Your US LLC abroad: how the UAE, Hong Kong and others see a disregarded LLC
A founder who lives in Dubai sells to American customers through a Wyoming LLC. A Hong Kong company owns a Delaware LLC that runs its US web shop. A consultant who has moved to Lisbon invoices through a single-member LLC. Sooner or later the same sentence comes up in each of these situations: the LLC is transparent, so for tax purposes it does not exist. In the United States that is often correct. The question that tends to be skipped is whether any other country agrees.
Whether an LLC is ignored for tax purposes is decided by the US tax rules, and those rules bind only the United States. Every other country decides for itself what a US LLC is, and most of them look at its legal form rather than at a box ticked on a US tax form. The result can be an LLC that is invisible in the US and a fully fledged company everywhere else, with consequences for where it is resident, for the tax on what it pays out and for exemptions that everyone assumed would apply. In this article we set out the US starting point and then look at how the United Arab Emirates and Hong Kong see the same LLC, with a shorter look at owners in Europe and at what happens on a sale. Not a complete legal handbook, but a practical overview of the questions that decide the outcome.
Table of contents
1. Transparent in the US does not mean transparent everywhere
3. How other countries decide what an LLC is
4. The UAE: a company, and possibly a UAE resident
5. A UAE company holding the LLC: the participation exemption
6. Hong Kong: outside the net, until the money comes in
7. Hong Kong: why the participation exemption rarely helps, and what does
8. An owner in Europe: opaque, but not out of reach
9. Selling the LLC: where the uncertainty becomes expensive
10. What to settle before the first profit
1. Transparent in the US does not mean transparent everywhere
Under the US rules an LLC with a single owner is disregarded by default: it is not a taxpayer, and its income and expenses are treated as those of its owner. An LLC with two or more members is treated as a partnership, which is transparent as well. Either can opt to be taxed as a corporation instead. For a foreign owner whose LLC has no business in the US, the default outcome is frequently that no US income tax is due at all.
That is what makes the LLC so popular with internationally mobile entrepreneurs, and it is also where the risk sits. A profit that the US does not tax will be taxed, or not, according to how the owner's own country sees the LLC. Transparency is not a characteristic of the LLC itself. It is the way one tax system, the American one, chooses to look at it.
If another country sees a company where the US sees nothing, three questions open up. Where is that company resident? Does a distribution from it qualify for an exemption when it reaches a parent company? And do rules aimed at low-taxed foreign entities apply to its owner? The answers differ from country to country, which is why the rest of this article works through them one jurisdiction at a time.
2. What the US itself sees
Disregarded does not mean invisible to the IRS. A single-member LLC owned by a foreign person must file an information return every year, Form 5472 attached to a pro forma corporate return, reporting the transactions between the LLC and its owner. For that purpose the US rules even treat the LLC as a domestic corporation. The penalty for a missing or incomplete form is USD 25,000 per form per year, which makes it one of the more expensive oversights in international tax.
Whether any US income tax is due depends on whether the LLC carries on a trade or business in the US. If it does, the profit connected with that business is taxed in the hands of the owner. A foreign company pays 21% federal tax on it and, without a treaty, a 30% branch profits tax on profit taken out of the US, while an individual owner pays the individual rates. Neither the UAE nor Hong Kong has an income tax treaty with the US, so those rates apply in full. Keeping stock in a US warehouse, for example through a fulfilment service, can be enough to create a US business, and where exactly the line lies is a question of fact on which advisers regularly differ.
The owner can also elect to have the LLC taxed as a US corporation. It then pays 21% on its own profit, and dividends to a foreign shareholder bear 30% US withholding tax unless a treaty reduces it. The election can take effect at most 75 days before it is filed, and after a change of classification a further change is generally not possible for five years. One more point for individuals who hold an LLC personally: for non-residents, US estate tax on US assets has an exemption of only USD 60,000, and whether a disregarded LLC shields its US assets from that tax is not settled.
3. How other countries decide what an LLC is
Most countries classify a foreign entity by comparing it with their own legal forms. They ask whether it has legal personality, whether its members are liable for its debts, whether profits belong to the members as they arise or only once they are distributed, and whether interests in it can be transferred. The US election plays no role in that comparison, because it is a choice for US tax purposes and says nothing about what the entity is under company law.
Measured against those criteria, a US LLC usually looks like a company. It is a legal person under the law of the state where it was formed, its members are not liable for its debts, and profit reaches them through a distribution rather than automatically. Most countries therefore treat it as opaque: the profit belongs to the LLC until it is paid out. For an LLC with several members some countries look more closely at the operating agreement, but for a single-member LLC the conclusion is almost always the same.
An opaque LLC is not necessarily a problem. It can simply mean that tax in the owner's country only arises on distribution. But it does turn the three questions from the previous section into real ones, and the countries we deal with most often answer them in quite different ways.
4. The UAE: a company, and possibly a UAE resident
The UAE corporate tax rules have no equivalent of the US election. A foreign entity is classified on its own legal features, and a US LLC is a juridical person, so for the UAE it is a company. Tax transparency in the UAE is reserved for partnerships and comparable arrangements between two or more persons, and for foreign partnerships only under specific conditions. A single-member LLC is neither, so its profit is not attributed to its owner as it arises.
That sounds attractive for an owner who lives in the UAE, since individuals pay no income tax there on dividends. The catch is residence. A company formed abroad is resident in the UAE if it is effectively managed and controlled in the UAE. An LLC whose only member lives in Dubai, and whose decisions are all taken there, may on those facts well be a UAE resident company. It must then register for corporate tax, file returns and pay 9% on its worldwide profit above AED 375,000. Small Business Relief can reduce that to nil for businesses with revenue of up to AED 3 million, and in August 2026 that relief was extended to tax periods ending no later than 31 December 2029.
Where a company is managed is a question of fact: where the strategic decisions are taken, by whom, and how that is recorded. For many founders the honest answer is that the LLC is run from a laptop in Dubai. That does not make the structure wrong, but it does mean the UAE position should be a conscious choice rather than a surprise. And any US tax on a US business comes on top, because there is no treaty to relieve double taxation.
5. A UAE company holding the LLC: the participation exemption
Many structures put a UAE company between the owner and the LLC. Distributions from the LLC then rely on the UAE participation exemption, which requires an interest of at least 5%, held for at least twelve months, in an entity that is subject to corporate tax, or a similar tax, at a rate of at least 9% in its country of residence. The guidance of the Federal Tax Authority (FTA) makes this a test of the tax system: if the statutory rate in that country is 9% or higher, the condition is met without recalculating anything. Only where the statutory rate is below 9% does the effective rate come into play.
For a disregarded LLC the rate is not the problem, since the US federal rate is 21%. The problem is residence. In favour of treating the LLC as a US resident: it is a legal person under US law, formed in the US, with its own tax identification number and its own filing obligation. Against: it is not a taxpayer in its own right, and the US will not issue a certificate of residence in its name. The FTA has not published a position on this specific case, so a taxpayer who relies on the exemption is taking a position that may be challenged.
In practice there are three routes. If the LLC is managed from the UAE, it is a UAE resident, and dividends from a UAE resident company are exempt without further conditions, but the LLC then pays 9% itself. If the LLC elects to be a US corporation, the exemption is clearly available, at the price of 21% US tax and 30% withholding on dividends. And if the LLC stays disregarded and is managed outside the UAE, the exemption is arguable but uncertain, and if it is refused the dividend is taxed at 9% without any credit. Note that the first and third routes both end at roughly 9%: the difference is timing and certainty, not the rate. The election is therefore rarely worth it for UAE reasons alone. It becomes logical when the LLC has a US business anyway, because the US then taxes the profit in either form and the election removes the discussion in the UAE.
6. Hong Kong: outside the net, until the money comes in
Hong Kong taxes only profits that arise in Hong Kong from a business carried on there. It has no election either, and it treats a US LLC as a separate company. Profits the LLC earns through operations outside Hong Kong are therefore not taxed in Hong Kong, even if the Hong Kong parent sets the strategy, because under the Hong Kong source rules it is where the operations take place that counts, not where the decisions are made.
