Dutch committee presents report on conduit companies and associated tax policy options

By Jian-Cheng Ku, Gabriël van Gelder and Rhys Bane, DLA Piper Nederland N.V.

On 22 November, a committee formed by the Dutch government presented its findings on the presence of conduit companies in the Netherlands and what tax and non-tax measures should be taken against such companies.

The committee was formed earlier this year following a call by several members of parliament to investigate the presence of conduit companies in the Netherlands, due to media attention relating to so-called “letterbox companies”. The committee consists of (former) civil servants and academics.

The committee report presents policy options the Dutch government may want to pursue. Given the large amount of anti-abuse rules introduced in Dutch tax law in recent years, the report only contains one policy recommendation for Dutch domestic tax law. The other recommendations relate to European and international tax law and, in particular, to financial reporting standards.

Domestic tax measures

The only domestic tax measure recommended by the committee is the abolishment of the safe harbor rule for so-called “financial services entities”. Financial services entities are companies that facilitate intercompany financing and licensing activities. For these activities, a company must have sufficient equity, an open norm. However, a safe harbor is available if EUR 2 million (USD 2.27 million) in equity has been contributed. The committee recommends abolishing this safe harbor.

Given earlier measures, such as the introduction of the principal purpose test in the Multilateral Instrument and the renewed Dutch ruling policy, under which it is, in practice, not possible to obtain a ruling solely on intercompany financing and licensing activities given the lack of substance in the Netherlands, the number of financial services entities has significantly decreased (to obtain a ruling, a taxpayer must have “economic nexus” in the Netherlands).

If the government were to follow this policy recommendation, the impact should therefore be limited to the few financial services entities that currently still operate in the Netherlands.

International and European tax measures

Recommendations for international tax measures in the report include unilateral measures relating to exchange of information, bilateral measures relating to tax treaties, and multilateral measures at the EU level.

The report contains two recommendations on the exchange of taxpayer information. The committee first recommends that the government expand the spontaneous exchange of information to financial services entities that do not meet the open norm of having sufficient equity and, potentially, to other financial services entities (it is unclear based on what criteria).

The committee also recommends spontaneously exchanging information to source countries where capital gains from the disposal of shares are exempt under the Dutch participation exemption. This would allow the source country to assess whether it believes the capital gains article should grant the taxing right to the Netherlands or whether the principal purpose test may be invoked by that source country.

The committee further recommends that the Dutch government include the principal purpose test of the Multilateral Instrument and the 2017 OECD Model Tax Convention in its new and existing tax treaties. This is already the tax treaty negotiation position taken by the Dutch government and this recommendation should therefore not change anything.

The committee recommends the Dutch government have a “proactive stance” in relation to the proposal for an EU directive against shell companies. The committee seems to take the position that multilateral measures are better than unilateral measures in this regard. This is something that tax practitioners have also argued in recent years, as unilateral rules significantly increase complexity and tax compliance burdens.               

The committee finally recommends that the Dutch government argue within the EU for clear scoping of the EU anti-abuse doctrine. The committee refers to the Danish cases in this regard for the purposes of amending the EU Interest and Royalty Directive and the EU Parent-Subsidiary Directive.

Domestic financial reporting measures

Most recommendations put forward by the committee are non-tax recommendations. The committee puts forward three recommendations on the publication of ultimate beneficial owner information. First, the committee recommends making stricter the rules on including upper management as functional ultimate beneficial owner in a case where there is no actual ultimate beneficial owner. Second, the committee recommends making the existing ultimate beneficial owner information more searchable. Third, the committee recommends that the Dutch government take the position that ultimate beneficial owner information should be available throughout the world (and not only within the EU).

The committee also has two recommendations for the financial reporting rules. First, the committee recommends abolishing the so-called “403-declaration”, under which subsidiaries of a group of companies may be exempt from preparing financial statements (if included in the parent company’s financial statements). Second, the committee recommends adding together the activities of different companies in the Netherlands to determine the size of the company. The size of the company impacts the financial reporting standards that apply to a company.

Other measures

The report contains several recommendations aimed at criminal activity facilitated with conduit companies. The recommendation includes cracking down on illegal corporate service providers, a further investigation into money laundering and the use of conduit companies, and international cooperation in combating criminal use of conduit companies.

The final recommendation of the report is to deny access to bilateral investment treaties for conduit companies. Under most modern bilateral investment treaties, conduit companies would already be excluded from protection. However, the committee recommends renegotiating bilateral investment treaties that are still accessible to conduit companies.

Our observations

The government has taken note of the committee’s report. However, the current government will not put forward any proposals, as it has indicated that this is up to the next government. We expect the next government to be formed within a month or two and that at least some of the recommendations put forward by the committee will be put forward as a legislative proposal by the new government in the course of 2022.