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Fiscal domicile: it is getting worse and worse

20 augustus 2018


Hertoghs Considers has often paid attention to the increased struggle of the Dutch Tax and Customs Administration against foreign business structures.


 Dutch people who take their assets outside the Netherlands cannot count on much sympathy from the tax authorities. Such foreign business structures will soon be branded as inadmissible tax evasion or at least tax avoidance.


The tax inspector uses his national and international range of intelligence to identify the facts and then confronts the persons involved with often towering tax assessments based on various primary, subsidiary and more subsidiary positions. And with good reason: unloading a shot of hail makes the chance of a direct hit much bigger.


This blog is not the place to judge whether certain foreign business structures are acceptable or not. Obviously, this question is a political one and thus must be answered by the legislator. However, we use this blog to share our concerns with our readers about a lack of legal certainty and legal protection and also draw attention to an imbalance in the balance of power that will cause individuals to get into difficulties.


A recent judgment by the Gelderland District Court on a foreign business structure is a grateful starting point to discuss and criticise the weak legal position of Dutch citizens. What was going on?
A Dutch entrepreneur X had transferred his interests in a trading company in medical specialist equipment to a Stichting Particulier Fonds (SPF), a Private Foundation, based in Curaçao. Shortly after the transfer of his assets, X and his wife emigrated to Spain. Some years later, the SPF made a donation to a child of X. This gift was then under scrutiny by the Dutch tax authorities.
After the investigation, the inspector adopted a two-pronged approach. Firstly, he considered that the SPF had to be ignored for tax purposes so that the donation was done by X himself. Because X, at the time of donation, had lived abroad for less than ten years, his donation would be subject to Dutch gift tax. Secondly, the inspector stated that the fiscal domicile of the foundation was not abroad, but in the Netherlands. Also in that case, the gift is subject to Dutch gift tax.


Both approaches are as clear as mud as far as taxes are concerned since the rules concerning both the fiscal transparency and the location of a foundation are anything but clear. Regarding the transparency of a foundation, no regulations were in place in 2008, the year in which the donation was made. The inspector relied only on case law showing that the assets of a foundation can be allocated under special circumstances to those who manage the foundation capital as their own assets. Whether this is the case, greatly depends on the facts and certainly also on the judge’s personal appreciation. In fact, in our opinion the Supreme Court is rather restrictive regarding this point. As far as the domicile of a foundation is concerned, there is a statutory provision, but it excels in insignificance.


Article 4, first paragraph AWR (State Taxes Act) stipulates that the domicile is determined according to circumstances. The law, therefore, does not bring any clarity and neither does case law in this field which is very casuistic.

The course of the outlined case shows how much room a judge has to make choices himself and thus often surprising process parties and also us.
The District Court of Gelderland rejects the primary position of the inspector. According to the judge, X did not have the foundation's assets as if it were his own capital. The fact that X was mentioned as a beneficial owner of the foundation on an opening form of a bank account, was no reason to ignore the foundation and tax X.
However, this did not lead to a favorable decision for the beneficiary of the donation. After all, the court does follow the subsidiary position of the inspector and decides that the foundation was tax-based in the Netherlands. In doing so, the court assigns a decisive meaning to the role of  X's tax consultant. The fact that the consultant had advised the structure, that he had a directing role in all kinds of decisions and – according to the court – had initiated the gift in question, lead to the court’s conclusion that the foundation was actually led by the consultant who had his practice in the Netherlands. As a result of that, the tax gift assessment was maintained. Fortunately, the primary position led to a considerable lower gift tax assessment for the beneficiary than the subsidiary opinion because a donation by a foundation is subject to the higher third-party rate than the lower parent-child rate.

By doing so, we think that the court went a bridge too far. The position of the tax consultant is misjudged and wrongfully exaggerated.

It may happen that tax consultants play an important role and clients take their advice to heart. However, this by no means implies that the consultant takes over the client’s position and will thus fulfil the function of de facto director of a foundation. The consultant plays the same role as that of the trust office which is so often disqualified by the tax authorities. The consultant can only make decisions after consultation the client. Since the trust office is disregarded as a policymaker, this should also apply to the tax consultant.
However, this judgment also warns people like X who are too enthusiastically upgrading the position of their consultant in order to prevent a possible 'Durchgriff' of the foundation. Apparently, the judge was not too pleased about this.