Foreign holding company: economic reality
remains decisive
The ’s-Hertogenbosch Court of Appeal recently ruled that a EUR 19 million dividend distribution by a Dutch BV to a Luxembourg holding company was taxable in the Netherlands. The case concerns the wording of Article 17(3)(b) of the Dutch Corporate Income Tax Act as it applied in 2014, but it remains relevant for the assessment of international holding structures today.
What was the case about?
A Luxembourg company held the shares in two Dutch BVs. Above this Luxembourg company was a
Luxembourg SPF, with an ultimate shareholder resident in Belgium.
In 2014, one of the Dutch BVs distributed a EUR 19 million dividend to the Luxembourg company. Due to the interposed holding company, no Dutch taxation took place. The Dutch tax authorities argued that the structure had been used to avoid Dutch personal income tax or dividend withholding tax at the level of another party.
Decision of the Court of Appeal
The Court of Appeal applied the recent line of case law of the Dutch Supreme Court on abuse and foreign holding companies.
The key issue was the “look-through” approach: what would happen if the Luxembourg company and the SPF were disregarded from the structure? According to the Court of Appeal, the dividend would then have accrued directly to the ultimate shareholder, and the Netherlands would have been able to levy tax.
On that basis, the tax authorities had provided sufficient indications of abuse. It was then for the taxpayer to provide evidence to the contrary. The taxpayer failed to do so. The Luxembourg company had no employees, no office space of its own and only limited activities carried out by trust directors. The alleged financing function was insufficient to establish a genuine economic function.
Why this remains relevant today
Under current law, the foreign substantial shareholding regime is structured differently. Abuse involving dividend withholding tax is now mainly addressed through the Dutch Dividend Withholding Tax Act, the domestic withholding exemption and the broader anti-abuse doctrine. This judgment therefore does not mean that every dividend paid to a foreign holding company automatically falls within the scope of Article 17 of the Dutch Corporate Income Tax Act.
Its relevance lies primarily in the assessment framework. In the case of foreign holding companies, the key questions are:
what the tax outcome would be if the holding company were disregarded;
whether the holding company performs a genuine business function;
whether decisions are actually taken at that level;
whether there are sufficient people, resources and authority;
whether the business reasons are specifically documented.
Nassau observation
This judgment confirms that substance is not a simple checklist. The decisive factor is economic reality.
For international groups, family businesses and personal holding structures, it is advisable to reassess, before dividend distributions, restructurings, remigrations or capital repayments, whether the foreign holding company still performs a sufficiently genuine business function.
Nassau Tax & Global Mobility assists with the assessment of international holding structures, dividend flows and Dutch withholding tax exposure.
