Tax residency and substance in the Netherlands
If Brexit determined that it is better to move your company to the European continent, then the Netherlands is a good option. However, it is important to know what it takes for an entity to become a tax resident of the Netherlands.
Netherlands tax residency
An entity is resident in the Netherlands for corporate income tax purposes if its place of effective management is in the Netherlands. In that case, the entity will be considered a domestic taxpayer. This means that the entity is fully liable to tax in the Netherlands. Netherlands tax law does not include a definition of ‘place of effective management’ and this, therefore, depends on the facts and circumstances. Please refer to the image below for the facts and circumstances:
From Dutch case law, it can be determined what the most important facts and circumstances are to take into account when deciding whether the place of effective management of an entity is in the Netherlands. Please note that one has to look at the complete picture, using the different criteria as indicators. In case it can be determined that the majority of the indicators point to the Netherlands, it can be assumed that the entity is a resident for Netherlands corporate income tax purposes. However, this is never a guarantee because tax treaties concluded between the Netherlands and other countries, as well as foreign tax law also have to be taken into account.
Netherlands substance requirements
To make sure that an entity is a resident of the Netherlands for corporate income tax purposes, one could make use of the substance requirements from recently introduced anti-abuse provisions in Netherlands tax law. Please refer to the image below to see the substance requirements. Although these requirements were not introduced to give guidance for the Dutch tax residency of entities, in practice they can serve as safe harbor rules to make sure that the place of effective management is in the Netherlands.
Non Netherlands tax residency but foreign tax payer
In case the entity is not considered to be a Netherlands tax resident, the entity could still be considered a so-called foreign taxpayer in the Netherlands. This could be the case when the place of effective management is not located in the Netherlands, but the actual day to day business, or at least part of it, is. In that case the foreign entity can be deemed to have a permanent establishment in the Netherlands. A permanent establishment is basically a fixed place of business in which the business of the enterprise is wholly or partly carried on. In case of a permanent establishment, only the profits attributable to the Netherlands permanent establishment are liable to Netherlands taxation.
Check place of effective management and safe harbor rules
If you want to transfer the tax residency of your entity to the Netherlands or set up a new company and make sure it has its place of effective management in the Netherlands, you can apply the above-mentioned criteria developed in Dutch case law. Additionally, you could check the criteria from the recently introduced anti-abuse rules included in Netherlands tax law. These could serve as safe harbor rules in establishing whether the place of effective management of an entity is in the Netherlands.
If you have any questions about moving your business to the Netherlands after Brexit, please feel free to contact our experts.