The question moves to the Hong Kong company that receives the distributions. Since 2023, foreign-sourced dividends, interest and gains on shareholdings that are received in Hong Kong by a company belonging to a multinational group are treated as Hong Kong profits and taxed, unless an exception applies. A multinational group in this sense requires no minimum size: a Hong Kong company with a single US subsidiary already is one.
There is a preliminary question here that many overlook. The Hong Kong tax authority describes a dividend as a payment in respect of a share in a company, and an LLC has membership interests rather than shares. It is therefore not certain that a distribution from an LLC is a dividend within the meaning of these rules at all. That goes some way to explaining why many structures appear to run without friction, but it is not a foundation on which we would build.
7. Hong Kong: why the participation exemption rarely helps, and what does
The Hong Kong participation exemption requires an interest of at least 5% held for twelve months, and a subject-to-tax condition: the income, or the profits from which it is paid, must actually have been taxed at a headline rate of at least 15%. The tax authority's own examples make clear that income exempt in a country with a 20% rate does not meet the condition, because no tax was charged on it. A disregarded LLC without a US business pays no tax anywhere, so the condition fails, even though the US rate on paper is 21%.
This is where Hong Kong and the UAE part ways. The same LLC can pass the UAE test, which looks at the tax system, and fail the Hong Kong test, which looks at the tax actually charged. The Hong Kong condition is met if the LLC elects corporate status, or if it has a US business whose profit is taxed in the US.
Two other routes remain. The first is economic substance. A company that does nothing but hold shareholdings faces a reduced test: it must meet its registration and filing obligations and have adequate people and premises in Hong Kong to hold and manage its interests. It may outsource that to a Hong Kong service provider, provided the work is actually done in Hong Kong under the supervision of the board. A nominee director while the management takes place elsewhere is not enough, and as soon as the company also lends money, charges fees or recharges costs, the full substance test applies. The second route is not to receive the money in Hong Kong: a distribution paid to an account outside Hong Kong and passed on from there is not received in Hong Kong, but using it to pay Hong Kong expenses counts as receipt. If none of these routes works, the distribution is taxed at the ordinary profits tax rate of 16.5%, without a credit.
8. An owner in Europe: opaque, but not out of reach
Most European countries also classify a US LLC by its legal form, and most conclude that it is a company. For an owner who lives there, that sounds like deferral: no tax until the LLC distributes. In practice the owner's country usually has a second line of defence. Every EU country is required to apply controlled foreign company rules to companies resident there, and several apply similar rules to individuals. Those rules can attribute income of a low-taxed foreign entity to the person who controls it, every year and regardless of any distribution. Which income is caught differs per country: some rules target passive income such as interest and royalties, others any arrangement without real substance, and some cast the net wider. A disregarded LLC that pays no tax anywhere is exactly the kind of entity those rules look at.
Some countries go further and treat certain low-taxed foreign entities as transparent for their residents by statute, whatever the entity looks like under company law. Others have not taken a clear position on single-member LLCs at all. Portugal is an example: its tax authority has ruled that an LLC with two members is not transparent, but it has never published a ruling on a single-member LLC owned by a Portuguese resident, and advisers read the rulings that do exist in different ways.
For an owner in Europe the question is therefore less whether the LLC is transparent and more whether its profit is attributed to the owner anyway. Putting a Hong Kong or UAE company in between does not automatically solve that, because many of these rules also look at entities held indirectly.
9. Selling the LLC: where the uncertainty becomes expensive
The questions in this article matter every year, but they matter most on a sale. For the US, selling a disregarded LLC is selling its assets: the buyer takes over the business itself, and the part of the gain that relates to a US business can be taxed in the US. Buyers often welcome that, because they get a fresh starting value for the assets. Selling the shares of a US corporation is different: for a foreign seller that gain is generally not taxed in the US, unless the company mainly holds US real estate.
In the UAE a gain on selling a participation falls under the same participation exemption as a dividend, including the subject-to-tax question discussed above. Two details make a sale more demanding than a dividend. The twelve months must actually have passed at the moment of the sale, because an intention to hold the interest for longer does not count here. And if the exemption is refused, the whole gain is taxed at 9% in one go. A position that costs little on an annual dividend can therefore become a significant exposure on an exit, which is reason enough to settle the classification well before a sale is on the table.
In Hong Kong, gains on the sale of shareholdings have been covered by the same regime as dividends since 2023, and broadly the same exceptions apply. Here too the subject-to-tax condition is hard to meet for a disregarded LLC, so the substance route or keeping the proceeds outside Hong Kong usually has to do the work. And whoever is considering the US election should put it in place well before a sale: it can take effect at most 75 days before it is filed, and changing classification shortly before a sale raises questions of its own.
10. What to settle before the first profit
The LLCs that cause trouble tend to share a pattern: the structure was chosen because the LLC is transparent in the US, and nobody asked how it looks from the country where the owner lives or where the parent company sits. The ones that work have usually answered a short list of questions at the start.
For every country involved: is the LLC a company there, where is it resident, and does what it pays out qualify for an exemption? On the US side: are the annual Form 5472 filings in order, and does the LLC have a US business, now or once stock is held in the US? On the election: is it a deliberate choice made before the first profit, with the US cost of 21% and the withholding on dividends set against the certainty it buys, and with the five-year lock in mind? On management: are decisions taken, and recorded, in the country where the LLC is meant to be resident, and is that consistent with the position taken elsewhere? For a Hong Kong parent: which exception is relied on, and do the money flows actually match it? And if a sale is conceivable within a few years: is all of this settled now, rather than during the buyer's due diligence?
A US LLC is a flexible and inexpensive vehicle, and in the right structure it does exactly what it promises. The mistake is to assume that the US answer is the only answer. If you hold an LLC from the UAE, Hong Kong or elsewhere, or you are about to set one up, we are happy to think it through with you, preferably before the classification is decided for you.
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Director of a foreign company: where is your remuneration taxed?
You live in the Netherlands and you have just been asked to join the board of a company in London, Dubai or Milan. Or the other way round: you have moved abroad and you still sit on the board of your own Dutch company, flying in every few weeks. In both cases a fee arrives, and in both cases the natural assumption is that it is taxed like any other salary: where you did the work, subject to the familiar 183-day rule. That assumption is wrong more often than it is right.
Tax treaties treat directors as a category of their own, and the rules for them run in the opposite direction from those for employees. The consequences are practical and sometimes expensive: a fee can be fully taxable in a country where you never set foot, a role you thought was a directorship may not count as one, and since 2023 a board seat in a low-tax country no longer saves a Dutch resident anything. In this article we set out who counts as a director, what happens when you wear two hats, how the Netherlands relieves double taxation and where the real risks sit. Not a complete legal handbook, but a practical overview of the points that matter most in practice.
Table of contents
1. Why a director is not an employee for treaty purposes
2. Who counts as a director: the appointment, not the business card
3. Two hats: the board role and the day job
4. Splitting the remuneration, and who has to prove it
5. Living in the Netherlands, sitting on a foreign board: credit, not exemption
6. Living abroad, directing a Dutch company
7. The owner-director and the customary salary
8. The hidden risk: the company may move with you
9. Social security follows its own track
1. Why a director is not an employee for treaty purposes
For ordinary employment income, treaties start from the country where the work is physically performed. The country of residence keeps the taxing right only if you work abroad for less than 183 days and the costs do not land with a local employer. That is why cross-border employees keep travel calendars: every day counts.
Directors' fees are governed by a separate treaty provision, and it turns the logic around. Remuneration a person receives in the capacity of a member of the board may be taxed in the country where the company is resident. Where the board meetings take place is irrelevant, and so is where you prepared for them. A Dutch resident on the board of a German company is taxable in Germany on the fee even if every meeting is held by video call from a home office in Utrecht. There is no 183-day rule and no requirement that you ever enter the country.
The reasoning is that a director's work is inherently hard to locate, so the treaty ties it to the one thing that is fixed: the company. The consequence is that the same day of work can be taxed in two completely different places depending on which hat you were wearing when you did it. That is what makes the questions in the next three sections decisive.
