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Substance developments

Tax treaty developments, case law of the European Court of Justice (“ECJ”), and unilateral rules introduced by countries, all reflect that maintaining an adequate level of substance is crucial to be able to (continue to) benefit from a jurisdiction’s tax system, tax treaties and eligibility to EU Directives.

The Netherlands applies minimum substance requirements in various Dutch anti-abuse rules. In the context of these rules the minimum substance requirements focus on the substance position at the level of the (lower-tier) subsidiary of the Dutch group company (Dutch CFC rules) or at the level of the (direct) shareholder of the Dutch group company (domestic exemption from Dutch dividend withholding tax, Dutch non-resident taxation rules, 2021 Dutch Withholding Tax Act on interest and royalties directly or indirectly due to low-tax jurisdictions).

Within the Netherlands itself the following Dutch minimum substance requirements apply to a so-called ‘financial services entity’ (“FSC”). An FSC is defined as a Dutch resident company whose activities in a year predominantly (for 70% or more) consist of directly or indirectly receiving and on-paying interest, royalties, rent or lease amounts to and from group companies outside the Netherlands.


a. At least half of the aggregate number of statutory and decision-competent
    board members of the taxpayer live or effectively reside in the Netherlands.

b. The board members living or residing in the Netherlands have adequate
    professional knowledge and skills to properly conduct their duties with
    respect to transactions involving the Dutch company and the implementation

c. The Dutch company should have qualified personnel at its disposal for the
    adequate execution and registration of the transactions entered into by that

d. The management decisions are taken in the Netherlands.

e. The main bank accounts of the company are held and maintained in the
    Netherlands (can be a non-Dutch bank account, but does need to be managed
    and controlled from the Netherlands)

f. The bookkeeping of the company needs to be performed in the Netherlands.

g. Abolished per 1.1.2021 - the office address of the company needs to be located
    in the Netherlands.

h. Abolished per 1.1.2021 - The Dutch company should - to the best of its
    knowledge - not be considered a tax resident in another jurisdiction.

i. The Dutch company runs a genuine economic risk (as defined in Article 8c of the
   Dutch Corporate Income Tax Act) with respect to its intra-group financing /
   leasing activities.

k. The Dutch company should have a sufficient amount of equity that is adequate
    in relation to the above genuine economic risk.

l. Newly introduced per 1.1.2021 - The Dutch company incurs at least € 100,000
   of wage costs for activities performed in relation to the intra-group financing or
   leasing activities.
     - The personnel does not need to be employed with the Dutch entity itself and
        it is therefore also possible to hire personnel within the group, provided that
        such personnel performs relevant activities.

     - Likely this wage-cost criterion will need to be satisfied at the level of each
        individual Dutch group company (not only (combined) at Dutch group level).

m. Newly introduced per 1.1.2021 - The Dutch company has office space (with
     adequate facilities for its activities) available in the Netherlands for a period
     of at least 24 months from which the company also actually performs its

If an FSC 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.

The Dutch government is exploring the option of introducing the same / similar substance criteria as those listed above for Dutch holding companies effective as of 1.1.2022 (also subject to spontaneous exchange of information in case of non-compliance with these requirements)

Other potentially relevant developments with respect to substance in the Netherlands include the following items.

a.  As of July 1, 2019, the Dutch tax authorities no longer issue rulings to taxpayers
     with insufficient “economic nexus” in the Netherlands. Both the group and the
     Dutch company pursuing the ruling need to be engaged in operational business
     activities in the Netherlands.

b.  The Dutch government has also appointed a Commission to research the use of
      ‘flow-through companies’ in the Netherlands and to present options for
      countering undesired use of such companies.

Contact your Taxperience tax advisor for more information to manage and prepare for these substance developments to ensure a sustainable and tax-efficient structure for the future!


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