Lower courts have recently ruled in favor of the Dutch Tax Authorities in combating captives. As a result of this, we have noticed that, in its audits, the Dutch Tax Authorities is increasingly challenging, for tax purposes, captives that insure group risks. This is especially true for foreign captives domiciled in a country with a lower tax rate than the Netherlands.
The common thread in the reasoning of the Dutch Tax Authorities is that captives are too far removed from reality. Which position does the Dutch Tax Authorities take in this respect? The arguments given are often a combination of the following:
- The insurance activities actually take place in the Netherlands (‘substance over form’ approach). Therefore, the profits of the captive must be attributed to the Netherlands and taxed here. Alternatively, a permanent establishment can be deemed to be present in the Netherlands, to which the profits are attributed.
- The insurance activities lack reality. Even though some relevant functions can be ascribed to the captive, the profit attributed to the captive is limited to a reduced handling fee.
- Even though the captive has substance, the insurance premiums and the transfer prices for intra-group services are wrong. The insurance premium of the Dutch group company making payments is therefore wholly or partly non-deductible.
- The participation exemption does not apply to the shares of a captive held by a Dutch company. After all, the captive is taxed at a low rate and, because no insurance activities take place, capital is only passively invested.
Our experience is that there are usually good grounds for rebutting these arguments so that the captive can be retained. Meijburg & Co has recently been able to bring its discussions with the Dutch Tax Authorities about captives to a successful conclusion in a number of situations. An important success factor in this respect is the multidisciplinary collaboration between insurance experts and transfer pricing specialists.