Netherlands: Proposals to increase substance requirements for letter box companies

2 February 2017

A letterbox company (also known as a paper company or shell company) is a company registered in one country but operating in another. Letterbox companies are commonly used when structuring multinational operating companies.

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When conversation turns to letterbox companies, the Netherlands is often mentioned. The Netherlands is home to many letterbox companies on account of its favourable tax regime, its tax treaties and the possibility to get advanced tax rulings from the Dutch Tax Administration on certain topics. In order to apply these advantages the Netherlands has set certain substance requirements. It now seems the current requirements are to be tightened to counteract the Netherlands’ reputation for hosting pure letterbox companies.

In November 2016, the State Secretary for Finance came up with the following three suggestions to tighten the substance requirements for letter box companies:

1. A company can only get an advance tax ruling if it they can prove a presence in the Netherlands by meeting a minimum expense account and a minimum number of employees. Additionally, international holding companies will need to have more equity than the 15% that is currently required.

2. The Dutch Tax Administration will exchange information on holding companies that do not meet the substance criteria. Currently this is only done for financial service companies.

3. To increase the minimum risk threshold of 1% of its outstanding loans or €2 million in order to be able to apply the treaty withholding tax rates on interest and royalties.

On January 25 2017, the Dutch Parliament requested the government draft a proposal that is in line with these suggestions. The government was asked to focus on the creation of employment and the amount of salary paid.

The substance requirements in the Netherlands will be tightened with more focus on local employment and salaries. If you have an international holding company in the Netherlands you may want to check whether the current status of the substance of the company is in line with these new measures.

Author: Corney Versteden, HLB Global Chairman, Partner at HLB Van Daal

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