When a principal purpose test challenge is raised against an IP holding structure in the Netherlands, the immediate risk is loss of treaty benefits on royalty flows and potential reassessment of prior years' withholding tax positions. Restructuring in response requires a careful analysis of substance, business rationale, and treaty eligibility under the Multilateral Instrument – not simply a relocation of entities or a cosmetic revision of intercompany agreements. This illustrative scenario, drawn from the pattern of matters our team has encountered, sets out how such a challenge can be addressed and what lessons the process yields.
Editorial note: This page presents an illustrative scenario based on typical matters in this area. It does not describe any specific client engagement, and no amounts, outcomes, or client-identifying details are presented as real.
Client Profile and the Challenge
The structure at issue involved a Dutch BV established as the central IP holding vehicle for a multinational group. The BV held a portfolio of trademarks and patents and licensed them to operating affiliates in several jurisdictions. The entity was registered in the Dutch commercial register (KvK) and had obtained an advance tax ruling (ATR) from the Belastingdienst covering the royalty flows at the time of its formation.
Several years after the structure was put in place, the Belastingdienst opened a review. The core concern was whether the BV had a sufficiently independent substance and whether obtaining treaty-reduced withholding tax on royalties from certain treaty-partner jurisdictions was, in the view of those jurisdictions' tax authorities, one of the principal purposes of the arrangement. The challenge came through a request for information from a treaty partner's tax authority, routed via the mutual agreement procedure channel, citing the principal purpose test (PPT) introduced into the relevant tax treaty through the Multilateral Instrument (MLI).
The MLI had been signed in June 2017 and entered into force on 1 July 2018. The treaty in question had been covered by the MLI, and the PPT – part of the treaty-abuse minimum standard under Action 6 of the BEPS project – had been incorporated. The ATR the group held predated the MLI's entry into force and had not been revisited. That gap became the central vulnerability.
If your group holds IP through a Dutch entity and has not reviewed your treaty positions since the MLI came into force, this is an appropriate moment to do so. We are available to discuss your situation at info@ferrazwhitmore.com or through our contacts page.
Strategy and Rationale
The advisory team's first step was to separate two questions that are often conflated in the heat of a tax audit: whether the Dutch BV was genuinely substantive, and whether the treaty positions taken were defensible under the new PPT standard. These are related but distinct analyses, and conflating them can lead to unnecessary concessions.
On substance, a diagnostic review was conducted against the criteria that the Belastingdienst applies when assessing whether an entity qualifies for advance certainty – criteria that also inform treaty-eligibility arguments. The review examined decision-making functions, the qualifications and physical presence of personnel, risk management capacity, and the alignment between the contractual arrangements and the actual conduct of the BV.
On the PPT itself, the team undertook a treaty-by-treaty analysis of each royalty flow, examining whether the arrangement as a whole – taking account of all relevant circumstances – could withstand scrutiny under the objective limb of the test: would it be reasonable to conclude that obtaining the treaty benefit was one of the principal purposes? The critical point is that the PPT is not a pure motive test; it is an objective assessment of the arrangement's design and effect, which means the quality of the business rationale documentation matters as much as the underlying commercial reality.
The restructuring strategy that emerged had three elements:
- Substance enhancement: Additional decision-making functions were relocated to the BV, with corresponding changes to staffing and governance. Board composition was revised to ensure that substantive IP management decisions were demonstrably made in the Netherlands.
- Documentation overhaul: Intercompany licence agreements, transfer pricing documentation, and board minutes were reviewed and, where necessary, reissued to accurately reflect the operational reality of the restructured entity. The documentation was aligned with OECD guidance on hard-to-value intangibles.
- ATR renewal: The group engaged with the Belastingdienst to obtain a renewed ATR under the post-MLI framework. This required presenting the revised substance profile and articulating the non-tax business rationale for the Netherlands as the IP holding location.
The rationale for seeking a renewed ATR, rather than simply defending the existing one, was strategic: a current ruling provides advance certainty and reduces the risk of a prolonged dispute, including at the level of the Hoge Raad (the Dutch Supreme Court), which has addressed the interpretation of anti-avoidance provisions in a series of decisions that inform how lower courts and the Belastingdienst approach these matters.
Milestones and Complications
The restructuring process proceeded through several identifiable phases, each carrying its own complications.
Phase 1 – Diagnostic and triage: The initial review identified that, while the BV had genuine staff and operations, several functions that contractually resided in the Netherlands were in practice being directed from a parent entity in another jurisdiction. This is a common finding and is among the primary factors that draw PPT scrutiny.
