NEW NETHERLANDS RULING PRACTICES

 

General

 

On 30 March 2001 the Dutch Ministry of Finance published the new Dutch ruling practice and transfer pricing policies. Effective from 1 April 2001 the “old” ruling practice has been modernized and converted into an Advanced Pricing Agreements (APA) / Advance Tax Ruling (ATR) practice. These changes have been introduced so as to ensure the Netherlands remains an attractive country for business activities and to bring the policies in line with OECD transfer pricing guidelines. A distinction will no longer be made between agreements on the entire profit and agreements on part of the profit. The APA/ATR team will handle all agreements and rulings will be published in anonymous or summary form, in order to meet the market demand for greater insight into the government policy on international agreements. This active publication policy will guarantee the transparency of the ATR/APA practice. The International Investors Desk (Aanspreekpunt Buitenlandse Investeerders, APBI) that informs international investors at short notice on the future tax status of a potential investment in the Netherlands will continue to play its role. Measures have been taken to improve the organization of the ruling practices and reduce the time required to issue a tax ruling to, in principle, a maximum of 8 weeks.

 

Advanced Pricing Agreements

 

An APA is in effect an agreement that approves in advance the determination of the arm’s length price or method of profit calculation with respect to cross border transactions between related (group) companies and cross border transactions between an entity and its foreign permanent establishment. Generally, the APA request must be filed with the APA/ATR-team in Rotterdam and the proposed length of the APA must be mentioned in the request.

 

Service companies, conduit companies that execute connected transactions; i.e. receive and pay interest or royalties within a group, need to meet certain requirements with respect to substance and risks in order to obtain certainty in advance.

 

The substance requirements are:

-         at least half of the managing directors are resident in the Netherlands;

-         the managing directors residing in the Netherlands have the professional skills required for the operation of the business. The board of managing directors has the power to enter into agreements, perform activities on behalf of the company and is responsible for the actions of the company, all within the normal framework. The company has qualified staff or has at its disposal hired staff from third parties, in order to execute and register the activities performed by the company;

-         the (important) management decisions must be taken in the Netherlands;

-         the (main) bank account must be kept in the Netherlands;

-         the bookkeeping must be done in the Netherlands;

-         the company must have met its fiscal obligations (e.g. filing tax returns and paying tax due);

-         the company is located in the Netherlands and must not be dual resident for tax purposes;

-         the capital (equity) of the company accurately reflects the activities performed by the company.

 

The company must take real commercial risks. These risks consist of bad debtor risks, currency exchange risks, market risks and operational risks. If the company only takes operational risks, this will not lead to “running actual risks”. The most important factor to determine if actually risks are run, is whether or not capital (equity) held against the assets of the company can be affected. Therefore it needs to be investigated whether or not the company runs the risks as described above and the company should have sufficient capital in order to bear the risks. Risks placed with a non-related third party company are considered to be actual risks of the service company. The service company that places the risks with a non-related company must be active and autonomous in its risk management.

 

A service company with finance activities is considered to run actual risks if its capital is either a minimum of 1% of the amount of the loan granted, or an amount of EUR 2 million.  If, therefore, a service company holds capital that equals the lowest amount of 1% of the loan or EUR 2 million with respect to the finance activities, the service company is considered to run actual risks, provided that it is proven that the capital will be affected if the actual risks occur.

 

If the company does not run actual risks and/or does not have substance, it is not possible to obtain certainty in advance and source country tax withheld on the interest and royalties cannot be credited against Dutch tax. Moreover the Dutch tax authorities may spontaneously inform the authorities in the source country (the country where the related company that pays interest or royalties to the Dutch service company is located), about the relevant transactions. However, if the company has substance in the Netherlands and does not run actual risks, but agrees in writing to the spontaneous exchange of information about the transactions certainty in advance may be provided. This also implies that the company agrees that the exemption clauses as mentioned in the Dutch International Assistance concerning Taxation Act do not apply and the company cannot appeal against the notification stating that the Dutch tax authorities are to inform the foreign authorities. The Dutch tax authorities will seek to grant APA’s on a bilateral basis in conformity with Article 25 of the OECD model tax treaty.

 

The published standard rulings, e.g. for finance, license and auxiliary activities will be replaced by internationally accepted and tailor-made APA’s.  Depending on the facts and circumstances the following information must be provided to the tax authorities:

-         information on the transactions, products and agreements;

-         information on the companies and permanent establishments involved;

-         details of countries involved;

-         information on the worldwide structure, history, financial data, products, functions and risks of the parties involved;

-         a description of the proposed transfer price method, including comparison analysis;

-         critical analysis of the economical and operational facts and circumstances that may affect the price, e.g. exchange rates, interest rates, tax rates, changes of laws;

-         a description of the market conditions.

