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Substance Requirements in the Netherlands
Explanation of substance requirements and governance expectations for Dutch companies, including directors, local presence and operational substance within EU corporate structures
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The concept of substance in the Netherlands has evolved from a formal checklist into a broader assessment of whether a Dutch entity performs a real function within an international structure. Dutch tax authorities (Belastingdienst) increasingly evaluate substance in the context of beneficial ownership, Principal Purpose Test (PPT) and the overall economic role of the company.
Substance is therefore not defined by a single rule, but by the alignment between legal structure, decision-making and actual business activity.
Substance is therefore not defined by a single rule, but by the alignment between legal structure, decision-making and actual business activity.
Legal framework and practical approach
Dutch substance requirements are not codified as a strict statutory test. Instead, they are derived from:
In practice, the Dutch authorities assess whether the entity can be regarded as having sufficient presence and autonomy to justify its role within the structure.
- domestic tax law and administrative practice
- OECD BEPS principles
- EU anti-abuse rules (including ATAD)
- treaty interpretation (PPT, beneficial ownership)
In practice, the Dutch authorities assess whether the entity can be regarded as having sufficient presence and autonomy to justify its role within the structure.
Core substance indicators in the Netherlands
While not exhaustive, certain indicators are commonly expected in practice which are not applied mechanically, but are considered together to determine whether the Dutch entity operates as a real part of the structure.
A Dutch company should typically demonstrate that:
A Dutch company should typically demonstrate that:
- its management board (bestuur) is capable of making decisions at the Dutch level
- directors have sufficient knowledge and involvement in the structure
- key strategic decisions are taken in the Netherlands
- bank accounts and financial flows are managed from the Netherlands
- the company maintains a registered office and operational presence
- accounting and administration are maintained locally
Governance and decision-making
Governance is central to substance in the Netherlands. The question is not where the company is incorporated, but where decisions are actually made.
In practice, this means that:
Where governance is exercised outside the Netherlands, the credibility of the structure may be challenged.
In practice, this means that:
- board meetings should reflect real decision-making rather than formal approvals
- financing, dividend and restructuring decisions should be aligned with the Dutch level
- directors should be able to demonstrate understanding and control over the structure
Where governance is exercised outside the Netherlands, the credibility of the structure may be challenged.
Substance and beneficial ownership
Substance is closely linked to the concept of beneficial ownership, particularly in the context of treaty access.
A Dutch company receiving dividends must be able to demonstrate that it:
Where the entity acts as a conduit, treaty benefits may be denied regardless of formal compliance.
A Dutch company receiving dividends must be able to demonstrate that it:
- has control over the income received
- is not contractually or фактически obliged to pass income onwards
- bears economic risk in relation to the investment
Where the entity acts as a conduit, treaty benefits may be denied regardless of formal compliance.
Substance and the Principal Purpose Test (PPT)
Under modern tax treaties, including those modified by the Multilateral Instrument (MLI), the PPT plays a key role.
Even where formal substance indicators are present, treaty benefits may be denied if the structure is considered to have been put in place primarily to obtain a tax advantage.
This means that substance must be supported by a credible commercial rationale, not just formal presence.
Even where formal substance indicators are present, treaty benefits may be denied if the structure is considered to have been put in place primarily to obtain a tax advantage.
This means that substance must be supported by a credible commercial rationale, not just formal presence.
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In Dutch holding structures, substance is assessed based on whether the entity performs a real ownership and coordination function within the group. A Dutch holding company is expected to actively manage its subsidiaries, participate in key strategic decisions and play a role in financing and dividend flows. Its position in the structure should reflect where control and value are effectively managed. - In SPV structures, particularly in acquisitions and joint ventures, the Dutch entity must act as a genuine transaction vehicle rather than a passive intermediary. This includes being the contracting party, participating in financing and governance arrangements and ensuring that its role is consistently reflected in documentation and actual operations. Where these elements are absent, the entity’s position within the structure may be challenged in practice.
Where substance fails in practice
Substance issues typically arise where the Dutch entity exists only on paper.
Common situations include:
In such cases, the structure may fail under beneficial ownership tests or the PPT.
Common situations include:
- directors formally appointed but not involved in decision-making
- decisions taken outside the Netherlands
- immediate pass-through of income without discretion
- lack of internal documentation supporting the entity’s role
In such cases, the structure may fail under beneficial ownership tests or the PPT.
Our Services
Our practice related to Netherlands substance and governance
Design of Dutch companies with governance and operational setup aligned to their role within the structure, ensuring consistency between legal form and economic activity.
Review of current Dutch entities to identify gaps in governance, decision-making and substance, with practical recommendations for improvement.
Development of board procedures, approval processes and documentation to reflect real decision-making at the Dutch level.
Structuring and documentation aligned with OECD BEPS standards, Principal Purpose Test (PPT) and EU anti-abuse requirements.
Design and alignment of combined structures with clear allocation of functions between jurisdictions.
Preparation of supporting documentation and positioning of the structure in response to tax authority queries or reviews.
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