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Commission Requests The Netherlands to Change Discriminatory Tax Laws
On 30 September 2010, the European Commission (EC) decided to send four separate requests to the Netherlands, to change certain Dutch discriminatory tax rules. One of the requests concerns the so-called taxation of substantial interests. Under this regime, a tax is levied on income (i.e. dividends and capital gains) from substantial interests (i.e. interests of at least 5% in Dutch companies), not forming part of the business capital of non-Dutch residents, whereas income from substantial interests held by domestic companies is exempt, regardless of whether it forms part of their business capital. This difference between Dutch residents and other EU (and EEA/EFTA) residents is in breach of the EU freedoms, as well as the Parent / Subsidiary Directive - so states the EC. Taxand Netherlands reviews the impact of the procedures according to Dutch tax law and views of the EC.
Current Dutch tax law
Under Dutch tax law, foreign parent companies are taxable on their substantial interests in Dutch companies, in so far as these substantial interests do not form part of their "business capital". For Dutch domestic parent companies, income from a substantial interest in a Dutch company is always exempt, as there is no "business capital" test for Dutch resident parents. Under Dutch law, all assets of Dutch resident companies are already deemed part of their business capital.
View of the EC
The EC considers this difference in treatment of a discrimination and a breach of the EU freedoms (Article 63 Treaty on the Functioning of the EU (TFEU), and in case of controlling participations of article 49 TFEU). Moreover, the current Dutch legislation is incompatible with the Parent-Subsidiary Directive (90/435/EEC), since this Directive does not provide for a "business capital" test.
The Dutch State Secretary of Finance has informed the Dutch Parliament that the substantial interest taxation rules will not be applied in the cases where the Parent-Subsidiary Directive applies (except in cases of abuse or fraud). Yet, in the EC's view, such a statement to Parliament without changing the law is not sufficient, to implement a Directive. The EC has therefore issued a "reasoned opinion" (the second step of the infringement procedure). If the Netherlands does not provide a satisfactory reaction to the reasoned opinion within two months, the EC may decide to refer the matter to the Court of Justice of the European Union.
In practice, due to the statement of the Dutch State Secretary of Finance, substantial interest taxation of EU companies only occurred in very limited and specific cases. We do however note that the statement of the State Secretary only mentioned dividends and not capital gains. Furthermore, the impact of substantial interest taxation is in practice often mitigated by double taxation treaties. Hence, in practice, we do not expect that any potential changes in the law will have a significant impact on EU companies, holding a substantial interest in Dutch companies.
Nevertheless, substantial interest taxation can apply in (passive) investment structures. Potential changes of the regime will become particularly relevant for non-EU (non-treaty protected) country investors, having a substantial interest in Dutch investment vehicles. We will however have to wait and see how the Netherlands will respond to the reasoned opinion, in order to determine what the practical impact of these procedures will eventually be.
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