The Dutch government announced on 6 December 2019 that the substance requirements that currently apply to so-called service companies will be tightened as of 2021. Service companies are entities of which the activities predominantly consist of receiving and paying interest, royalties, rent or lease instalments from and to non-Dutch group entities. In case a service company claims or could have claimed the benefits of a double tax treaty, the EU Interest/Royalty Directive, or a domestic provision implementing this directive in relation to incoming interest, royalty, rent or lease payments and one or more of the substance requirements are not met, the Dutch tax authorities will exchange this information with the relevant source country. Please note that this could have adverse tax consequences in the source country (i.e., reduced withholding tax rates as provided for by the applicable arrangement may be denied).
Qualification as a service company
A Dutch tax resident entity is considered to be a service company if the activities predominantly (more than 70%), consist of directly or indirectly, receiving and paying interest, royalties, rent or leasing instalments from and to non-Dutch tax resident group entities.
In case a service company claims or could have claimed the benefits of a double tax treaty, the EU Interest /Royalty Directive, or a domestic provision implementing this directive in relation to incoming interest, royalty, rent or lease payments in a specific financial year, such service company has the obligation to inform the Dutch tax authorities whether the substance requirements have been continuously met during this financial year (usually by ticking a box in the annual Dutch corporate income tax return).
Substance requirements
From financial year 2021, the following two requirements will be added to the existing list of substance requirements:
- The service company carries a minimum amount of EUR 100,000 of wage expenses; and
- The service company has an office space at its disposal for a period of at least 24 months.
We refer to annex I for the full list of the substance requirements.
Non-compliance
In case the service company does not meet one or more of the substance requirements, it has to disclose this information in its Dutch corporate income tax return.
This information consists of an explanation which of the substance requirements are not met, information based on which it can be determined whether the other substance requirements are met and an overview of the incoming interest, royalty, rent or lease payments. This information will subsequently be exchanged by the Dutch tax authorities with the relevant foreign authorities.
Failure to comply with any of these information requirements intentionally or as result of gross negligence is an offence, which may result in a penalty being imposed amounting to maximum EUR 20,750 (applicable in 2020).
Consequences in the source country
The source country could use the information received from the Dutch tax authorities to deny the application of the benefits of the relevant double tax treaty, the EU Interest /Royalty Directive, or a domestic provision implementing this directive. As a result, the lower withholding tax rates as provided by these arrangements in relation to interest, royalty, rent or lease payments may be denied.
Please note that service companies established in the Netherlands that do not meet the substance requirements will most likely still be able to obtain a residency certificate from the Dutch tax authorities. However, this certificate may not be sufficient to claim the reduced withholding tax rate as provided for by the relevant double tax treaty, the EU Interest/Royalty Directive, or a domestic provision implementing this directive.
The source state will determine (possibly based on the information exchange from the Dutch tax authorities) whether it will allow or deny the benefits of the double tax treaty.
Way forward
Service companies that are seeking to claim the benefits of a double tax treaty or the EU Interest/Royalty Directive should analyze whether they are meeting the additional substance requirements that will apply as of 2021.
Please let us, Jacob Mook or Jurgen van Hattum, know if you need our assistance to perform the above-mentioned analysis or if you have any questions regarding the new regulations.
Annex I
As of 2021, the substance requirements applicable to a service company that claims or could have claimed the benefits of a double tax treaty, the EU interest /royalty Directive, or a domestic provision implementing the Directive in relation to incoming interest, royalty, rent or lease payments will be as follows:
- At least 50% of the members of the board of directors with decision taking powers must be resident of the Netherlands.
- The board members must be sufficiently competent and qualified to perform their tasks.
- The (most important) board decisions must be taken in the Netherlands.
- The company should have qualified staff (own or outsourced) at its disposal, attending to an adequate processing and registration of the transactions the company will perform.
- The (main) bank account of the Dutch company is in the Netherlands.
- The bookkeeping of the Dutch company must take place in the Netherlands.
- The service company has at least EUR 100,000 wage expenses.
- The service company has an office space at its disposal for a period of at least 24 months.
- The company should incur sufficient risk with respect to the financing/licensing/renting/leasing activities as further defined in Dutch tax law (i.e., at least 1% of the outstanding loan or EUR 2 million for financing activities).
- The Dutch company must have a level of equity which fits with its functions.