2. Who counts as a director: the appointment, not the business card
Under Dutch case law the term is formal. You are a director for treaty purposes if you have been appointed as a statutory board member under the company law that governs the company, and only then. The Supreme Court laid that down in 1999 and confirmed it in April 2023, in a case about a manager of companies in Brazil and Argentina who had run them in practice but had never been formally appointed to their boards. His remuneration did not fall under the directors' article, and he could not claim the relief that goes with it.
The rule cuts both ways. A "managing director" or "CEO" title on a business card does not make you a director if the shareholders never appointed you, so the fee stays ordinary employment income and the working-day count applies. Conversely, a formal appointment brings you within the directors' article even if the actual board role is modest and you spend most of your time on operational work.
It also matters what "director" means in the country concerned. Treaties use the company law of the company's own country to decide who sits on its board, and some treaties widen the concept by protocol. What does not count is the underlying substance of what you do, at least not for this first question. That question is answered by the appointment decision and the trade register, nothing else.
3. Two hats: the board role and the day job
Once you are formally a director, the second question opens up: is everything you receive from the company a director's fee? The treaty text says the article covers remuneration received in the capacity of a board member. The official commentary on the model treaty draws the line explicitly: remuneration for other functions, for example as an ordinary employee, adviser or consultant, falls under the employment article instead. A director's status does not pull all of that person's other income into the directors' article. There is no attraction principle.
Dutch courts apply that distinction in practice. In June 2023 the Court of Appeal in 's-Hertogenbosch dealt with a Dutch owner-director who had moved to Italy and kept both his board seat and his operational job at his Dutch company. The court split the remuneration itself. It valued the board role, which consisted of approving the annual accounts and attending the shareholders' meeting, at EUR 3,000 a year, and treated the rest as ordinary employment income. That employment income was taxable in the Netherlands only for the roughly twenty days he had actually worked here, one twelfth of the total.
That judgment is instructive for anyone in a dual role. The board component of a working director is often small, because governing a company takes far less time than running it. The rest follows the ordinary rules, which means the country where the work is physically done. For a director who lives abroad and works mostly from there, that difference is the bulk of the tax bill.
4. Splitting the remuneration, and who has to prove it
Here the practical difficulty begins. If a company pays one undivided amount to a person who is both director and employee, settled case law places the burden of proof on the director to show which part was earned in which capacity. Fail to make that split credible and the whole amount is treated as a director's fee. Several taxpayers have lost on exactly this point: one blended remuneration, a contract that read like a director's contract, and no visible evidence of separate work.
The paperwork decides more than people expect. In March 2023 the Court of Appeal in The Hague ruled on the wording of the employment agreement itself, and treated the entire remuneration as a director's fee because the contract did not distinguish the roles. The Tax Administration's own policy has said since 1990 that the label does not decide and the actual functions do, but that principle works both ways: substance can rescue a badly worded contract, and it can also condemn a well worded one that is not lived up to.
Two traps deserve a specific mention. The first is the management agreement. If your personal holding company provides services to an operating company and the agreement says the holding company is "appointed as director", the Supreme Court held in 2004 that the entire management fee follows the directors' article. Service agreements for operational work should describe services and nothing else. The second is the requirement that the fee is actually borne by the company concerned. A general group recharge is not enough to bring a payment within the directors' article of a treaty, so where the money comes from and how it is invoiced matters as much as what the contract says.
5. Living in the Netherlands, sitting on a foreign board: credit, not exemption
If you live in the Netherlands, your worldwide income is taxed here and the Netherlands has to relieve double taxation on the foreign board fee. For ordinary employment income abroad the Netherlands generally uses the exemption method with progression: the foreign income is taken out, the foreign tax rate is effectively final, and a low foreign rate means a low overall burden.
For directors' fees Dutch treaty policy has for decades preferred the credit method instead. The foreign fee stays in the Dutch tax base, and the foreign tax is deducted from the Dutch tax. The result is that you always end up paying at least Dutch rates. The reason is stated openly in the policy documents: directors' fees are prone to being taxed nowhere, either because the company's country does not tax work performed outside its borders or because it offers directors a favourable regime, and the credit method closes that gap.
For many years an approval softened this. A Dutch resident could still claim the exemption method for a foreign board fee, provided the fee had actually been taxed in the other country and had not enjoyed a preferential regime there. The Supreme Court applied that condition strictly in September 2013: a director who had not declared part of his remuneration in the United States, and had paid no tax on it there, could not use the exemption, and the court added that a nil valuation under foreign rules did not help either. In July 2022 the approval was withdrawn altogether with effect from 1 January 2023. Since then the credit method applies whenever the treaty prescribes it, which is most treaties. In practice that means a board seat in a country with a low or zero rate on directors' fees no longer produces a saving for a Dutch resident: the difference is simply paid in the Netherlands.
6. Living abroad, directing a Dutch company
Turn the situation around and the same rule works in favour of the Dutch treasury. A person who lives abroad and is a statutory director of a Dutch company is taxable in the Netherlands on the director's fee, wherever the work is done. Dutch domestic law contains a specific rule that treats the directorship of a Dutch resident company as work performed in the Netherlands, so the company must run the fee through Dutch payroll and withhold wage tax, even if the director never comes here.
What the Netherlands cannot do is tax the other hat. Remuneration for operational work that the same person performs abroad falls under the employment article and stays with the country where the work is done, as the 's-Hertogenbosch case in section 3 illustrates. For a director who has emigrated and keeps running the business from abroad, the composition of the remuneration therefore determines most of the outcome, and a realistic split documented in advance is worth a great deal.
Treaties do not all follow the model text. The treaty with the United Kingdom, for example, only allows the company's country to tax a board fee insofar as it relates to services actually performed there, which brings the day count back in through the side door. Older treaties, such as the one that still applies to Bosnia and Herzegovina, define by protocol who is regarded as a director. Before assuming the standard rule, read the treaty that actually applies.
7. The owner-director and the customary salary
Owner-directors (DGAs) who hold a substantial interest in a company they work for are subject to the Dutch customary salary rule, which in 2026 sets a norm of EUR 58,000 unless a lower salary can be substantiated. A cross-border board seat creates a frequent misunderstanding here. The test applies per company. A board fee received from a foreign company does not fill the norm for the Dutch holding company, and a Dutch salary does not cover the foreign company either. Each entity in which you hold a substantial interest and for which you work is assessed on its own.
That matters because a correction under the customary salary rule is fictitious wage. It is taxed in the Netherlands in full, and since no foreign country has actually taxed that fictitious amount, there is no foreign tax to credit against it. Reducing a Dutch holding salary because a foreign board fee has appeared is therefore not a neutral rearrangement: it is a position that has to be defended with evidence about the most comparable employment, and if the defence fails the cost lands entirely in the Netherlands.
The safe route is to keep each company's salary at or above its own norm and to let the foreign fee be what it is: additional remuneration for an additional role. The moment the two start being traded off against each other, the file needs to be considerably thicker.
8. The hidden risk: the company may move with you
The biggest risk in these situations is often not the fee at all. A company is tax resident where its effective management is exercised, and effective management is exercised by the people who take the key decisions. If a Dutch company has a single director who has moved to Dubai and runs everything from there, the question is no longer where the director's fee is taxed but whether the company itself has quietly become a resident of the United Arab Emirates. The same applies in reverse to a foreign company run by a Dutch resident from a home office.
Modern treaties increasingly resolve dual residence of companies through a mutual agreement procedure between the two tax authorities rather than a fixed tiebreaker. Until they agree, the company is not entitled to treaty benefits at all. A dispute about a EUR 30,000 board fee can in that way escalate into a dispute about the residence of the whole company, its profits and its dividends.
The mitigation is not complicated, but it has to be real. Board decisions should be taken, and minuted, in the country where the company is meant to be resident. A second director who is resident there helps. Periodic physical presence for board meetings is worth the airfare. And the director's contract should reflect the split between governing the company and doing the daily work, which is the same document that section 4 asks for.
9. Social security follows its own track
None of the above says anything about social security contributions, which follow entirely separate rules. Within the European Union, and under the protocol that now governs the United Kingdom, a person is insured in one country at a time, and for someone working in two countries that is generally the country of residence if a substantial part of the work is done there, otherwise the country of the employer. Outside those frameworks bilateral agreements or plain domestic law decide.
