Substance requirements in the Netherlands – beware of missing out!

| NL Law

| Reading time: 3 minutes
Substance requirements

Dutch Substance requirements are increasingly important to consider when doing business in the Netherlands. Failing to meet these requirements could mean missing out on valuable Dutch tax benefits and facing potential fines. Let us guide you through the steps to ensure compliance and the nuances of Dutch substance requirements.

Understanding Substance Requirements – An Introduction

While substance requirements aren’t explicitly outlined in legal texts, their significance in politics and policy memos cannot be overstated. Substance requirements are requirements that have to be met to be able to use Dutch tax benefits. These requirements exist for tax purposes. They play a key role in attributing functions to entities and subsequently in attributing profits to entities. Substance requirements can be used to determine tax residency or identify the beneficial owner. They can also be used for transfer pricing purposes.

Goal of the substance requirements

Ever since the OECD came out with the BEPS action plan, tax avoidance and tax evasion are in the crosshairs of governments all around the world.  Substance requirements are especially critical when incorporating an entity in the Netherlands, particularly one providing financial services. The Dutch Tax Authorities (belastingdienst) leverage these requirements to assess tax rulings and establish a framework for anti-avoidance provisions. Fulfilling substance requirements signals that the structure isn’t primarily for tax avoidance, potentially leading to awarded fiscal benefits.

Decoding substance requirements – what are they?

In the Netherlands, the following substance requirements serce as criteria to determine whether an entity has sufficient functions. They are not legally binding requirements.

1. Statutory board

  • At least half of the statutory board members with decision-making powers must reside in the Netherlands.Members of the supervisory board are not taken into account.
  • Dutch resident board members must have equal decision-making powers to non-resident members.
  • These members should possess sufficient knowledge and capacity to make decisions on transactions and manage their completion.
  • At least half of the statutory board members with decision-making powers must reside in the Netherlands.
  • These Dutch resident board members
    • must at least have equal decision-making powers to the non-resident board members;
    • have sufficient knowledge and capacity to perform their tasks, which at least includes making decisions on transactions and managing the completion of transactions carried out by the entity.

2. Qualified staff

  • The entity has qualified staff to manage and register the transactions in the Netherlands.
    • This qualified staff may be hired, for example, from a trust company.

3. Management decisions

  • The management of the entity is required to make decisions physically in the Netherlands during board meetings.
  • Key management and commercial decisions vital for the entity’s business should be substantively made during these board meetings.
  • Board meetings must not merely serve as a formality for approving decisions made outside the Netherlands.
  • Board meetings are not permitted to take place in another jurisdiction or be conducted electronically outside the Netherlands, whether through Skype, video conferencing, or phone calls.
  • Board meetings should not be mere rubber-stamping of decisions made outside the Netherlands

4. Bank accounts

  • The most important bank accounts must be held in the Netherlands, granting decision-making power to the entity.
  • The entity must have the entitlement to these account, which account may be with a non-resident bank.

5. Bookkeeping

  • The bookkeeping of the entity should be done and kept in the Netherlands.

6. Office space

  • The entity should have an office space in the Netherlands, properly equipped  and used for at least 24 months.
  • The entity has appropriate equity with regard to the risks run relating to its activities.

7. Salary

  • The entity must incur salary expenses of at least € 100,000.00 annually.
  • These expenses are for its activities related to its stake in the Dutch entity,
  • This amount needs to be multiplied by the country of residence factor of the other entity involved.

Wrapping up about substance requirements

In conclusion, understanding and adhering to Dutch substance requirements are paramount for businesses operating in the Netherlands. Compliance with these criteria is not just about accessing valuable tax benefits but also prevents potential fines. Delving into the intricacies, we highlighted the essential criteria, emphasizing the significant role of Dutch resident board members and their decision-making powers.

Understanding these requirements can be quite confusing. Especially since these are not hard requirements, but rather criteria to test whether an entity should have access to various fiscal benefits. LexQuire’s specialists are ready to assist, ensuring you comprehend how substance requirements impact your business. Contact us for personalized guidance, and let’s secure your path to optimal tax benefits together.

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