On 14 June 2019, the Dutch government responded to questions raised by members of the Dutch parliament about the impact of the decisions of the ECJ of 26 February 2019. In these decisions, the ECJ essentially held that Member States are under an obligation to deny the benefits under the EU Parent Subsidiary Directive and the Interest and Royalty Directive if the recipient of the income is a conduit company. The response of the Dutch government, outlined below, is in our view remarkably mellow, especially given that this government wants to avoid the use of the Netherlands as a tax planning jurisdiction. Perhaps they wish to avoid admitting that what has been going on for years may have been abusive under EU law.  As a result, the picture painted by the Dutch government looks like 'business as usual, albeit under slightly more stringent conditions'. In our view, that is a risky strategy given the clear directions given by the ECJ.  Is the Dutch government 'kicking the can down the road'?  

Notwithstanding this seemingly light touch approach, taxpayers should take a critical look at their structures to see whether, if and when challenged, they would pass the tests set by the ECJ in its 26 February 2019 decisions.

The Dutch government acknowledges that the Dutch minimum substance requirements, which, if met, guarantee access to an exemption from Dutch dividend withholding tax under the EU Parent Subsidiary Directive, may need to be updated following the ECJ decisions. However, the Dutch government believes that in broad terms these requirements are in line with EU law. The role of the minimum substance requirements will be revisited in September 2019. They will probably lose their status as safe harbors and will become rebuttable presumptions: the Dutch tax authorities will be given the authority to challenge a taxpayer even though the minimum substance requirements have been met. The minimum substance requirements will also be reinforced. It is quite clear in our view that the ECJ has rejected the use of safe harbor rules, such as the Dutch minimum substance requirements. The continuation thereof in the form of rebuttable presumptions, even if reinforced, carries the risk in it that the Dutch tax authorities will in practice not challenge abusive situations. This would then make the situation non-compliant with EU law again which could prompt action from the EC (on the state aid front, infraction procedure, Code of Conduct group, etc.), causing uncertainty for taxpayers.

The Dutch government does not expect that there will be many cases in which the Dutch tax authorities can successfully take the position that a situation is an abuse of EU law following the ECJ decisions. Nevertheless, it is forecasted that marked cases will be brought to litigation. Two examples are mentioned in this regard: situations in which the minimum salary (EUR 100,000, one of the minimum substance requirements) required to be incurred by a foreign intermediate company is clearly too high in relation to the dividends, interest and royalties received and situations in which, based on all the relevant facts and circumstances, it is evident that the foreign intermediate company immediately passes on the income received. It is reassuring for taxpayers that the Dutch government does not intend to launch a large scale review of cases. It should be noted, however, that these statements cannot be relied on by individual taxpayers as a safety net against a challenge by the Dutch tax authorities.

There is also some clarification on the status of rulings. Rulings for situations that meet the current minimum substance requirements, but that will not meet the revised minimum substance requirements will automatically terminate on 1 January 2020. It will be a relief to taxpayers that existing rulings will be respected. However, in doing so, the Dutch government essentially grandfathers abusive situations until 1 January 2020, which seems contrary to the ECJ's decisions that abuses must be challenged. Other rulings will be respected after 1 January 2020 until the tax authorities notify the taxpayer that the ruling is revoked prospectively. For these rulings, it seems that the tax authorities will not use their right to challenge a taxpayer that meets the new substance requirements until the ruling is actually revoked, which, again, is not in line with the ECJ's decisions. Existing rulings will be reviewed on a risk weighted basis (i.e., high-risk taxpayers vs. low-risk taxpayers). It is not mentioned who might be considered high-risk taxpayers. Some sectors may be more vulnerable than others; whether, for example, the private equity industry is such an industry is unclear. No-ruling situations can be challenged at all times within the statutory period for re-assessment, i.e., also before 1 January 2020.

The Dutch government reiterates its position that if the benefits of the EU Parent Subsidiary Directive are denied, taxpayers will still be entitled to invoke the benefits of a tax treaty. In the case of Luxembourg, for example, this implies that dividends may benefit from the 2.5% rate of Dutch dividend withholding tax. Obviously, once a treaty contains a principal purpose test, which will be the case as of 1 January 2020 under the Luxembourg-Netherlands tax treaty, treaty benefits may be denied under this provision.

With respect to the question whether the ECJ decisions will impact the application of the participation exemption, the Dutch government states that the issue is being studied, but that it probably needs further case law to answer this questions.