The political and international attention towards the Dutch so-called flow-through landscape increased in recent years. With the recent introduction of a research commission, the Dutch Government started a new investigation into intermediary financing “flow-through” companies. It is expected that these developments will put further pressure on existing flow-through structures. Today, it is fair to question whether a Dutch flow-through structure can still be considered as sustainable. If you have a flow-through structure in place, we believe it would be worthwhile to assess your current structure and look into alternatives.
On 12 February 2021, the Dutch Government announced the establishment of a new research commission on flow-through companies. Flow-through companies are entities or permanent establishments which main activities consist of intermediary financing activities, such as receiving and paying interest, royalties, rent or leasing installments from and to non-Dutch group companies. The commission’s main task is to investigate the amount of taxes paid by these Dutch flow-through companies and how the tax payments relate to the contribution of these flow-through companies to the economy.
From a transfer pricing point of view, it is understandable that a company with limited functions and risks, such as a flow-through company, receives a limited remuneration. However, considering the current perception towards the Netherlands as a jurisdiction which facilitates tax avoidance by allowing flow-through structures, we are curious about the commission’s conclusion.
Regardless of the conclusion of the research commission, Dutch flow-through companies already faced many developments in past years. Below we will briefly touch upon the main developments.
Increase of substance requirements
Flow-through companies are, already for years, required to meet so-called substance requirements when they claim benefits of a tax treaty or of the EU Interest / Royalty Directive. As of 1 January 2021, these substance requirements have been expanded with two new requirements:
- The flow-through entity should have wage expenses of at least € 100,000.
- The flow-through entity should have an office space at its disposal for a period of at least 24 months.
If these requirements are not met, the Dutch tax authorities may exchange information with source countries, which can have negative tax consequences in the source country.
Changed role of substance requirements
Historically, the list of substance requirements was used as a “safe harbor”. If a flow-through company met all requirements on the list, it was allowed to claim the tax benefits of a tax treaty or the EU Interest / Royalty Directive. However, as a result of the ECJ decision in the Danish cases, the Dutch Government has changed the role of the substance requirements as per 1 January 2020. Today, the substance requirements are used as an allocation of the burden of proof.
Conditional withholding tax on interest and royalties
Until 2021 the Netherlands did not levy any withholding tax on interest and royalties. As from 1 January 2021, the Netherlands has implemented a conditional withholding tax on interest and royalty payments to low-tax jurisdictions and in situations of abuse. This effects flow-through structures where the ultimate receiving company is located in a low tax jurisdiction or in cases that qualify as abuse. There is no exception for flow-through companies (in the form of a legal entity or permanent establishment) with significant activities in the Netherlands.
Further restrictions expected
As mentioned in the introduction, it is possible that the newly appointed research commission will propose even further restrictions on flow-through companies.
We therefore recommend assessing whether your current flow-through structures are still sustainable, and which alternatives would be available.
We hope to have provided you a brief overview of the current Dutch flow-through landscape and its main developments. If you would like to discuss this further and need any support in assessing your current structure, please do not hesitate to contact us. We would be pleased to support you.