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Nov. 16 — Dutch lawmakers are ramping up the pressure on the state secretary of finance for more stringent rules to prevent “letterbox” or shell companies from shifting profits through the Netherlands.
Lawmakers from the Labour Party (PvdA) and the Dutch Greens (GroenLinks), in a motion to the Dutch House of Representatives, called on State Secretary of Finance Eric Wiebes to present a proposal by Feb. 1, 2017, that would strengthen existing substance requirements for companies based in the Netherlands under the country’s corporate taxation laws.
The changes would require companies to have a minimum number of their own employees, as well as meet a higher threshold for profits, to qualify as tax residents for corporate tax income purposes. They also would call for a quicker exchange of information with foreign tax authorities when resident holding companies don’t meet the existing substance requirements.
The motion was submitted Nov. 16 during a parliamentary discussion on the 2017 budget and is likely to muster enough votes during the scheduled vote Nov. 17, lawmakers told Bloomberg BNA.
Ed Groot of the Labour Party and Rik Grashoff of the Dutch Greens had submitted an Oct. 11 motion calling on the state secretary to present “options” for more stringent substance criteria, and the speed at which the parliament backed that motion and the state secretary subsequently set out his views surprised even the lawmakers themselves.
“There apparently appears to be substantial political support to work on these substance criteria for the letterbox companies,” Grashoff told Bloomberg BNA Nov. 16. “Let’s say that we currently appear to be getting further than we ourselves initially thought we would.”
Grashoff, emphasizing that he submitted the motion along with a member of the ruling coalition, said he “can’t say with certainty that the motion will pass, but I think the likelihood is very real it will.”
The motion, if passed, would require Wiebes to develop a proposal that would place into law the tighter substance requirements he outlined in a Nov. 4 letter. The motion calls on the state secretary to prioritize a payroll requirement that would penalize companies that don’t have sufficient wage costs to be able to develop “real activities.”
The motion also would force Wiebes to develop a legal proposal scrapping Article 8c from the 1969 Dutch Corporate Income Tax Act. Under the Netherlands’ double taxation agreements with other countries, resident financial service companies that receive interest or royalties from abroad must have an amount in their own funds that sufficiently covers their risks—either 1 percent of their outstanding loans or 2 million euros ($2.1 million), whichever is lower—to benefit from reduced withholding taxation in the source country. Scrapping Article 8c would remove the 2 million euro minimum threshold and make 1 percent the rule.
If the motion passes, more stringent rules could be put in place in as little as two months, as not all of the proposed changes would require actual legislative adjustments.
Faster exchange of information on holding companies that don’t meet the substance requirements could, for instance, be mandated through a simple executive decision from Wiebes, Grashoff noted. He admitted that scrapping Article 8c would call for changes to existing laws—but even such a legislative adjustment, which requires approval from both the Senate and the House of Representatives as well as an opinion from the Council of State, could be implemented within six months if there is sufficient “political willingness,” Grashoff said.
The Netherlands is holding general elections in March 2017. Any pending legislation could be declared “controversial” by the Senate after the cabinet has resigned, with the legislative process halted until a new government has been formed. Legislative proposals can be declared controversial when they can be reasonably expected to produce a different outcome when treated by a different cabinet.
A 2013 study by the research firm SEO Economisch Onderzoek estimated that letterbox companies shifted approximately 4 trillion euros ($4.28 trillion) in profits through the Netherlands in 2011.
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