Dutch Substance requirements are increasingly important to consider when doing business in the Netherlands. If the requirements are not met, you might even risk a fine, next to missing the Dutch tax benefits. Let us explain how the requirements can be met.
What are substance requirements – an introduction
Substance requirements are not found in any legal text. However, the term is used in politics and policy memos quite often. Substance requirements are requirements that have to be met to be able to use Dutch tax benefits. They exist for tax purposes – they help to attribute functions to an entity and subsequently can be used to attribute profits to the entity involved. Substance requirements can be used to determine tax residency or to determine the beneficial owner. They can also be used for transfer pricing purposes.
Goal of the substance requirements
Ever since the OECD came out with the BEPS action plan, tax avoidance and tax evasion are in the crosshairs of governments all around the world. Substance requirements are especially important to take into consideration when you intend to incorporate an entity in the Netherlands, that will primarily provide (financial) services. In that case, the Dutch Tax Authorities (belastingdienst) will use the substance requirements to determine whether a tax ruling may be given. They also use the requirements to provide a framework for anti-avoidance provisions. When the substance requirements are fulfilled, they presume that the structure has not been set up with the main goal of tax avoidance. In that case, fiscal benefits may be awarded.
Substance requirements – what are they?
In the Netherlands, the following substance requirements are used. To be clear, these are only criteria used to establish whether the entity has sufficient functions. They are not legally binding requirements.
At least half of the statutory board members of the entity with the power to decide have to reside in the Netherlands. The Dutch resident board members must at least have equal decision-making powers to the non-resident board members. Members of the supervisory board are not taken into account.
The Dutch resident board members have sufficient knowledge and the capacity to perform their tasks, which at least include making decisions on transactions and managing the completion of transactions carried out by the entity.
The entity has qualified staff to manage and register the transactions in the Netherlands. This qualified staff may be hired, for example, from a trust company.
The decision by the management of the entity should physically be made in the Netherlands during board meetings. During the board meetings, the key management and commercial decisions that are necessary for the conduct of the entity’s business should in substance be made. The board meeting may not be a mere rubber-stamping of decisions made outside the Netherlands. The board meetings should not be held in another jurisdiction or be held electronically outside the Netherlands (through Skype/video conferencing or over the phone).
The most important bank accounts are held in the Netherlands. This means that the entity has the decision-making power and the entitlement to the account, which account may be with a non-resident bank.
The bookkeeping of the entity should be done and kept in the Netherlands.
The entity should have an office space in the Netherlands that is used and properly equipped for at least 24 months. The entity has appropriate equity with regard to the risks run relating to its activities.
The entity should incur salary expenses for its activities related to its stake in the Dutch entity, of at least € 100,000.00 annually. This amount needs to be multiplied by the country of residence factor of the other entity involved.
Wrapping up about substance requirements
The substance requirements can be quite confusing. Especially since these are not hard requirements, but rather criteria to test whether an entity should have access to various fiscal benefits. The specialists of LexQuire are ready to help you out and to assist you so that you know how the substance requirements will affect your business.