident group companies), that do not meet the substance requirements may be subject to spontaneous exchange information by the Dutch tax authorities. This will be the case if such financial services company benefits from a reduced withholding tax rate or an exemption of withholding tax under a tax treaty or EU Interest and Royalty Directive. In such case, the Dutch tax authorities will exchange information on the (lack of) substance of the financial services company to foreign tax authorities of countries that have provided such relief of taxation. Such exchange of information is de facto an invitation for such authorities to deny the reduction of relief. 

Non-Dutch resident companies

For non-Dutch companies the substance requirements can be of direct relevance. For example, under the non-resident corporate income tax rules and for withholding tax purposes, having relevant substance can provide access domestic exemptions without having to rely on the treaty. In those scenarios it is recommended that the foreign entity meets Dutch published substance requirements in its own jurisdiction. Although not intended as such, it will be interesting to see whether the introduction of a General Anti Abuse Rule in Dutch tax will impact the practical application of these rules.

What to do?

When considering expanding to the Netherlands, it is good to assess whether substance requirements will play a role in your envisaged structure. If you are interested to learn more, reach out to one of our Principals who can provide you with our more elaborate Substance Memorandum.

At Bentham we are always happy to have an open discussion on what your plans are and provide feedback on the importance of these rules.