Phase 2 – Operational changes: Implementing the substance enhancements required coordination with employment law and corporate governance advisers – areas where our corporate law practice in the Netherlands provided material support. Changes to the BV's articles, board composition, and employment arrangements all required formal corporate steps, including KvK filings.
Phase 3 – Transfer pricing alignment: The revised intercompany arrangements triggered a need to update the transfer pricing documentation and, in one case, to enter into a new advance pricing agreement (APA) with the Belastingdienst covering the royalty rate. APA negotiations are resource-intensive; the timeline extended beyond the original estimate.
Phase 4 – Treaty partner coordination: The mutual agreement procedure channel remained open with the treaty-partner jurisdiction throughout. Resolving the withholding tax risk required not only satisfying the Belastingdienst but also providing sufficient documentation to the treaty partner's competent authority to demonstrate that the restructured arrangement no longer presented a PPT concern.
The principal complication throughout was timing: the Belastingdienst's ATR process operates within defined procedural windows, and the group had to manage an active audit in the treaty-partner jurisdiction in parallel. Misalignment between the two jurisdictions' timelines created periods of uncertainty that required careful client communication and risk management.
For groups navigating simultaneous proceedings in multiple jurisdictions, early engagement with specialist counsel is important. Our tax structuring practice in the Netherlands regularly coordinates with local counsel in treaty-partner jurisdictions on precisely these multi-front matters. Please feel free to reach out at info@ferrazwhitmore.com.
Outcome Category
In this type of matter, a successful outcome is not the absence of any tax adjustment – it is the achievement of a defensible, durable structure that provides advance certainty going forward and limits retrospective exposure to a defined and manageable scope. In the illustrative scenario described here, the outcome fell within that category: the renewed ATR was obtained, the transfer pricing documentation withstood scrutiny, and the mutual agreement procedure was concluded without a requirement to restructure the royalty flows themselves.
It is important to be clear that outcomes of this kind are not guaranteed. They depend on the specific facts of the entity's operations, the terms of the applicable treaties as modified by the MLI, and the conduct of the competent authority dialogue. The PPT is a broadly drafted standard, and the Belastingdienst and treaty-partner authorities retain significant discretion in its application.
Three Transferable Lessons
This scenario illustrates patterns that recur across IP holding restructurings in the Netherlands. Three lessons are particularly worth drawing out for groups assessing their own positions.
Lesson 1: ATRs obtained before the MLI entered into force need active review. The MLI came into force on 1 July 2018, and the PPT minimum standard was incorporated into a substantial number of Dutch tax treaties as a result. An ATR that predates that entry into force was granted against a different treaty landscape. Groups that have not revisited their rulings since then are carrying an unquantified risk – not because the old ruling is invalid, but because the treaty framework within which it operates has changed.
Lesson 2: Substance and documentation must be consistent with each other and with operational reality. The most common vulnerability identified in PPT challenges is not an absence of substance but a misalignment between what contractual and corporate documents say and what the entity actually does day to day. Tax risk management in this area requires periodic reconciliation of the two – not just at formation but on a continuing basis as the group's operations evolve.
Lesson 3: The PPT is an objective test, and a credible non-tax business rationale must be documented proactively. Waiting until a challenge arises to articulate why the Netherlands was chosen as the IP holding location is significantly less effective than having contemporaneous documentation that demonstrates the commercial logic. The Netherlands offers genuine advantages as an IP hub – legal certainty, skilled workforce, treaty network, regulatory infrastructure overseen by bodies including the AFM and DNB for regulated activities – and those advantages should be documented in a way that is available to competent authorities when needed. A detailed guide to the Netherlands conditional withholding tax regime provides further context on how treaty-based royalty flows interact with the Dutch withholding framework more broadly.
How Ferraz & Whitmore Can Assist
Our team in the Netherlands works with groups at each stage of the process described above: from initial diagnostic reviews of existing IP holding structures, through substance and documentation enhancement, to representation in ATR and APA processes with the Belastingdienst and, where required, competent authority procedures under applicable tax treaties. We approach these matters as legal and strategic advisers, working in coordination with tax advisers and local counsel in other jurisdictions as the matter requires.
If you are advising a group that holds IP through a Dutch BV and has concerns about its treaty position under the PPT, or if you have received a request for information in connection with a royalty flow, we would welcome the opportunity to discuss the matter. Please contact us at info@ferrazwhitmore.com or visit our contacts page to arrange a consultation.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.