Somewhat hidden among the massive volume of tax legislation that came out as part of the 2021 Dutch budget on 15 September 2020, three important documents were released by the Dutch Under Secretary of Finance. 

I will consider these in a three-part series, starting with this blog on a study conducted by the Ministry of Finance on whether the application of the Dutch participation exemption should be denied to holding companies that have no substance in the Netherlands. Two further blogs will discuss an amendment of the application of the arm's length standard in the Netherlands and the future of the Dutch fiscal unity regime. Please subscribe to the blog to be alerted when these are published. 

Study on substance-less holding companies

The Under Secretary of Finance announced the study on substance-less holding companies in February 2018 in a letter to the Dutch parliament. The letter described a number of Dutch government initiatives aimed at combatting international tax avoidance and tax evasion. 

In the summary of the study released on 15 September 2020, the Under Secretary of Finance concludes that the way forward on substance-less holding companies is for the Netherlands to exchange information with jurisdictions in which these companies claim benefits under the Parent Subsidiary Directive or tax treaties. 

International businesses that have Dutch holding companies in their structure which rely on the Dutch participation exemption will have breathed a sigh of relief. One of the other measures that had been contemplated by the Dutch Ministry of Finance, but was dismissed, was an anti-abuse rule that would allow the Dutch tax authorities to deny the application of the Dutch participation exemption in abusive situations. Obviously, such a rule would have given rise to much uncertainty for taxpayers. And not only for international groups with Dutch holding companies in their structures; the anti-abuse rule would have had to be applied to domestic groups as well in order to be compliant with EU law.

Information exchange from 2022

The information exchange on substance-less holding companies is expected to become effective as of 2022. 

If it follows the rules that already apply to royalty and finance companies, it will take the form of a requirement for taxpayers to declare in their corporate income tax returns that they meet the substance requirements, and taxpayers that do not meet these  requirements will be subject to information exchange.

The substance requirements currently applicable to royalty and finance companies are, inter alia, having at least 50% Dutch resident directors, and maintaining their books and taking board decisions in the Netherlands. 

Danish conduit cases

In the summary of the study, the Under Secretary of Finance also briefly referred to the possible impact of the Danish conduit cases on the participation exemption. In these cases, the Court of Justice of the European Union (CJEU) held that Member States are required to deny the benefits of EU law in abusive situations. 

Although the Dutch participation exemption regime predates the Parent Subsidiary Directive, it should probably be seen as the implementation of the requirements of that Directive into Dutch law. Hence, the question whether the benefits of the participation exemption should be denied in abusive situations as defined by the CJEU seems warranted. In line with previous statements, the Under Secretary of Finance is of the view that this question will have to be answered by the courts. But he did not mention which courts. Should it be the CJEU or the Dutch courts? Or could case law from other EU member states shed light on this question? 

Therefore, although Dutch legislative action in this area seems unlikely, the prospect of the Dutch tax authorities trying challenge the application of the participation exemption in abusive situations is still looming.