Abuse must be combated, and this certainly applies to tax abuse as well. But what exactly is tax abuse, and how should it be combated? That is not easy to determine. Moreover, it varies over time. Structures that, for example, didn't pose many problems 20 years ago and formed a more or less common way of tax saving, can easily be seen as abuse in current times. It can also depend on the country where the abuse takes place: one country simply has different standards than another. In the past decade, the global fight against tax abuse has been high on the political and social agenda. The well-known BEPS project - the battle against Base Erosion and Profit Shifting - is the driving force behind this and is currently endorsed by around 150 countries worldwide. In essence, BEPS focuses on a wide variety of rules in the national laws of countries and in treaties to combat tax evasion. In the EU, this project is embraced and has led to various regulations that member states must implement. A well-known example is the so-called DAC6 directive, which obliges companies to report aggressive tax advice to the tax authorities. These are advice specifically aimed at tax evasion. However, the phenomenon I mentioned earlier may arise: what constitutes abuse and whether there is aggressive tax advice can vary geographically; standards in Southern and Eastern Europe, for example, may differ from those in Western Europe. The same applies, of course, to the abuse rules of the OECD. However, the fact that we are increasingly using a single concept of abuse worldwide reduces these differences between countries. We are getting a more consistent understanding of abuse. This is a positive development as it provides at least some level of legal certainty.
Nevertheless, it remains vague. Although there are specific anti-abuse rules that often consist of concrete standards, the general anti-abuse concept, referred to as fraus legis within the Kingdom or abuse of law as we use it in the EU, is not very concrete and depends on the circumstances. In short, it involves (a) acting contrary to the purpose and intent of the law and (b) with the aim of tax evasion. It is clear that the burden of proof plays an important role here: is it the tax inspector who must prove that there is abuse, or the taxpayer who must prove that everything is done for legitimate business reasons? In general, the rule is that the burden of proof lies with the tax authorities, and that often proves to be quite challenging. However, it is also true that as the transaction becomes more unusual or contrived, the burden of proof shifts to the taxpayer. This is also a rather factual and vague matter. In the Netherlands, for example, we see that more specific anti-abuse provisions are often included in the law to make it easier for the tax authorities to demonstrate tax avoidance. We also see that legislators increasingly place the burden of proof of legitimacy on the taxpayer. A good example is the tightening of the fight against so-called dividend stripping that will be included in Dutch legislation from 2024 onwards. In short, this means that in the case of dividend payments, the stakeholders must prove that there is no dividend stripping.
An interesting example of the question of whether there is abuse in the relationship between the Netherlands and Curaçao is currently pending in various proceedings before the Supreme Court. A conclusion has already been reached by the Advocate General, so the judgments are expected soon. One of the cases concerns a family concern whose business activities in the Netherlands take place in an operating company. Above that, there is also a Dutch BV. The latter is owned by two personal holding companies, each owned 50% by a father and his son. The father is the director of both personal holding companies. The son has been living in Curaçao for a very long time; the father also emigrated to Curaçao in 2011. Due to the emigration of the father, the places of establishment of the personal holding companies have also moved from the Netherlands to Curaçao. In 2015, the stake in the operating company is sold for approximately € 28 million, which amount is paid out to the personal holding companies in 2016. The amount is not distributed to the father and the son. The point now is that under the Tax Arrangement for the Kingdom until 2016 (BRK), the dividend payment would have been subject to 15% Dutch dividend tax. However, under the Tax Arrangement for the Netherlands and Curaçao (BRNC) that came into effect in 2016, in this case, no dividend tax is due. The inspector now believes, in short, that there is abuse by not paying out the dividend in 2015 but in 2016, saving 15% dividend tax. With the BRK and the BRNC, this cannot be challenged, but the Dutch corporate income tax does include an anti-abuse provision that may provide a basis for the tax authorities. I will leave that aside given its rather technical nature. The crux of the dispute is whether there is abuse here? The burden of proof rests with the inspector. Given the previous rulings in this case and the conclusion of the Advocate General, it is likely that this is not the case. I agree with that. After all, (a) the father emigrated in 2011 while the dividend only becomes available from 2015, (b) the change from the BRK to the BRNC is obviously not part of abuse but a change in regulations that can work well for taxpayers, (c) fundamentally, this concerns a business transaction, namely the sale of an active (family) business, and finally: (d) there is, of course, no obligation to pass on dividends received by a holding company directly to the underlying shareholders. In short, as far as I am concerned, there is no abuse at all, but the fact that the tax authorities and the State Secretary are contesting this setup indicates that there may be a different perspective. The Supreme Court will lay the egg soon. It would surprise me if this turns out well for the tax authorities.
Peter Kavelaars is a professor of Tax Economics at Erasmus University Rotterdam and of counsel at Deloitte Dutch Caribbean.