In March 2001, the Dutch Ministry of Finance issued ”substance” rules for Dutch interest and royalty conduit entities. To our surprise, these new rules did not affect our proprietary royalty conduit solutions -discussed elsewhere on this website- as the then new rules were confined to Dutch conduit entities who enter into transactions with ‘related’ companies.

In the Publications section of this website, you may find a hyperlink to several articles we have published on the new Dutch ‘substance’ and ‘beneficial ownership’ rules which came into force per 31/03/2001 (with a transition rule for then-existing structures to 31/12/2005). In practice therefore, the new rules applied as from 1/1/2006.

Many tax payers still want to run their own Dutch royalty conduit company and do not (yet) opt for our concept of third party owned royalty flowthrough entities. Since we are very experienced in this area we can assist companies who want to set up their own Dutch conduit entity to comply with the new rules; this would typically be done against an hourly fee charge. As a rule, we recommend clients to let us request an advance tax ruling for their Dutch entity which confirms that in the view of the Dutch tax authorities, the Dutch entity is regarded as the beneficial owner of the royalties which it receives. One cannot take any risks in this area in our opinion, since the Dutch tax authorities, if they should conclude that the Dutch conduit entity does not meet the new ‘substance’ and therefore the new ‘beneficial ownership’ rules, may inform the foreign tax authorities in the country where the royalty payments originate. This would be a horror scenario: the foreign tax authorities will, with restrospective effect, assess the royalty payor(s) for the non-withheld royalty tax, plus fines, plus interest. And there may be other very adverse (penal) consequences on top of the financial ones.

Under pressure from the recent flow of publications by investigative journalists in the ways which large multinationals use to reduce their worldwide tax bill very considerably (Apple, Yahoo, Google, Starbucks, to name just a few) the Dutch Ministry of Finance has instructed the Dutch revenue service to investigate Dutch conduit companies that are subject to the substance rules of article 8c of the Dutch CIT Act more often and more deeply and to indeed start sending out notifications to foreign tax authorities in case a conduit entity does not meet the Dutch substance rules. ”Substance” has therefore to a large extent taken the place of ”beneficial ownership” in tax investigations.

It should be noted that the conduit solutions we advise are not subject to art. 8c CITA. This feature is becoming more and more important when setting up a Dutch conduit structure.

The BEPS programme of the OECD will mean another severe setback for traditional Dutch royalty conduit structures (where the client owns the Dutch entity): the BEPS report proposes to introduce a general Limitation on Benefits article (LOB article) in the bilateral tax treaties between participating countries (i.e. in several thousands of tax treaties!) which will deny treaty benefits such as the reduction of royalty withholding taxes if royalties are paid to a legal entity in a treaty country, if that legal entity is owned by persons (natural persons or legal entities) not resident in that treaty country or, even if this residency test is obeyed, in case the receiving entity pays more than 50% of its income out as tax-deductible expenses to persons not resident in the treaty country. BEPS will therefore make it very difficult to benefit from the usual SPV entities that businesses have been using for decades to legally avoid the high withholding taxes on their royalty income. For international taxation purposes the notion ”royalties” includes not only licensing income, but also income from renting out or operationally leasing equipment (boat charters; airplane leases), technical service fees, in many countries also consultancy fees, management fees and a host of other cross-border payments).

Our recommendation is first to consider using an unrelated Dutch BV, owned by Dutch residents, as a royalty conduit vehicle or if this is no option, to make sure that the conduit company which the client wants to own himself, meets the substance and beneficial ownership rules and secures this via an Advance Tax Ruling (ATR), with which we will gladly assist.

It should be noted in this regard that the ATR team requires a transfer pricing benchmark study before they will agree to any advance ruling for a conduit entity that deals with related parties, to ensure that the margins which the Dutch entity will earn are ‘at arm’s length’, in the light of the agreements which it closes with the payor(s) of the royalties and the party to which it pays them onwards. We can also assist in preparing this benchmark study, based on experience with several similar client situations of the past.

We are very closely monitoring the progress of the BEPS discussion to determine if the OECD’s attack on royalty conduits, worldwide, might still leave options to set up tax effective royalty conduits, in the Netherlands or elsewhere. Any tax payer who would be interested in the developments of our research can e-mail us at for further information.