The result can be that tax on a board fee is due in one country while contributions are due in another, and that a person who owes no Dutch contributions also receives no Dutch tax credits. Where the answer is the Netherlands, the foreign company may find itself with Dutch payroll obligations for contributions even though it has no presence here. An A1 certificate before the first payment prevents most of the surprises, and it is far easier to obtain in advance than to unwind afterwards.
10. How to keep it manageable
The directors most likely to run into trouble share the same pattern: one contract, one undivided fee, no record of where decisions were taken, and a residence that changed without anyone revisiting the arrangements. The ones who do not have usually done a handful of simple things.
They have a formal appointment decision, so the first question is never in doubt. They have separate agreements for separate roles, and the service agreement for operational work describes services without a word about management or appointment. The board fee is proportionate to what the board actually does, and it is paid and invoiced by the right company. They keep a working-day log, because under several treaties the days still matter for the employment part and under some for the board fee itself. Board meetings are minuted in the right country. Each company in which they hold a substantial interest passes its own customary salary test. And where the amounts are material, they ask the Tax Administration for advance certainty on the split rather than defending it after the fact.
A cross-border board seat is a normal feature of an international career, and the rules are workable once you know that directors and employees live in different chapters of the treaty. If you are about to accept a seat abroad, or you have moved and still direct a company here, we are happy to think it through with you before the first fee is paid rather than after the first assessment arrives.
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Tax Plan 2027: what changes for entrepreneurs, owner-directors and international taxpayers
Every third Tuesday of September the same ritual plays out in The Hague: the budget is presented, the tax plan lands with it, and within hours the summaries start circulating. Most of them run to dozens of pages and treat a change to the excise duty on beer with the same weight as a change to your box 2 position. If you run a business, own one through a holding company, or live and work across borders, you do not need all of it. You need to know which measures actually touch you and, just as importantly, which ones reward acting before 1 January and which ones reward waiting.
The 2027 Tax Plan is not a year of grand reform. It is a year of trimming: several long-standing allowances for the self-employed are being wound down, a handful of reliefs are being frozen rather than indexed, and a number of court rulings are being written into law. But underneath the trimming sit a few genuinely useful changes, from a quadrupled innovation box lump sum to a step-up for shareholders of companies that move to the Netherlands. In this article we set out the measures that matter most for entrepreneurs, owner-directors and internationally mobile taxpayers, and where the timing makes a difference. Not an exhaustive list of every proposal, but a practical overview of the points that deserve a place on your agenda before the year ends.
Table of contents
1. Rates and credits: a little more tax at the top, a little less at the bottom
2. Innovation box: the lump sum quadruples
3. The self-employed: three allowances head for the exit
4. Share options at start-ups and scale-ups: tax at sale, on 65%
5. Mergers and demergers: the three-year presumption disappears
6. Borrowing from your own company: a fix for inherited debt
7. Real estate: transfer tax on second homes drops to 7%
8. Employers: mileage, pensions and the work-related costs scheme
9. International: a step-up on arrival, and the 30% ruling becomes 27%
10. What to do before 1 January, and what to leave until after
1. Rates and credits: a little more tax at the top, a little less at the bottom
The box 1 rates for people below state pension age move in familiar small steps. The first bracket is expected to run to EUR 39,247 at 36.23%, the second to EUR 78,426 at 38.16%, and everything above that stays at 49.50%. Compared with 2026 that is roughly half a percentage point more in the first two brackets, partly offset by a slightly longer first bracket. For most employees and owner-directors on a customary salary the net effect is modest.
The credits move in the opposite direction. The general tax credit rises to a maximum of EUR 3,154 and the employed person's credit to EUR 5,929, both up from 2026. The income-dependent combination credit for working parents goes the other way: it drops to EUR 2,918 in 2027 and is now on a published path to complete abolition in 2035, so families that rely on it should stop treating it as a permanent feature.
One earlier decision also lands this year. The self-employed deduction falls again, from EUR 1,200 to EUR 900. On its own that is a small number. Read together with section 3, it is part of a clear direction: the fiscal distance between a sole trader and an employee is being closed, one allowance at a time.
2. Innovation box: the lump sum quadruples
The innovation box taxes profit from self-developed intangible assets at 9% instead of the normal corporate rate. For smaller companies the barrier has never been the rate, it has been the paperwork: allocating profit to a specific asset is expensive, and for a business with a few tens of thousands of euros in qualifying profit the exercise rarely paid for itself. The lump sum alternative solved that in principle but was capped so low that few bothered.
That changes. Under the proposal a company that opts for the lump sum may treat 25% of its profit as innovation profit, and the maximum amount that can enter the box this way rises from EUR 25,000 to EUR 100,000 per year per taxpayer. The lump sum applies in the year the asset comes into existence and the two following years. For a software company, a product developer or an engineering firm with a modest patent portfolio, this turns a theoretical relief into a real one.
Two things to keep in mind. The lump sum replaces the normal allocation, so a company with large innovation profits may still be better off doing the full calculation. And if your group is large enough to fall under the global minimum tax, be aware that the innovation box is not covered by the new safe harbour for incentive regimes, because it follows income rather than investment. In that setting the 9% rate can trigger top-up tax elsewhere.
3. The self-employed: three allowances head for the exit
The starters' allowance is effectively gone. It drops from EUR 2,123 to a symbolic EUR 10 on 1 January 2027 and is abolished altogether in 2028, with no transitional protection for people who started their business before 2027. The accelerated depreciation option for starters ends in 2028 as well, and the starters' allowance for the partially disabled follows in 2029.
Two more allowances are being used to pay for something else. The co-working partner deduction, for entrepreneurs whose partner works in the business without pay, and the discontinuation allowance, which shelters part of the profit when you stop, are both cut by roughly three quarters first and abolished three years later. The discontinuation allowance falls from a maximum of EUR 3,630 to EUR 908. If you were counting on it for a planned exit, it is worth checking whether the timing of that exit still makes sense.
Taken together with the shrinking self-employed deduction, the message is unambiguous. The remaining tax advantages of operating as a sole trader are being phased out, and for a growing business the comparison with a private limited company deserves a fresh look rather than an inherited assumption.
4. Share options at start-ups and scale-ups: tax at sale, on 65%
This is the measure the previous three are funding, and for founders and their early employees it is a significant one. Today an employee who receives share options is generally taxed when the shares become tradeable, or at exercise if they choose, on the full value of the benefit. That produces the well-known problem of a tax bill on paper wealth before any cash has been received.
For employees of qualifying start-ups and scale-ups the proposal moves the taxable moment to the actual sale of the shares, and counts only 65% of the benefit as wages. In practice that means the tax follows the cash, and at a materially lower effective rate. The scheme is intended to apply from 2027 and comes with conditions, including as a rule a minimum of two years between grant and sale.
The transitional rule is unusually generous and worth flagging to anyone who granted options recently. Options granted on or after 17 April 2025 that have not yet been taxed by the end of 2026 can be brought under the new scheme, provided the required ruling is applied for by 31 December 2027. If you run a start-up with an option plan, that is a date for the calendar.
5. Mergers and demergers: the three-year presumption disappears
A business merger or demerger can be carried out without an immediate tax settlement, as long as the reorganisation is not mainly aimed at avoiding or deferring tax. Until now the law added a presumption: if you sold one of the companies involved to an independent buyer within three years, you had to prove yourself that there were sound business reasons. The Supreme Court held that this reversal of the burden of proof is incompatible with European law, and the presumption is now being removed. Going forward the inspector has to produce at least a beginning of evidence before the facility can be challenged.
That is good news on the substance, but it comes with a practical loss. Because the presumption no longer exists, the Tax Administration will also no longer give advance certainty specifically about a sale within three years. The inspector can still question a reorganisation on ordinary grounds. So the burden shifts, but the need for a well-documented business rationale does not go away, and if anything a solid file becomes more important precisely because there is no longer a formal ruling to hide behind.
6. Borrowing from your own company: a fix for inherited debt
Owner-directors who owe their own company more than EUR 500,000 are deemed to receive a dividend for the excess. That rule has been in place for a few years. What the current text did not handle well is death. When shares are inherited, regular income from those shares received within 24 months after death can under conditions stay outside box 2, with a corresponding reduction of the acquisition price. Applied to the deemed dividend on excess debt, that produced an odd result: the exclusion applied, but the EUR 500,000 threshold did not move up with it, so the following year the same debt triggered tax again.
