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Substance requirements for Dutch cash pool vehicles
It is for various reasons that the Netherlands is a popular jurisdiction for multinationals to set up the group’s cash pool leader. Firstly, the company can benefit from the financial infrastructure in the Netherlands, a stable legal system and the availability of qualified staff. Besides that, Dutch cash pools have the benefit of the acceptance of the EURO in the Netherlands and furthermore have access to the EU Directives, such as the Interest and Royalty Directive.
One of the main tax benefits is that the Dutch cash pool leader can rely on the extensive treaty network of the Netherlands and the EU Interest and Royalty Directive and can therefore be entitled to either a reduction / exemption of foreign withholding tax on interest payments or a credit of the foreign withholding tax against the Dutch corporate tax due.
Although cash pool vehicles will already have a certain presence in the Netherlands, depending on the type of cash pool, the Dutch vehicle can also become subject to specific minimum substance requirements and exchange of information by the Dutch tax authorities. In this alert we will provide more details on the Dutch minimum substance requirements and the consequences should these requirements not be met.
Qualification of Dutch cash pool vehicles
Under Dutch tax law, specific rules apply to so called financial service companies (“FSC”). An FSC is a Dutch corporate tax resident of which the activities in a calendar year consist for 70% or more out of intra group financing, licensing or leasing activities towards non-Dutch group companies.
It is explained by the Dutch Ministry of Finance that Dutch cash pool leaders can under circumstances qualify as an FSC. Although every cash pool should be analysed based on its specific terms and conditions, an important indication will be whether it concerns a notional cash pool and the cash pool leader solely performs activities of an administrative nature (likely not an FSC) or whether it concerns a zero balance cash pool, whereby the Dutch company is in fact involved in intragroup back-to-back financing (in such a case, the company is likely to qualify as an FSC).
Minimum Dutch substance requirements for FSC
Specific minimum substance requirements apply to companies that qualify as an FSC. These requirements are summarised below and relate inter alia to the composition of the statutory board of directors and the minimum equity that the company should have at risk.
- At least 50% of the statutory and decision making board members are tax resident of the Netherlands
- The Dutch tax resident board members have sufficient professional capabilities to fulfil their tasks, taking into account the specific nature of the financial transactions of the cash pool
- The company has employees that are qualified and capable to adequately process the transactions of the cash pool
- The board decisions are taken in the Netherlands. This means that the main board decisions are prepared and physically held in the Netherlands. Due to the good infrastructure (e.g. airports) this is easily facilitated for foreign board members
- The company’s principal bank account are managed by the board member residing in the Netherlands
- The company’s administration and bookkeeping is performed in the Netherlands
- The company’s registered address is in the Netherlands
- To its best knowledge, the company is not also considered a tax resident in any other country than the Netherlands
- The company runs a genuine risk with regard to the intra group financing activities
- Taking into account the risk that the company is subject to, it has a sufficient level of equity
Consequences in case of a lack of substance
Dutch cash pool leaders that do not meet the minimum substance requirements may face adverse tax consequences, which we will describe below.
1.Penalty regime and Exchange of information
An FSC that may be entitled to treaty benefits or the benefits of the EU Royalty and Interest Directive, should report in its annual corporate tax return whether, throughout the fiscal year, it has met all the substance requirements. This reporting obligation applies as of the 2014 corporate tax return.
The company should report additional information in the tax return so that further review by the Dutch tax authorities can take place, if the requirements are not all met. This additional information includes at least a description of which requirements are and which are not met, together with an overview of the group companies of which it has received interest/royalty or lease payments (name, registered address and amounts involved).
This reporting requirement is subject to a penalty regime in case of infringement. If the additional information has not, not timely or incorrectly been submitted to the Dutch tax authorities, and this is the result of intent or gross negligence, a penalty of EUR 20,500 can be imposed.
In case the minimum substance requirements are not met, exchange of information may take place by the Dutch tax authorities towards jurisdictions that may have an interest in that information. It was recently published by the Dutch Ministry of Finance that exchange of information has already taken place in a number of cases.
2.Request for APA can be denied
Dutch cash pool leaders can in principle request an Advance Pricing Agreement from the Dutch tax authorities, confirming that the reported profit and transfer pricing applied meets the arm’s length principle. Such a request will however not be granted if the company does not meet the substance requirements.
In this regard it is important to note that should the cash pool leader itself have sufficient substance and be entitled to conclude an APA with the Dutch tax authorities, the content of that APA can also be subject to exchange of information if no other operational activities are conducted in the Netherlands by the cash pool or its group companies. To date, no exchange of information has however taken place on those grounds.
3.Credit of foreign withholding tax will be denied
In case the FSC does not meet the requirement as depicted under (i) and consequently does not run a genuine risk with regard to its activities, the company is regarded as a mere intermediate flow through vehicle. As a result, the interest received is eliminated from the Dutch tax base and the credit of foreign withholding tax will be denied. The company should still report however an at arm’s length taxable remuneration for it services (a handling fee).
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