By Waldo Kapoen

The Dutch government is moving – under pressure from the European Union – to change its approach to issuing advance tax rulings. This may have an effect on companies that hold their offshore investments through Holland.

Background

The European Union issued a report in 1999 targeting 66 potentially EU “harmful tax regimes” that were in use in EU member countries. Ten of the 66 regimes identified were in Holland. They included the Dutch government’s practice of issuing advance rulings to companies that invest through holding companies in Holland to confirm that the investments qualify for the “participation exemption.” Dividends received on an investment qualifying for the participation exemption are exempted from Dutch tax. This is also true for capital gains upon disposal.

In late November, the underminister of Finance — who is responsible for taxation – said he expects the EU to drop eight of the 10 Dutch regimes from the harmful tax practices list. This was the tradeoff for new measures the government announced in a letter to parliament. The new measures will take effect from April 1, 2001. The new measures cover not only advance tax rulings, but also advance pricing agreements in transfer pricing cases.

Advance Tax Rulings

The underminister said the government will continue to issue advance tax rulings on the tax classification of international structures — for example, to confirm that the participant exemption applies to offshore investments and on whether the taxpayer will be treated as having a “permanent establishment” in Holland or abroad.

Tax rulings have not usually been published in the past. Rulings that deviate from the standard rulings are — with only a very brief description of the facts — published from time to time. This will change. The underminister of Finance said that the policy-related aspects and circumstances underlying the conclusion of both advance tax rulings and advance pricing agreements will be systematically published in the future. So, too, will the government’s decision not to rule or enter into a pricing agreement. Publication will be in an anonymous form or in a summarized form.

The underminister said the Dutch government is also studying whether to impose a substance requirement to discourage the location of activities in The Netherlands that are purely tax driven. The government does not want any such requirements to lead simply to migration of the activities to other countries in Europe.

Obtaining an advance tax ruling usually takes about four months currently. The underminister agrees that this is too long, and he has taken measures to improve the organization of the rulings practice and reduce the time required to issue a tax ruling to, in principle, a maximum of eight weeks. Furthermore, the backlog of ruling requests will be halved within six months, assuming that the inflow of requests remains constant. These are goals. It remains to be seen whether they will be met.

Advance Pricing Agreements

The Ministry of Finance will issue an advance pricing agreement decree. Although the Netherlands prefer so-called bilateral APA’s, unilateral APA’s are also possible. The duration of an APA will be four years, although a longer period is possible. An APA team is being set up within the tax department in Rotterdam.

Holland will follow the internationally-accepted arm’s-length principle in the OECD rules on transfer pricing. This will be adopted by statute. The government will also publish a decree dealing with the calculation of transfer prices.

Exchange of Information

The Dutch government notifies taxpayers before turning over information to foreign tax authorities. The government intends to shorten the notice period to 10 days. If the taxpayer lodges an objection within this period, the exchange of information will be suspended. Within the set term, the taxpayer can appeal to the courts to seek provisional relief — for instance, if it fears that release of the information would damage its interests. The court would then rule on the merits of the objection. The information will not be released before the court has ruled on the provisional relief procedure.

Transition Rules

Tax rulings that are submitted before April 1 this year will be handled under the old rules.

Rulings are issued for a limited time period and must be renewed. The underminister said any rulings issued under the old rules will be given effect through December 2005, unless the taxpayer prefers to stick with the expiration date given in the ruling.

Taxpayers who do not have to obtain an advance ruling, but who file tax returns in accordance with the existing ruling practice, can continue to do so through December 2005, provided they conduct activities that fall under the present published ruling practice and they currently file tax returns in accordance with the mentioned practice.

In order to get a standard ruling dealing with the application of the participation exemption or financing or royalty activities, action before April 1, 2001 is needed, although it may be advisable to wait for more information on the new ruling practice before submitting such ruling requests. It may be worthwhile to have such ruling requests prepared in the meantime to avoid a “time is up” situation.