Within the Netherlands, there are various anti-abuse or anti-avoidance rules containing purpose tests. Most relevant within the context of dividend distributions seem to be the statutory general anti-abuse rule (GAAR) in the Dutch Dividend Withholding Tax Act 1965 (DWTA), aimed at implementing the GAAR of the Parent-Subsidiary Directive, and the abuse of law doctrine (fraus legis). Other relevant anti-abuse rules, which are not further discussed for the purposes of this post, are an independent tax qualification (zelfstandige fiscale kwalificatie) and a fiscal interpretation of the facts (fiscal duiding van de feiten).

GAAR in the DWTA

Pursuant to the GAAR in the DWTA an exemption from Dutch dividend withholding taxes is refused in the event that a subjective and an objective test are met. Additionally, a non-Dutch tax resident entity may become subject to Dutch corporate income tax with respect to dividends distributed by a Dutch resident entity in which it holds a substantial shareholding, i.e., a shareholding of at least five percent, if a subjective and an objective test are met. In general terms, a look-through approach is applied for the purposes of the subjective test.

Pursuant to this approach, the subjective test is met if the recipient of the dividend holds the shares in the Dutch resident entity paying the dividends for the principal purpose of avoiding Dutch (dividend or income) taxes due by another person (i.e., the shareholder of the recipient). This look-through approach, interestingly, does not seem to take into account the situation where dividends would be avoided for a person other than the shareholder or the recipient. As such, if shares are held for the principal purpose of avoiding Dutch (dividend or income) taxes due by a person that is not the shareholder, for example in connection with dividend stripping transactions with third parties, the subjective test would not seem to be met if one were to follow the look-through. In our view, it is highly debatable whether such a strict application of the look-through approach was envisaged by the Dutch legislature.

The objective test is met if there is an artificial structure or transaction in place which does not reflect the economic reality. With respect to this objective test, it is presumed that it is not met if it can be demonstrated that the recipient meets certain minimum substance requirements. The main criteria are that at least fifty percent of the managing directors with decision-making powers reside or are established in the relevant state, the entity has qualified personnel and incurs salary costs of at least EUR 100,000 per year and has office space pursuant to a lease with a term of at least 24 months. This presumption may, however, be rebutted by the Dutch tax authorities if they can prove that there is, in fact, an artificial structure or transaction that does not reflect economic reality and is set up for the principal purpose of avoiding Dutch taxes due by another person.

Abuse of law doctrine

In addition to the GAAR of the DWTA, the application of the abuse of law doctrine may also be relevant in the context of exemptions from dividend withholding taxes, as well as within the context of claiming credits or requesting refunds. Pursuant to the abuse of law doctrine, a transaction constitutes an abuse of law if a subjective and an objective test are met.

In general terms, the subjective and objective tests for the purposes of the abuse of law doctrine seem stricter than the subjective and objective tests in the context of the GAAR in the DWTA. Regarding the subjective test (motiefvereiste), it must be assessed whether, for the taxpayer, achieving significant tax savings has been the only or at least the entirely predominant motive for the transaction. Additionally, for the objective test (normvereiste), it must be determined whether granting the tax benefit would be against the object and purpose of the relevant tax law. The object and purpose of the law can be inferred, inter alia, from the legislative history or the way it has been drafted. Artificial transactions with no commercial purpose (other than to generate a tax saving) are likely to be regarded as resulting in a conflict with the object and purpose of the relevant law.

In the event that both the subjective and objective tests of the abuse of law doctrine are met, the transaction can be disregarded or recharacterized for Dutch tax purposes.

Enforcement trends

Within the context of beneficial ownership and purpose tests in anti-abuse or anti-avoidance provisions, the following enforcement trends can be distinguished.

First, holding structures with indirect tainted shareholders are more actively being challenged by the Dutch tax authorities with a view to denying the Dutch dividend withholding tax exemption. In the context of such challenges, there are cases pending before the Dutch Supreme Court. We expect the Dutch Supreme Court to clarify the application of the objective test in the context of the anti-abuse or anti-avoidance provision in DWTA in these cases within a year.

Second, dividend stripping transactions are actively being investigated by the Dutch Tax Authorities and Dutch Public Prosecution Office. In this context, it can, for example, be mentioned that the Dutch Public Prosecution Office has called on parties involved in dividend stripping to come forward in exchange for mitigation of sentences.

Third, the general abuse of law doctrine is being invoked by the Dutch tax authorities with mixed success in the context of the denial of the deduction of interest on shareholder loans, especially those granted by (entities of) private equity funds.