The proposal removes that overlap. For estates that include both shares and a substantial debt to the company, the practical consequence is that box 2 tax on the excess can be due straight away rather than being pushed around between years. Anyone with a large current account debt to their holding company should look at this in the context of their estate planning, not only their annual return.
7. Real estate: transfer tax on second homes drops to 7%
The general rate of transfer tax for homes that the buyer will not use as a main residence falls from 8% to 7%. That covers rental property, second homes and holiday homes, and the stated aim is to make investing in rental housing more attractive again. The 10.4% rate for non-residential property, the 2% rate for owner-occupiers and the starters' exemption all stay as they are.
The timing point is obvious but easy to miss in the excitement of a purchase. If you are planning to acquire a property that will not be your main residence and the transfer can reasonably take place after 1 January 2027, the difference is a full percentage point of the purchase price. On a EUR 600,000 apartment that is EUR 6,000 for signing a few weeks later.
Two housing measures aimed at housing corporations round out this chapter: a new transfer tax exemption for transfers between corporations of property used for services of general economic interest, and an exemption for corporations from the general interest deduction limitation in corporate tax. Both are sector-specific and will not affect most private investors.
8. Employers: mileage, pensions and the work-related costs scheme
The tax-free mileage allowance rises from EUR 0.23 to EUR 0.25 per kilometre, and does so with retroactive effect from 1 January 2026, formalising an earlier policy decision. Employers are not obliged to pay it, and if you want to apply the increase for the whole of 2026 you need to agree that with your staff. The same EUR 0.25 applies to the deductible travel costs of entrepreneurs and to a few forfaits in the personal deductions.
The work-related costs scheme gets slightly more room: the free space over the first EUR 400,000 of the wage bill goes from 2% to 2.16%, with 1.18% above that unchanged. Against that, the targeted exemption for staff discounts on the company's own products, up to 20% and EUR 500 per employee per year, is abolished. Those discounts can still be given, but they will now consume free space, and many employers will find that the two changes roughly cancel each other out.
The quietest measure in this chapter may end up being the most expensive over time. The salary cap for tax-facilitated pension accrual, EUR 137,800 in 2026, will not be indexed from 2027 up to and including 2032. Over six years of wage growth that pulls a steadily larger group of higher earners above the cap, and above it no second-pillar pension or third-pillar annuity can be built with tax relief. For owner-directors who fund their own pension the arithmetic changes accordingly.
9. International: a step-up on arrival, and the 30% ruling becomes 27%
The most welcome international measure fixes a long-standing unfairness. When a foreign company moves its place of effective management to the Netherlands, a foreign-resident shareholder with a substantial interest becomes liable to Dutch box 2 tax on that holding. Until now the acquisition price for Dutch purposes was the historical cost, which meant the Netherlands could tax value growth that arose long before it had any taxing right. Under the proposal the acquisition price is set at the fair market value at the moment of the move, so only the increase after that date is taxed here. The step-up does not apply if the shareholder was already a Dutch non-resident taxpayer for that holding, and separate rules are announced for returning residents. A defensible valuation at the date of migration becomes essential, because without one you cannot later show which part of a gain falls outside Dutch tax.
For internationally recruited staff, previously enacted changes now bite. From 2027 the 30% ruling becomes a 27% ruling and the salary thresholds rise. Employees who came in by the end of 2023 keep 30% and the old indexed thresholds. Those who arrived in 2024 move to 27% but keep the old salary norm. The transitional protection for the partial non-resident status, which allowed expats to keep foreign assets outside box 3, also runs out at the end of 2026. If you employ, or are, someone on the ruling, 2027 looks different from 2026 and the payroll should reflect that from the first month.
Three further items for groups and investors. First, the global minimum tax gets four OECD-agreed safe harbours that set the top-up tax for a country at nil when the conditions are met, including a simplified calculation and a safe harbour for groups with a parent in a country with an equivalent regime, with the United States clearly in mind. Parts of this apply retroactively to the end of 2025. Second, investors who hold Dutch shares through a foreign investment fund get a statutory right to a refund of Dutch dividend tax for tax withheld from 2027, following a 2024 Supreme Court ruling, with a five-year window to claim and three years for companies. Third, for companies that hedge the currency risk on a foreign participation and have the result covered by the participation exemption, the part of the result that was already priced into the hedge through the interest differential becomes taxable from financial years starting in 2027, with old law continuing until the end of 2027 for hedges approved or applied for before 15 September 2026.
10. What to do before 1 January, and what to leave until after
A tax plan is a list of proposals until parliament has voted, and details can still move in the coming months. That said, the direction is clear enough to act on, and the calendar sorts itself into three groups.
Act before the year ends if you are planning a business merger or demerger and want to make use of a ruling on a possible sale within three years, because that option disappears. Check whether existing hedges on foreign participations were approved or applied for before 15 September, since that determines whether you keep the old treatment through 2027. If you are on the 30% ruling, or employ people who are, work out what 27% and the higher salary norm mean for 2027 payslips now, and remember that the partial non-resident status ends. And if you still have deductible healthcare costs that can be planned, 2027 is the last year for that deduction.
Wait until after 1 January if you are buying a home you will not live in, because transfer tax drops a point. Consider the same for energy-saving investments on the energy list, where the deduction rises from 40% to 45.5% for commitments entered into in 2027. And if you have a start-up option plan, do nothing rash: options granted since 17 April 2025 that are still untaxed at the end of 2026 can move into the new regime, provided the ruling is requested in time.
Finally, two structural questions rather than deadlines. If you operate as a sole trader with a growing profit, the steady removal of allowances makes the comparison with a private limited company worth redoing on 2027 numbers. And if you are a foreign shareholder considering moving a company's management to the Netherlands, the new step-up removes what used to be the biggest objection, provided you document the value at the date of the move. Both are conversations we are happy to have with you, ideally before the calendar turns rather than after.
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The 0% rate in a UAE free zone: when your income actually qualifies
The plan sounds simple enough. You set up a company in a free zone in Dubai or one of the other emirates, the licence arrives within a few weeks, and from that moment on the profit is taxed at 0%. It is the story that circulates at every network event, and it is not entirely wrong. The zero rate genuinely exists, it is written into the corporate tax law, and thousands of companies apply it every year.
What that story leaves out is the part that decides whether you actually get there. The 0% rate does not attach to your company, it attaches to your income, and only to the part of it that qualifies. Everything else is taxed at 9%, and a single misstep can cost you the status for five years in a row. In this article we set out what qualifying income really is, which conditions sit underneath it, how the test works per income stream and where free zone companies most often come unstuck. Not a complete legal handbook, but a practical overview of the points that matter most in practice.
Table of contents
2. Not one test, but five conditions at once
3. Substance: the work has to happen in the zone
4. Qualifying income: four routes, tested per income stream
5. Selling to another free zone company: who really receives it
6. Selling outside the zone: only the list counts
7. Income from intellectual property: the nexus fraction
8. The de minimis rule: how a small sale costs you five years
9. Where it goes wrong in practice
10. How to keep the 0% defensible
1. What the 0% rate really is
A company registered in a free zone is, in the language of the corporate tax law, a free zone person. If it meets all the conditions it becomes a qualifying free zone person, and that status carries two rates rather than one: 0% on its qualifying income and 9% on the taxable income that is not qualifying income. There is no exemption for the company as a whole. The rate follows the income, which is why the whole exercise comes down to sorting your revenue into the right boxes.
Not everyone can be a free zone person to begin with. It has to be a legal entity that is incorporated, established or registered in a free zone, and a branch registered there counts as well. An individual cannot be one. Neither can a company that was set up somewhere else and is simply managed from a free zone address, which is an anti-abuse rule worth knowing before you buy into a structure that relies on it.
The zero rate also does not put you outside the system. A qualifying free zone person remains a taxable person: it registers for corporate tax, it files a return within nine months after the end of its tax period, and it prepares audited financial statements regardless of how small it is. Paying nothing and filing nothing are two very different things, and the second one costs you the status.
