Netherlands draft law requires disclosure of cross-border transactions to tax authorities

By Jian-Cheng Ku & Rhys Bane, DLA Piper Nederland N.V.

On July 12 the Netherlands government published a legislative proposal implementing the EU mandatory disclosure directive. This follows an internet consultation on a draft legislative proposal which ran from December 19, 2018 — February 1, 2019.

Netherlands mandatory disclosure

The legislative proposal is the Netherlands implementation of an EU directive that requires all EU member states to implement mandatory disclosure rules. Under these rules, intermediaries and, in some cases, taxpayers, must report cross-border arrangements that meet certain hallmarks to the tax authorities.

The definition of intermediaries is very broad. An intermediary is defined as any person that designs, markets, organizes, or makes available for implementation or manages the implementation of a reportable cross-border arrangement.

The legislation fully enters into force on July 1, 2020, but applies to any and all reportable cross-border arrangements implemented between June 25, 2018, and June 30, 2020. The deadline for reporting is August 31, 2020.

Reportable cross-border arrangements

 Cross-border arrangements with certain “hallmarks” are reportable if the main benefit or one of the main benefits is the obtaining of a tax advantage.

These include arrangements where taxpayer must comply with confidentiality obligations on how the tax benefit is obtained; where intermediary’s fee is dependent on the tax advantage; where the arrangements is based on standardized documentation without a need to be substantially customized for implementation; where a participant of an arrangement acquires a loss-making company to use the tax losses; arrangements that have the effect of converting income into income taxed at a lower rate or that is exempt; and arrangements that include circular transactions of funds, where the entities are without commercial function.

Other cross-border arrangements are reportable in all instances.

These include arrangements that involve deductible cross-border payments between associated enterprises where certain specific conditions are met; where deductions for the same depreciation on the asset is claimed in more than one jurisdiction; where relief from double taxation is claimed for the same item of income in more than one jurisdiction; arrangements that include transfers of assets where there is a material difference in the amount being treated as payable in consideration for the assets in those jurisdictions involved; arrangements where the reporting obligation under certain laws is frustrated; arrangements where the ultimate beneficial owners are unidentifiable; arrangements that use unilateral transfer pricing safe harbors; arrangements involving transfer of hard-to-value intangibles; and  arrangements involving intragroup cross-border transfer of functions, risks, or assets, if the projected EBIT will shrink by at least 50% within 3 years.

The information obtained by the Dutch tax authorities is automatically exchanged with other EU member states.

Due to the wide scope of the definition of ‘intermediary’, the large number of ‘hallmarks’ and the difficulty of applying the ‘main benefit test’ for hallmarks, there is still a lot of uncertainty on what and when cross-border arrangements must be reported by intermediaries who do not directly advise clients on their structures, such as banks and trust offices.

The expectation is that more guidance will be provided in the course of the parliamentary proceedings.