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Lower Court of The Hague decided parent company of group not holding company for purposes of Tax Regulation of the Kingdom

On 15 June 2007, the Lower Court of The Hague decided a case on the classification of the parent company of a group of companies (fiscal unity) as a "holding company" for the purposes of the Tax Regulation of the Kingdom (TRK).

(a) Facts. The taxpayer (BV X) was formed in the Netherlands and until 1 January 1999 established in the Netherlands; thereafter, its statutory seat was transferred to the Netherlands Antilles (Curaçao). BV X owned 100% of the shares of BV Y, a company established in Aruba. BV Y in turn owned 100% of the shares of four companies established in the Netherlands. BV X and BV Y constituted a group.

For the year 2000, the tax inspector imposed a tax assessment of NLG 828,393 (EUR 375,908).

(b) Legal background. Art. 25 TRK provides that the profits of a holding company formed in accordance with the law of one of the countries (i.e. the Netherlands, the Netherlands Antilles or Aruba) and deemed to be resident in one of the other countries, may be taxed in the first-mentioned country at a rate not exceeding 4%, notwithstanding the right of that other country to levy tax.

In a decree of 3 May 2004, the State Secretary for Finance indicated that Art. 25 TRK does not apply to a holding company established under Dutch law, the actual management of which is transferred to the Netherlands Antilles; in such a case, the company is not a holding company for the purposes of the TRK and it is accordingly subject to tax at the normal Dutch corporate income tax rates.

(c) The issue was whether or not BV X was a holding company for the purposes of the TRK.

(d) Decision. The Court observed that Art. 25 TRK must be read and interpreted in the context of the common division of the authorization to levy tax in bilateral relations with respect to profits derived by a company, which is resident in a country other than the country of formation. Art. 25 TRK constitutes an exception to those principles, and extends the authorization to levy tax in the country of formation with respect to a holding company that is resident in another country.

Furthermore, the Court considered that the term "holding company" must be interpreted in a narrow sense, and decided that it only includes companies the activities of which (almost) entirely consist of the managing of participations.

Thereafter, the Court pointed out that the taxpayer did not only manage participations, but also acted as the parent company of a group of companies. In the last mentioned capacity, the taxpayer carried out additional active entrepreneurship activities.

Consequently, the Court held that the taxpayer is not a holding company for the purposes of the TRK. Therefore, the taxable profits realized by the taxpayer in the Netherlands were subject to tax at the normal Dutch corporate income tax rates.

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