The judgment relates to the question whether a Luxembourg holding company was liable to non-resident corporate income tax in 2012 in respect of dividends received from a Dutch BV. The non-resident corporate income tax rules act as an anti-abuse rule, aimed at structures where companies are considered to be interposed between a Dutch entity and foreign shareholder, in order to reduce Dutch taxation.
The case at hand concerns a Swiss resident individual who held an interest in a Dutch BV through companies established in Jersey and Luxembourg. The Luxembourg company had no other function than holding shares in the Dutch BV, which at that time was a cash box company. The Luxembourg company subject to non-resident corporate income tax in the Netherlands on its shareholding in the Dutch BV in case of an “abusive situation”.
In short, the Supreme Court ruled that holding the interest in the BV through a company established in Luxembourg could indeed be qualified as abusive in this specific case. The Supreme Court ruled that the look-through approach used by the Dutch tax authorities, which looks through the structure to the level of an active business enterprise, or, in absence thereof, to the ultimate investors, is valid and compatible with recent case law of the Court of Justice of the European Union.
Consequently, the Netherlands was allowed to levy non-resident corporate income tax on the dividends. However, taxation was limited to 2.5% under the tax treaty with Luxembourg. The practical significance of this specific judgment is expected to be relatively limited, as the circumstances in this case were quite specific.
In general, the Supreme Court considered that an abusive situation would in any case not be present:
1. If the Dutch company carries out an active business enterprise which is an extension of the foreign company’s business enterprise;
2. If the foreign company is a holding company which fulfils an essential function in respect of the business activities of the group; or
3. If that the foreign company acts as an investor, and holds interests in one or more entities that do not merely invest but have themselves an active business.
The non-resident corporate income tax liability only applies in case Dutch taxation is avoided. The Supreme Court noted in this respect that this test must always be applied at the moment when the benefit is derived from an interest in a Dutch company. These rules are also included in the Dutch Dividend Withholding Tax Act as of 2018. It is expected that the rules following from this judgment can only be applied to the current regime to a limited extent, as the non-resident corporate income tax rules have changed in 2016, 2018 and 2020.
Finally, it is important to note that the importance of the non-resident corporate income tax rules has increased. Previously, a foreign company could often benefit from treaty protection pursuant to one of the many tax treaties concluded by the Netherlands. The State Secretary for Finance has mentioned that after entry into force of the Multilateral Instrument (in particular the so-called Principal Purpose Test), treaty protection will be denied in cases where a domestic anti-abuse regime is applied.