Based on Supreme Tax Court case law which dates back to 1976, Dutch tax payers can sometimes claim a tax deduction for certain expenses which they have not actually incurred. If a Dutch tax payer realises business profits which arise from transactions with group companies, these profits are only taxable in the Netherlands if the transactions were genuine business transactions, against third party prices. If not, the profit, even if it is reported in the tax payer’s GAAP accounts and statutory accounts, may remain untaxed! The Supreme Court case referred to above, dealt with an interest free loan. The Supreme Tax Court decided that the loan being interest free was caused by the fact that the lender was in fact acting as shareholder, not as a bank or vendor. The unpaid interest was therefore tax deductible in the Netherlands for corporate income tax purposes and, since it was unpaid, should be booked as an informal capital contribution from the shareholder (”share premium”).
This case law has never been repealed or amended by the Supreme Court since 1976 and it is clear from later cases that the view of our supreme judges has not changed. As a result, so-called ”informal capítal rulings” can sometimes be obtained from the Dutch Revenue Service which will confim these Dutch tax benefits. This already powerful tax planning feature could gain additional momentum when it is combined with the possibility to create hybrid partnerships in the Netherlands. Such hybrid partnerships can themselves also be the subject of an advance tax ruling. Both Dutch tax features can save mnc’s millions of corporate income tax. So they are in high demand. But one must know the way and speak the language to get them.
We can assist clients in applying for such an advance tax ruling in the informal capital or hybrid partnership area. Careful designing and planning are essential to utilise these remarkable Dutch tax features to their maximum extent. The BEPS programme initiated by the OECD in 2013 (first published in some detail in July 2014) will most certainly have an impact on the willingness of the Dutch Ministry of Finance to have the Dutch revenue service (the ATR or APA teams in the Rotterdam inspectorate) issue new ”informal capital” rulings. ”Substance” in the form of regular employees (FTE’s), which must have the technical and managerial skills to operate the Dutch legal entity under consideration, will likely become the decisive factor.