Domicile status – facts and circumstances test

Facts and circumstances test

It is not uncommon for the Dutch Tax and Customs Administration to argue, based on the link between a foreign entity and a resident of the Netherlands, that a foreign entity has its domicile in the Netherlands and hence qualifies as a Dutch tax resident for corporate income tax purposes. Once they suspect an entity has its domicile in the Netherlands, the tax authorities will initiate a facts and circumstances test.

They will typically send the entity a letter of questions in which they will request it to provide all its accounts and records, including all emails. It pays off to be alert when this happens given that this request tends to exceed the scope of the entity’s tax disclosure requirement (link to page in Dutch). The tax authorities do not have the authority to request to provide all emails (link to page in Dutch), for instance, nor are they permitted to go on a ‘fishing expedition’. Their request has to be determinable and proportionate. Also, an entity that believes not to have its domicile in the Netherlands can choose to argue that it is not subject to all or some of the disclosure requirements.

Place of important business decisions

The facts and circumstances test allows the tax authorities to establish whether or not an entity is domiciled in the Netherlands (Section 4, Dutch State Taxes Act). A key aspect [1] in this test is the place of effective management, which is determined based on who makes the important business decisions and where these decisions are made. [2]

But what are the important business decisions of an entity? This depends on its core business. Conducting an entity’s day-to-day management does not constitute an important business decision, that much is clear.

The next question that needs to be answered is who has the power to make important business decisions. That power in itself is not decisive, given that the Supreme Court of the Netherlands has ruled that advisers may also be in a position to make important business decisions for their clients. [3] The decisive factor is who effectively makes the important business decisions.

Once it has been established who makes the important business decisions, it needs to be determined where these decisions are made. In many cases, this is difficult to do because, in this digital world, people can work remotely from anywhere (and make important business decisions) just by opening their laptop.

Burden of proof on tax authorities

It is up to the tax authorities to argue convincingly that a company is domiciled in the Netherlands. That said, in our practice, we see that their arguments can be thin or insubstantial. The fact that a shareholder resides in the Netherlands, for instance, is typically enough for the tax authorities to argue that he or she makes the important business decisions in the Netherlands. This should be regarded with a critical eye.

When domiciled in two states

If the facts and circumstances test were to show that an entity is domiciled in two states, a multilateral instrument (MLI) (link to page in Dutch) can be used to determine the company’s tax residency and to prevent double taxation. The two states in question will then engage in a mutual agreement procedure to decide where the entity has its tax residency so as to prevent double taxation.

Please do not hesitate to contact us if you are involved in a debate with the Dutch Tax and Customs Administration about your tax residency or if you want to find out more about the multilateral instrument. We are here to help.

[1] Supreme Court, 23 September 1992, ECLI:NL:HR:1992:ZC5105, BNB 1993/193.
[2] Supreme Court, 19 January 2018, ECLI:NL:HR:2018:47 and Supreme Court, 2 July 2021 ECLI:NL:HR:2021:1044.
[3] Supreme Court, 2 July 2021, ECLI:NL:HR:2021:1044.