Even if an investment structure has been set up and maintained for genuine economic reasons, it may still be considered ‘abusive’, which could result in the Dutch dividend withholding exemption not being applicable. Foreign investment structures involving Dutch companies must be closely examined; it cannot simply be assumed that the Dutch dividend withholding exemption should be applicable.
On 18 July 2018, the Dutch Supreme Court issued two important rulings concerning the applicability of the Dutch dividend withholding exemption (hereafter: “Dutch DWT exemption”) in case of dividend distributions to a foreign (in this case Belgian) holding company. The Dutch Supreme Court confirmed the judgments of the Amsterdam Court of Appeal, concluding that abuse may still be considered present, even where a holding company conducts “substantial business activities and the corporate structure was initially established for legitimate business reasons that align with economic reality.”
Facts
In both cases, it concerned a Belgian holding company that held an interest in a Dutch BV acting as a ‘feeder entity’ for a private equity fund. These feeder entities had no other material activities than holding a participation in a Dutch limited partnership (a CV) which subsequently held diversified interests in various portfolio companies. The private equity firms fully controlled the management of both the Dutch feeder entities and the underlying portfolio companies.
Both holding companies did not employ their own personnel, nor were they substantively involved in the strategic or operational management of the Dutch private equity subsidiaries holding the ultimate portfolio interests. They primarily served as passive investment vehicles.
The difference between these court cases primarily lies in the other business activities of the holding companies. The inactive holding company initially served as the parent of an energy company, but following the sale of that interest, it only held — aside from its interest in the feeder entity —two old-timer cars.
In addition to its interest in the Dutch company, the active holdingcompany also held participations in sixteen other businesses. Its management was primarily conducted by family members through their own management entities. Nevertheless, there was no genuine or functional involvement in the activities of the Dutch private equity structure holding the ultimate portfolio interests.
Judgement Supreme Court
The Supreme Court’s focus in these cases was on how the objective and subjective tests should be applied in the context of the Dutch DWT exemption. Both the national anti-abuse and the EU anti-abuse concept involve an objective and a subjective test. The Supreme Court confirms that the anti-abuse concept for the Dutch DWT exemption must be interpreted in accordance with EU law.
- Subjective test: Was the main purpose or one of the main purposes of the structure to avoid Dutch DWT?
- Objective test: Does the structure constitute an artificial arrangement?
The subjective test focuses on the purpose of the structure. Was the main objective or one of the main objectives of the structure to avoid Dutch DWT? This involves the so-called “look-through approach”, which examines whether an intermediary company was inserted into the structure with the main purpose of avoiding taxation that would otherwise have been levied had the dividend been paid directly to the ultimate shareholder.. The Dutch Supreme Court concludes that while this concept may serve as a guiding principle, it is not sufficient to shift the burden of proof. The tax inspector must also present concrete facts and circumstances demonstrating that such abuse has occurred.
The objective test focuses on the economic aspects of the structure. The question is whether the structure is artificial and established without valid business reasons that reflect economic reality. A key factor in this assessment is whether there are genuine economic activities (‘substance’) at the level of the holding company.
The inactive holding company lacked any operations or activities. It was therefore not surprising that the Dutch Supreme Court concluded the structure constituted an artificial arrangement. More remarkable was the reasoning concerning the active holding company that did engage in business activities. The Dutch Supreme Court explicitly held that the existence of a genuine economic activities does not, in itself, exclude the possibility of an abusive situation. Where passively held investments cannot be functionally attributed to the business operations of the holding company, those investments may still be considered part of an artificial arrangement. As a result, the Dutch Supreme Court concluded that objective test was met.
Of particular significance is that the Court of Appeal,whose reasoning was not deemed incomprehensible by the Supreme Court, took into account that the family, as shareholder, was free to decide whether to distribute the dividends received by the holding company to themselves or to reinvest them. This reflects a form of the ‘look-through approach’ with respect to governance. In this context, the Court concluded that the holding company did not possess independent discretionary power over these dividends. The Supreme Court confirms that the burden of proof for both the subjective and objective test lies with the Tax Authority. However, it should be noted that the Inspector is only required to make this plausible. If the Tax Inspector succeeds in doing this, the taxpayer must then provide counterevidence by demonstrating that there were valid business reasons which reflect the economic reality for the structure.
Conclusion and action points
These court cases clarify that family structures and private equity vehicles in international settings are not automatically safeguarded merely by the existence of genuine economic activities. Passively held portfolio interests through a holding company lacking any independent activities or substance face a significant risk of being classified as artificial. It is not relevant that the structure was originally established with legitimate business purposes; the assessment of artificiality is based on the facts and circumstances prevailing at the time of the dividend distribution. Even when a holding company performs economic activities, the Tax Authority may still conclude that abuse has occurred if these passive interests cannot be functionally linked to the holding company. Therefore, continuous and thorough analysis of the economic role of each entity within the structure is essential to identify and, where necessary, mitigate any tax risks.