2. Not one test, but five conditions at once
The law sets five conditions and they apply cumulatively. You maintain adequate substance in the UAE, you derive qualifying income, you have not elected to be taxed under the regular regime, you comply with the arm's length principle and the transfer pricing documentation rules, and you meet any further conditions set by the Minister. Those further conditions turned out to be two: your non-qualifying revenue stays within the de minimis limit, and you prepare audited financial statements.
What makes this regime unforgiving is the sanction. If you fail any one of the conditions at any moment during a tax period, you lose the status from the start of that period and for the four following ones. That is five years in total, and it is not undone by fixing the problem in month eleven. Recovery afterwards is not automatic either: when the quarantine ends you are simply tested again, on the same conditions.
There is also a deliberate way out. A free zone person can elect to be taxed under the regular regime instead, which means giving up the zero rate in exchange for the things a qualifying free zone person cannot have: the 0% band on the first AED 375,000 of taxable income, small business relief, qualifying group relief, business restructuring relief, the transfer of tax losses and tax grouping. For most companies that trade is a poor one, because they hand in the rate that made the structure attractive in the first place. It becomes worth considering when the qualifying income is marginal anyway, or when the status has become impossible to defend.
3. Substance: the work has to happen in the zone
Substance is the condition that fails most often, and it is more specific than an office and a visa. The rule is that you carry out your core income-generating activities in the free zone itself, with assets, qualified full-time employees and operating expenditure that are adequate for each separate activity. Core income-generating activities are the essential, value-adding things you do to earn the revenue, so they differ per business: for a trading company they sit in sourcing and dealing, for a manufacturer in production, for a holding company in the investment decisions.
Adequate has no fixed number attached to it. It is a sliding scale that follows the nature, the scale and the revenue of the activity, and it cuts both ways. A holding company without employees can be fine with a modest office and board decisions that are demonstrably taken in the zone. A trading operation with substantial turnover and one part-time administrator will not be. If you run several activities, the same employee cannot be counted twice for two of them.
Outsourcing is allowed, within limits. You may outsource core activities to a related party or a third party inside a free zone or a designated zone, provided you exercise adequate supervision, and for qualifying intellectual property the circle is wider: anyone in the UAE, and unrelated parties outside it. Two things break the test quietly. Activities carried out through a permanent establishment on the mainland do not count towards the substance of the free zone company. And a company that only executes decisions taken by a foreign parent is not performing its core activities in the zone at all, whatever the organisation chart says.
One detail catches goods businesses off guard. For distribution, and for goods physically entering the country, you need a designated zone rather than any free zone. A designated zone is a zone that is also recognised as such for VAT purposes, and not every free zone has that status. It is worth confirming with your own free zone authority which of the two you are in, before the goods start moving.
4. Qualifying income: four routes, tested per income stream
Qualifying income comes in four categories. The first is income from transactions with another free zone person, as long as it does not come from an excluded activity. The second is income from transactions with anyone outside the free zones, but only where it relates to an activity that appears on the list of qualifying activities. The third is income from qualifying intellectual property, calculated with a formula rather than taken in full. The fourth is everything else, which only qualifies if it stays inside the de minimis limit.
Three types of income are pushed out before you even reach those categories. Income attributable to a permanent establishment, whether on the mainland or abroad, is never qualifying income. Neither is income from immovable property, with a narrow exception for commercial property inside a free zone in a transaction with another free zone person. And intellectual property income that falls outside the qualifying intellectual property regime is out as well.
The practical consequence is the one most people miss: this is not an all-or-nothing test at company level. You test each income stream separately, against the counterparty and the activity behind it. A company can have rental income that qualifies, service income that qualifies and one advisory fee to a mainland customer that does not, all in the same year. Sorting that out afterwards, from an accounting system that was never set up to distinguish them, is considerably harder than tagging the streams as they arise.
5. Selling to another free zone company: who really receives it
Income from another free zone person only qualifies if that other company is the beneficial recipient of the goods or the services. The definition is deliberately plain: the beneficial recipient is the person with the right to use and enjoy what it received, and without a contractual or legal obligation to pass it on to someone else. A conduit, an agent or a nominee therefore fails the test, and when it does, the consequence lands with you as the seller rather than with them.
The distinction is finer than it looks. A free zone buyer that is contractually obliged to deliver the same goods straight on to a third party is not the beneficial recipient. A free zone buyer that uses what it bought in its own business and later sells its own output onward remains the beneficial recipient of the original purchase. What matters is whether the goods or the services stop with them, not whether the company eventually sells something.
Because you cannot see inside your customer's contracts, the tax authority accepts that a seller may rely on a written confirmation from the buyer that it is the beneficial recipient, unless there is reason to doubt it. Building that confirmation into your standard terms of delivery is a small administrative step that protects a large part of your revenue, and it is far easier to arrange at the start of a relationship than during an audit.
6. Selling outside the zone: only the list counts
As soon as your customer sits outside the free zones, the question is no longer who they are but what you do. The income qualifies only where it relates to one of the listed qualifying activities: manufacturing, processing, trading in qualifying commodities, holding shares and securities for investment, owning and operating ships, reinsurance, fund management, wealth and investment management, headquarter services to related parties, treasury and financing services to related parties, aircraft financing and leasing, distribution in or from a designated zone, logistics services, and anything genuinely ancillary to those. The list was widened in 2025 with retroactive effect, so an activity that did not qualify under the older list may qualify now.
Against the list stand the excluded activities, which never qualify no matter who the counterparty is. Any transaction with an individual is excluded, apart from a few carve-outs such as ships, fund management, wealth management and aircraft. Banking is excluded, insurance is excluded apart from reinsurance and captive arrangements under headquarter services, finance and leasing are excluded apart from named exceptions, and so is owning or exploiting real estate, again apart from commercial property inside a free zone in a transaction with a free zone person.
For a goods business the sharpest distinction sits between manufacturing and distribution. Manufacturing, which covers producing, improving or assembling products from raw materials or components, carries no restriction on who your customer is, so selling to the end user qualifies. Distribution does carry restrictions: it must take place in or from a designated zone, and your customer has to resell or process the goods rather than consume them. The same sale can therefore qualify along one route and fail along the other, which makes it worth deciding early which of the two describes what you genuinely do.
Two further limits are easy to trip over. Trading in qualifying commodities stops being a qualifying activity if revenue from distribution, warehousing, logistics or inventory management makes up 51% or more of your total revenue in that period. And shares or securities only count as held for investment purposes once you have held them for at least twelve uninterrupted months, which turns the timing of a sale into a tax decision.
7. Income from intellectual property: the nexus fraction
Intellectual property has its own regime and it does not work like the other categories. Only qualifying intellectual property counts: patents, copyrighted software and rights that are functionally equivalent to patents, such as utility models and plant protection rights. Marketing-related intellectual property is explicitly outside it, so income from a brand or a trademark does not qualify however valuable it is.
Even for qualifying intellectual property you rarely get the whole income at 0%. The qualifying part is determined by a fraction that compares the research and development spending you did yourself, or outsourced to someone in the UAE or to an unrelated party abroad, with the total spending on that asset, including its acquisition cost and development outsourced to a related party abroad. The qualifying spend gets a 30% uplift, capped so that it can never exceed the total spend, and the resulting percentage is applied to the income. Income embedded in your products counts as well, so a company that never invoices a royalty can still have qualifying intellectual property income, within the limits of the fraction.
The structure of that fraction explains the most common mistake in this area. Research and development bought from a related company outside the UAE lands in the denominator only, which drags the percentage down, and it fails the substance test at the same time, because those core activities are precisely the ones you are not allowed to place with a group company abroad. On top of that comes an administrative demand that is easy to underestimate: you have to be able to show ownership, the spending on both sides of the fraction and the link between that spending and the income, over the entire life of the asset rather than for the current year alone.
8. The de minimis rule: how a small sale costs you five years
Some non-qualifying revenue is tolerated, but the margin is narrow. Your non-qualifying revenue in a tax period has to stay below the lower of two limits: 5% of your total revenue, or AED 5,000,000. For most companies the percentage bites long before the absolute amount does, which makes the limit a great deal tighter than the five million figure suggests.
