How to meet (Dutch) substance requirements during the COVID-19 pandemic?

Corona virus measures

Further to our Tax Alerts of 17 and 19 March 2020 concerning the Dutch tax measures to provide relief for the economic impact of the corona virus, this short read provides you with some preliminary guidance on how the non-tax related measures taken in the Netherlands may affect your Dutch structure.

In an attempt to stop the spread of the corona virus, multiple jurisdictions have been implementing travel restrictions and mandatory quarantines over the past weeks. The Netherlands has closed its borders for travellers coming from highly affected areas, many flights have been cancelled and all public gatherings and meetings have been forbidden until at least 1 June 2020. Meetings with more than three persons are strongly discouraged and in any event, 1.5 meter distance should be taken into account (in public and private situations), subject to penalties. 

Substance requirements

Under Dutch tax law, certain substance requirements may apply. In order to qualify as a Dutch resident company under an all facts and circumstances test (e.g. to be included in a fiscal unity in the Netherlands or to qualify as a tax treaty resident under the corporate tie-breaker and to be eligible for treaty benefits), a Dutch company should be effectively managed from the Netherlands. This generally means that important decisions should be prepared and made by management in the Netherlands during physical board meetings held in the Netherlands. In addition, certain Dutch (minimum) substance requirements apply to intra-group financing and licensing companies; if these requirements are not met, information is exchanged automatically with other jurisdictions. These minimum substance requirements require inter alia that at least 50% of the board members are Dutch tax residents and that important board decisions are made in the Netherlands during physical board meetings.

For non-Dutch intermediary companies that hold an interest in a Dutch company the following may apply. Assuming the non-Dutch intermediary shareholder relies on its linking function between the business of the Dutch company and its ultimate shareholders to be eligible for the application of the Dutch dividend withholding exemption or to prevent the application of the Dutch foreign substantial interest rules, the non-Dutch intermediary shareholder should have sufficient economic substance locally. Having sufficient economic substance locally means meeting the (Dutch) minimum substance requirements locally and in addition have local payroll expenses of at least EUR 100k and a local office at its disposal for at least two years (referred to as the ‘relevant’ substance requirements). We emphasize that as of 2020 - following EU case law - the substance requirements no longer function as a ‘safe harbour’, but are relevant in respect of the division of the burden of proof between the taxpayer and the Dutch tax authorities; meeting the substance requirements would lead to the presumption of ‘non-abuse’. However, the corona virus emergency and the corresponding travel restrictions would arguably dictate a pragmatic approach for the duration of the crisis. Such pragmatic approach may entail an alternative set up for physical board meetings – such pragmatism would arguably fit well with EU-law requirements, which would point at an all facts-and-circumstances test for establishing whether a structure is potentially abusive.

All ‘levels’ of substance requirements have in common that it is required that important board decisions are made in the jurisdiction of residence during physical board meetings.

Organizing and attending board meetings

The global corona virus measures may complicate organizing and attending physical board meetings in the Netherlands (or elsewhere, e.g. in case the shareholder is required to meet the Dutch substance requirements locally), especially for non-resident board members travelling from overseas. Not being able to hold physical meetings may violate the substance requirements. This could mean in a worst case scenario that for instance the company would no longer be considered a Dutch tax resident, that Dutch dividend withholding tax may apply and/or that certain information may be exchanged spontaneously with foreign tax authorities. The Dutch Association of Tax Advisors (NOB) has sent a letter to the Dutch Ministry of Finance suggesting that the Dutch tax authorities take a lenient approach towards meeting the substance requirements. On a similar note, an interest group for Dutch listed companies requested the Dutch government to adopt an emergency act to allow electronic general meetings for listed companies.

The Dutch government has not yet responded to these requests and no guidance has been published to date. However, if board meetings have been planned and if holding a physical board meeting in the Netherlands (or elsewhere in case the shareholder should meet the Dutch substance requirements) is currently not an option, there may be alternative ways to keep meeting the substance requirements. We are happy to discuss tailored, pragmatic solutions with you.