 

The taxpayer in principle is free to choose the transfer pricing method, including the comparable-uncontrolled-price method, resale-price method, cost-plus method, profit-split method, and transactional-net margin method, provided that the method chosen will lead to an arm’s length price for the specific transaction for which certainty in advance is requested. Notwithstanding the above, it is still necessary for the taxpayer to justify its choice of transfer pricing method, and the tax authorities are free to challenge the method adopted in circumstances where it believes the method adopted will give rise to a distortion favourable to the taxpayer.

 

Transfer Pricing Rules

 

Transfer pricing rules have also been published, which may be considered as the first step to the codification of the arm’s length principle. These rules are conform with the OECD Transfer Pricing Guidelines and apply to all international transactions within a group. The Dutch taxpayer must prove that the transfer pricing method used is reasonable within its operational business, and furthermore it needs to be proven that reasonable margins are taken into account with respect to various products. The Dutch taxpayer needs to document the international transactions with:

-         functional analysis of the functions, assets and risks run;

-         an economical analysis of comparable transactions and comparable businesses;

-         a financial analysis.

 

There is software for support of the obligation of documentation available.

 

Advance Tax ruling

 

An ATR is an agreement on the Dutch tax classification of international structures in respect of the applicability of the participation exemption and the presence of a permanent establishment in advance. Furthermore, an ATR can be obtained with respect to certain international structures with hybrid finance activities or with hybrid entities.

 

The ruling needs to be applied for by the inspector competent for the taxpayer who has to submit the ruling request for approval to the APA/ATR-team of the tax inspectorate in Rotterdam in the following situations:

i)                    ruling requests for certainty in advance regarding the application of the participation exemption of sub-holding companies in international structures, and top holding companies holding foreign subsidiaries that do not have activities in the Netherlands;

ii)                   requests for certainty in advance concerning international structures with hybrid finance activities and/or hybrid entities;

iii)                 requests for certainty in advance whether or not a foreign company has a Dutch permanent establishment;

 

 

A detailed description of all relevant facts and names of entities, beneficial owners and countries involved need to be presented. It should be noted that if the ruling request regards the participation exemption, the taxpayer must state that the subsidiaries will be financed by at least 15% capital. The Dutch taxpayer must confirm that the information mentioned in the ruling is not exempted from the exchange of information clauses under the Dutch International Assistance concerning Taxation Act.  If the tax authorities agree with the arrangement the ruling will generally be granted for a period of 4 years. Upon the expiration of the 4-year period the parties may discuss whether or not it is feasible to extend the ruling. 

 

No certainty in advance will be provided in respect of certain tax structures the use of which cannot be justified. An example of this is if interest is received on a loan granted by a Dutch company to a foreign related group company and on the basis of Dutch case law the “interest” is sheltered under the Dutch participation exemption. This may be possible if the loan is granted to a related group company by the Dutch company. In this instance, from a Dutch tax point of view it will be considered as capital because the interest is profit dependent, the loan is subordinated and there is no fixed term. Other examples are the “BV1/BV2” structures; hybrid finance structures.

 

There are no changes with respect to holding ruling policy.

 

APBI

 

Foreign investors considering investing in the Netherlands can contact the APBI with respect to certainty in advance regarding their investments provided the investment exceeds EUR 4 million.

 

Bona fides (good faith)

 

No certainty in advance will be provided if this would violate the good faith granted under a double tax treaty. For example, if it is known by the Dutch tax authorities that the facts are presented differently in the source country or if the Dutch authorities would not agree with the set up if only the Netherlands is involved, then no certainty in advance will be provided for. In this connection the Dutch service company may be requested to prove that the tax treaty countries involved in the arrangement are familiar with the structure and the connected transactions so as to obtain certainty in advance.

 

Current rulings

 

Rulings currently in force, that is those in accordance with the ruling practice as at 31 March 2001 which have a termination date prior to 31 December 2005, will run until 31 December 2005, unless the tax payer wishes to apply the earlier termination date. Where taxpayers have not applied for a ruling, but file tax returns according to published ruling practice, they will be able to continue in this manner until 31 December 2005, provided they have qualifying activities at 31 March 2001.

 

Summary

 

The new APA/ATR regime is more in line with the OECD transfer price guidelines and offers taxpayers possibilities to obtain tailor-made solutions.

 

 

Please contact Christian M. Strik or Herko Koekkoek on +31 20 6625501 or email cmstrik@strik-law.nl or hjkoekkoek@strik-law.nl if you have any questions.