Non-qualifying revenue means revenue from excluded activities, revenue from activities that are not qualifying activities where the customer sits outside the free zones, and revenue from transactions with a free zone person that turns out not to be the beneficial recipient. A few categories are left out of the calculation entirely, on both sides of the ratio, including revenue attributable to a permanent establishment and most real estate revenue.
The tax authority's own guidance contains the example that makes the point better than any warning. A free zone company in its start-up year sells an office chair to an employee for AED 100. A sale to an individual is an excluded activity, so that AED 100 is non-qualifying revenue, and in a year with no other revenue it represents 100% of the total. The company loses its status for that year and the four that follow, over a chair. The lesson is not that chairs are dangerous, it is that the ratio is measured per tax period and that a quiet year has no cushion. Checking the position each quarter is a modest effort compared with what it prevents.
9. Where it goes wrong in practice
The mainland is the most frequent source of trouble. Activities carried out outside the free zone quickly create a domestic permanent establishment, whose income is taxed at 9%, stays outside your qualifying income and is left out of the de minimis calculation as well. There is also an anti-fragmentation rule: if you and a related mainland company between you carry on what would be a single coherent business had it not been split up, the exception for preparatory or auxiliary activities falls away and the permanent establishment appears anyway. The common structure of a free zone entity next to a mainland company deserves a deliberate look for that reason.
The second cluster is documentary. Every qualifying free zone person has to comply with the arm's length principle and file the transfer pricing disclosure form, whatever its size, with master file and local file obligations on top once the group or the company passes the thresholds. Audited financial statements are required regardless of turnover. These are conditions, not formalities, and failing them triggers the same five-year consequence as a substance failure.
Then there are the traps inside the qualifying activities themselves: distribution to end users instead of resellers, distribution from a free zone that is not a designated zone, shares sold just before the twelve-month mark, commodity trading where warehousing and logistics have quietly grown past half of revenue, and research and development for your own intellectual property placed with a group company abroad. Each of these is invisible in the accounts until someone tests the position.
Finally, two developments that sit above the regime. If your group has consolidated revenue of at least EUR 750 million, a domestic minimum top-up tax applies for periods starting on or after 1 January 2025 and brings the effective rate on that income to 15%, so the zero rate no longer survives at group level. And the general anti-abuse rule applies to free zone structures as it does to everything else, which is why the commercial reason for the structure, including the choice of the zone itself, belongs in the file alongside the functions, the assets and the people that support it.
10. How to keep the 0% defensible
The companies that hold this position comfortably tend to do the same few things. They map their revenue by stream rather than by customer, and they know for each stream which of the four routes it travels and why. They set up the accounting system to make that split visible during the year, instead of reconstructing it when the return is due.
They also treat substance as something to record while it happens. Board decisions are taken and minuted in the zone, employees are allocated to activities without double counting, outsourcing arrangements are on paper with evidence that the supervision is real, and the file holds the licence, the confirmation of free zone or designated zone status and the audited financial statements. For intellectual property the spending records start on day one, because reconstructing years of research and development afterwards is close to impossible.
And they watch the two numbers that decide the outcome: the de minimis ratio, checked quarterly rather than annually, and any mainland activity that could mature into a permanent establishment. Both give plenty of warning if you look, and neither is fixable once the year has closed.
A free zone structure is a legitimate and well-used route, and for many entrepreneurs it is exactly the right choice. What it is not is automatic. The 0% rate is earned per income stream and per tax period, and the price of an oversight is five years rather than one. If you are considering a free zone company, or you already have one and want to know whether the position holds up when someone examines it properly, we are happy to think it through with you, preferably before the structure is built rather than after.
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Transfer of tax residence from the Netherlands: what it is and how it works
You have built a Dutch company, you have moved abroad or you are about to, and the question comes up almost by itself: can the company come along? In practice such a move rarely involves packing anything up. The company keeps its Dutch legal form and its registration in the commercial register, and the only thing that really changes is the place from which the business is genuinely run.
That simplicity is deceptive. Moving the place of effective management out of the Netherlands is a taxable event, and the charge is often considerably larger than the balance sheet suggests. It also reaches further than the company itself, because shareholders with a substantial interest receive an assessment of their own. In this article we set out how a transfer of tax residence works, what it costs, when it actually takes place and what the Netherlands continues to claim afterwards. Not a complete legal handbook, but a practical overview of the points that matter most in practice.
Table of contents
1. What a transfer of tax residence actually means
2. Why companies move, and why the reason matters
3. Your company stays Dutch: the incorporation rule
4. When the migration actually takes place
5. The exit tax: what is taxed
6. How the value is determined
7. Paying the exit tax: instalments, security and personal liability
8. What the Netherlands still claims afterwards
9. What it means for you as a shareholder
1. What a transfer of tax residence actually means
A company has two seats, and they are often confused. The statutory seat is a matter of corporate law. It follows from the deed of incorporation and determines under which country's law the company exists. The tax seat, the place of effective management, is a matter of fact. It is simply the place where the company is genuinely run.
These two can be separated. A Dutch private limited company can move its place of effective management abroad while remaining, in legal terms, a Dutch company. It keeps its name, its legal form and its registration. From the outside, very little appears to happen.
For tax purposes a great deal happens. It is the movement of effective management, not the legal form, that determines which country may tax the profits. This is why a quiet relocation, with no new entity and no legal conversion but a board that now sits abroad, is nonetheless a fully taxable event in the Netherlands. It is worth distinguishing this from a cross border conversion, in which the company itself changes nationality and legal form. That is a separate corporate law process with its own consequences. Most relocations we see are of the first type: the company stays Dutch, the management leaves.
2. Why companies move, and why the reason matters
The commercial drivers are usually straightforward. Founders and key management move abroad and want the company where they are. An investor base or a customer market shifts. A group is simplified after a reorganisation. Sometimes it is succession, because the next generation lives elsewhere.
The reason matters more than most entrepreneurs expect. Tax treaties increasingly contain a principal purpose test. If obtaining a treaty benefit was one of the principal purposes of an arrangement, the benefit can be refused. A relocation supported by a genuine commercial rationale is defensible. A relocation whose only visible justification is a lower rate is vulnerable, particularly because the protection you will rely on afterwards is itself treaty based.
The file also speaks for you, or against you. Board packs, internal memoranda and adviser correspondence prepared at the time of the decision are the evidence if the position is ever examined. We regularly see files in which the business reasons are entirely real, but the contemporaneous documents lead with tax efficiency, simply because that is what the finance team was asked to quantify. Where the commercial reasons are genuine, it is worth recording them as the primary rationale from the outset.
3. Your company stays Dutch: the incorporation rule
Here is the point that surprises people most. Relocating the management does not end Dutch tax liability.
Under Dutch law a company incorporated under Dutch law is deemed to be established in the Netherlands. This incorporation rule does not disappear when the board moves abroad. The company therefore remains a domestic taxpayer for as long as it keeps its Dutch legal form. What changes is the treaty position. Once the company is genuinely managed from the new country, that country will normally treat it as resident under its own law as well. The company is then resident in two states, and the applicable tax treaty resolves the conflict. Most treaties allocate residence to the state where the effective management is situated, and that allocation is what ends the Dutch right to tax worldwide profit.
Two things follow. First, it is the treaty, not the move itself, that sets the decisive moment. Second, and this is worth checking early, not every treaty still contains an automatic tie breaker. After the treaty amendments of recent years, a number of treaties provide that dual residence must be settled by agreement between the two tax authorities rather than automatically by reference to effective management. Where that applies, the timing of your migration depends on a negotiation between states rather than on a fact you control. Which regime applies to your destination country is one of the first questions to answer, not one of the last.
4. When the migration actually takes place
The migration date is a question of fact, not of paperwork. Effective management moves when the acts implementing the move are actually carried out, not when the board resolves to move.
In practice the tax seat is assessed on the basis of where the board resides and meets, where the core strategic decisions are taken and ultimate responsibility is borne, where the financial administration is kept and the accounts are prepared, and where the remaining operational and administrative activities are performed. Day to day operational decision making is relevant but not decisive. The emphasis lies on policy and strategy.
