Dutch State Secretary Proposes Tougher ‘Letterbox’ Rules

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Linda A. Thompson

Nov. 7 — The Dutch state secretary of finance, Eric Wiebes, has presented three proposals to tighten the rules for so-called letterbox companies to prevent them from shifting profits through the Netherlands.

In a letter to the House of Representatives Nov. 4, Wiebes proposed three options for more stringent substance requirements, which companies based in the Netherlands currently have to meet under the country’s corporate taxation laws. .

Wiebes presented the tighter rules in response to an Oct. 11 motion from the House of Representatives calling for tighter restrictions in relation to the substance requirements.

He didn’t give any indication in his letter as to when or how his proposals might be transposed into law, which isn’t likely to occur before the March 2017 parliamentary elections.

Lawmakers have warned that thousands of letterbox companies—these have little or no real economic activity in the country—use their tax residency status to benefit from double-taxation agreements the Netherlands has concluded with their home countries.

Wiebes said the three proposals aim to make it easier for source countries not to award treaty benefits in “abuse situations.”

Information Exchange

The finance secretary suggested that Dutch tax authorities start exchanging information with other countries about resident holding companies that don’t meet the existing substance requirements. Currently, information is exchanged only in relation to service entities or financial service companies considered to hold insufficient substance.

The second proposal involves the substance requirements that companies must meet to obtain advance tax rulings from the Dutch tax authorities. Wiebes suggests these could be tightened by introducing a minimum amount in expenses as “an indicator for real presence in the Netherlands,” a minimum number of employees or increasing the current 15 percent minimum amount in own funds holding companies must have.

Finally, under the double taxation agreements the Netherlands has concluded with other countries, resident financial service companies that receive interest or royalties from abroad must have an amount in own funds that is appropriate to cover their risks—either 1 percent of their outstanding loans or 2 million euros ($2.2 million), whichever amount is lowest—to benefit from reduced withholding taxation in their source country.

Minimum Threshold

Wiebes proposed raising or completely abandoning the 2 million euro minimum threshold, which he said would make the Netherlands “less attractive” to companies shifting interest and royalties through the country.

To contact the reporter for this story: Linda A. Thompson in Brussels at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The state secretary’s letter is at: http://src.bna.com/jT7.

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax