On 24 December, a Brexit deal was finally concluded between the United Kingdom (“UK”) and the European Union (“EU”). From an EU perspective, the UK will become a third country despite the relevant trade agreement. Therefore, certain trade barriers will arise for businesses in relation to their UK-EU cross-border activities, such as adjusted and strengthened border controls and additional administrative work. This may obviously affect the business of UK companies in the EU and vice versa.
In this regard it makes sense for UK companies to explore the possibilities of a gateway to the EU. Such gateway can be achieved by establishing a Dutch resident company, such as the limited liability company (in Dutch “BV”) or by establishing a permanent establishment in the Netherlands. In this way, a UK company can profit from the tax benefits that come along with EU residency and the Dutch tax treaty network. When establishing a Dutch BV it is important to take into account certain substance requirements, which we will discuss below.
Residency vs. substance requirements
From a Dutch perspective, a company incorporated under Dutch law – such as the Dutch BV – is formally not bound by minimum substance requirements for it to be considered a Dutch tax resident. Irrelevant of where the Dutch BV is managed or where business activities are carried out, it is deemed to be a corporate income tax resident of the Netherlands.
However, in relation to other countries, such as the UK, not only the Dutch perspective but also the other state’s perspective and the relevant tax treaty is relevant. In this sense, and in particular in view of the Brexit and a EU gateway-approach, it is advisable to have a minimum substance in the Netherlands to prevent the UK Tax Authorities to treat the Dutch BV as a UK tax resident and/or to ensure that the company can utilize the benefits of the tax treaty concluded between the Netherlands and the UK.
In a cross-border situation between the Netherlands and the UK, various criteria will be used to determine the tax treaty-residency of the company. A non-exhaustive list of the relevant criteria to be taken into account is as follows:
- the place where senior management is exercised;
- the place where the board meetings take place;
- the place where the head office is located;
- the degree and nature of the company’s economic connection with each of the two states; and
- whether the fact that the company is deemed to be a resident of one of the states and not of the other state creates the risk that the tax treaty will be abused or that the national law of one of the states is applied incorrectly.
The place where senior management is exercised is one of the factors determining the residency of the company. This concerns the place where the most important business decisions, as regards the administrative side and the commercial side of the company, are taken. In essence this means that it is important that the day-to-day management rests with the Dutch BV itself without the continued involvement of persons in the UK. In practice, companies often work with corporate service providers, such as trusts. Yet, this does not always have to be sufficient in that respect. In any case it must be ensured that the company is effectively managed in the Netherlands.
Advance tax ruling by the Dutch Tax Authorities
Should you seek for more certainty on the tax position of your company from a Dutch tax perspective, a solution can be found in an ‘advance tax ruling’ by the Dutch Tax Authorities. An advance tax ruling provides a taxpayer certainty about the tax consequences of its corporate structure and residency. Such advance tax ruling can be granted by the Dutch tax authorities if certain substance requirements are met. The following requirements apply:
- At least half of the board members with decision-making powers must be resident of the Netherlands.
- The board members must have the necessary professional knowledge and be sufficiently competent and qualified to perform their tasks.
- The board has decision-making powers.
- The most important decisions of the board must be physically taken in the Netherlands.
- The company has qualified staff for an adequate execution and registration of the transactions to be concluded by the company.
- The (main) bank account(s) of the Dutch company is maintained in the Netherlands.
- The accounts of the company are kept in the Netherlands.
- The company complies with its tax return obligations.
- The registered address of the company is in the Netherlands, whereby the legal entity is not considered a tax resident in another country;
- The company must have an appropriate level of equity in relation to its activities.
- The company incurs at least EUR 100,000 wage expenses.
- The company has an office space at its disposal for a period of at least 24 months.
Please note that the UK Tax Authorities may also require the relevant company to meet certain requirements, which may differ from the Dutch substance requirements.
Should you require further information on establishing a Dutch BV, please feel free to contact us.