Sign in Subscribe
International Tax 国际税法

Economic Substance: From the Perspective of the Dutch Tax Authority

KCG 揆创国际

• 4 min read
Economic Substance: From the Perspective of the Dutch Tax Authority

Economic Substance (“ES”) plays a critical role in international tax planning, yet it often feels elusive and vague. For instance, companies with sufficient ES can qualify as tax residents and enjoy treaty benefits. However, the majority of countries worldwide do not clearly specify when a company has sufficient ES and when it does not.

I. The Elusiveness of Economic Substance

In 2019, tax havens began implementing Economic Substance Acts (“ES Acts”), which introduced vague requirements for determining whether a company has sufficient ES in the jurisdiction. Take the British Virgin Islands (“BVI”) as an example. To meet the ES requirements under BVI law, a company must satisfy the following conditions:

1. Activities must be directed and managed in the BVI

    • How many BVI-based directors are enough to qualify as "directed" locally? Is 50% sufficient, or must it be a majority?
    • Is it adequate for management to visit the BVI every six months? If not, would quarterly visits suffice?

2. Adequate number of suitably qualified employees

    • How many employees are considered "adequate"? Would two be enough? If not, what about three? Or four?
    • What qualifies an employee as "suitably qualified"? Is a university degree sufficient? How many years of work experience are needed? What specific credentials are required?

3. Adequate expenditure

    • Is $100,000 per year sufficient? What about $200,000? Or would $300,000 be enough?

We once had the opportunity to consult a BVI official on these questions, and their answer was: They don’t know either.

However, there are some countries in the world that are willing to provide clear and specific requirements for economic substance, and one such country is the Netherlands. As long as the relevant criteria are met, the Netherlands will recognize that a company has sufficient ES in the country. This clarity is immensely valuable for international tax planning: the higher the certainty, the lower the risk of the planning strategy.