This creates a risk that is easy to miss and expensive to discover late. Many Dutch holding companies have quietly ceased to be managed from the Netherlands over the years: no Dutch office, no Dutch staff, and a director whose role has become largely formal. If the core decisions have in fact been taken abroad for some time, a tax authority on either side may take the position that treaty residence shifted at an earlier moment than the one you intended. That is not a technicality. It can move the exit charge into a different financial year, with a different loss position and a different valuation.
Before implementing a migration it is therefore worth establishing and documenting where the key decisions have actually been taken in recent years, and aligning the formal steps with the facts rather than the other way round. From the intended date onwards the evidence should be built deliberately: board meetings genuinely held in the new country, minutes that reflect real decision making, travel records, the administration relocated, and a residence certificate from the new state once it can be obtained.
5. The exit tax: what is taxed
When the Netherlands loses the right to tax a company's profits, it settles up first. The assets whose future profits will no longer fall within the Dutch base are treated as having been disposed of at market value immediately before residence ends. The difference between that value and the tax book value is taxed at the normal corporate income tax rates.
The critical insight is what actually carries the value. For most successful companies the largest component of the exit charge is not on the balance sheet at all. It is self generated goodwill and intellectual property: the brand, the platform, the technology, the customer base, the data. Internally generated goodwill and similar intangibles cannot be capitalised, so they appear nowhere in the accounts no matter how valuable they have become. The result is a pattern we see regularly. A company with a modest book equity and a healthy earnings profile faces an exit charge running into the millions. The tax follows the enterprise value, not the balance sheet.
Three further points are worth knowing. Cash is neutral, because it is included at face value in both the valuation and the book value and therefore carries no built in gain. Carry forward losses can shelter part of the gain, subject to the statutory limits on loss relief, which means that timing matters where those losses are about to be absorbed by ordinary trading profits. And a dividend paid shortly before the migration does not reduce the exit tax. This last point is a common misconception. Distributing cash reduces the value of the company and its book equity by exactly the same amount, so the taxable gap stays where it was.
6. How the value is determined
The Dutch tax authorities generally expect the market value of an active business to be determined using a discounted cash flow method or a method belonging to that family. A valuation prepared for another purpose, for example for an investment round, is a useful starting point but rarely sufficient on its own.
Three practical rules apply. The value has to be determined as at the actual migration date, so a valuation with an earlier reference date should be brought down to that date. The exit tax return should be fully consistent with the valuation report, because an inconsistency between the two is the first thing an inspector will notice. And where the amounts are material, a second independent valuation strengthens the position considerably, since two consistent reports are far harder to displace than one.
Valuation is also the part of the process where a difference of opinion is most likely. It is worth budgeting time for that discussion rather than assuming the first report will simply be accepted.
7. Paying the exit tax: instalments, security and personal liability
Having a charge is one thing, funding it is another. This is where the destination country becomes decisive.
Inside the EU or EEA
For migrations within the EU or the EEA, Dutch law allows the exit tax to be paid in five equal annual instalments. That facility exists because EU law requires it, following a judgment of the Court of Justice of the European Union in 2011 in a Dutch exit taxation case, which held that demanding immediate payment on a cross border move goes further than is necessary. It softens the cash impact substantially.
Outside the EU or EEA
For a move to a country outside the EU and EEA that facility is simply not available. What matters is where the company is established for tax purposes after the migration, not what legal form it retains, so keeping the Dutch legal form does not preserve access to the scheme. The exit tax is then in principle payable within the normal payment term of the assessment. Deferral can at most be requested under the general discretionary framework: it is at the discretion of the tax collector, it will normally require adequate security such as a pledge or a bank guarantee, and collection interest runs throughout. In our experience a pledge over shares is not always accepted, particularly where the underlying assets offer limited comfort, so the form of security is worth discussing early.
There is also an accelerated collection power. An assessment becomes immediately collectible where a taxpayer intends to move its place of establishment out of the Netherlands, unless it can be shown that the debt remains recoverable. A documented payment arrangement, or funds visibly set aside for the charge, takes the sting out of this.
Personal liability
Finally, the point that is most often overlooked. The persons charged with effecting the migration are jointly and severally liable for the corporate income tax and dividend withholding tax owed by the company. A person is released from that liability only insofar as they can prove that the non payment is not attributable to them. This turns an abstract company liability into a personal exposure for the directors or founders who implement the move. It is a strong reason to settle the funding and the payment framework before implementation, and to record in advance who is formally responsible for what.
One related timing point pays for itself. Tax interest on the exit charge starts to accrue from a statutory date well after the year of migration and continues until the assessment is formalised. It can be avoided by requesting a provisional assessment for the exit gain in good time. On a charge of several millions, an administrative step taken a few months early can save a substantial amount in interest.
8. What the Netherlands still claims afterwards
Because the incorporation rule survives the move, the company remains a Dutch domestic taxpayer. The treaty does not end that liability, it limits what the Netherlands may actually tax to the items the treaty allocates to it, typically the profits of a Dutch permanent establishment or income from Dutch real estate. Where neither exists, the Dutch taxable base is in practice nil.
Nil is not the same as absent. The obligation to file Dutch corporate income tax returns continues, formally covering worldwide profit with the treaty position claimed in the return. That is not only a compliance burden. The returns are also part of the evidence that the management genuinely sits abroad, so neglecting them weakens the very position they support.
For dividend withholding tax the rule is even more durable. A company incorporated under Dutch law is always deemed established in the Netherlands for withholding tax purposes, and unlike the corporate income tax rule this one contains no exceptions and does not expire. The company therefore remains a Dutch withholding agent indefinitely. What blocks the levy in practice is the treaty. Many treaties prohibit a state from taxing dividends paid by a company resident in the other state, and where the treaty with the new residence state contains such a provision the Netherlands cannot effectuate its withholding tax. This protection can extend even to distributions to shareholders resident in third countries, which is valuable for an internationally dispersed shareholder group. It does depend entirely on the migration having real substance, and it remains subject to the principal purpose test.
Because the company formally stays a withholding agent under national law, this is an area where advance certainty from the tax authorities, or at the very least a properly documented position in the file, is worth the effort. It allows distributions to be made without a withholding discussion each time. The VAT position and any registrations should be reviewed as part of the same implementation.
9. What it means for you as a shareholder
If there is one message we would want an owner to take from this article, it is that a migration is not only a company level event.
Where an individual holds a substantial interest in the company, broadly an interest of five per cent or more, the migration of the company's effective management out of the Netherlands is treated as a deemed disposal of that interest. You are treated as having sold your shares at market value immediately before the migration and are taxed on the built in gain. This applies to non resident shareholders as well. Someone who has never lived in the Netherlands, and who holds shares in a Dutch company from abroad, is squarely within scope. That is precisely why it is so often missed.
The gain is not collected straight away. It is formalised in a protective assessment, a separately imposed and frozen claim on the value built up before the migration. Payment is deferred for an indefinite period. Within the EU and EEA that deferral is automatic, without a request and without security. For a migration to a country outside the EU and EEA it has to be requested in writing and backed by adequate security. Note that this depends on where the company goes, not on where you live, so a shareholder resident in an EU member state still faces the request and security regime if the company moves to a third country.
Two mechanisms determine the real economic impact. Your acquisition price is stepped up to the value used for the assessment, so the same value cannot be taxed twice and any remaining Dutch claim concerns only growth in value after the migration. It is worth having that stepped up price formally fixed by decision, so the basis for a future claim is settled rather than argued later. The assessment itself is then collected as value is actually realised, on a sale of the shares and on distributions, while relief is available where the shares decline in value or where foreign tax is levied on a later sale.
One practical consequence deserves emphasis. This deemed disposal applies to every individual with an interest of five per cent or more, not only to the founder. Management pools, early employees and co investors are all caught, and each of them will face their own assessment, their own deferral request and their own deadlines. Discovering that after the migration creates a serious problem with exactly the people you can least afford to blindside, so it is worth mapping and communicating well in advance.
10. How to prepare
A migration is best treated as a sequenced project rather than a single decision. In our practice the order that works is as follows.
Establish the present position first and document where effective management has factually been exercised in recent years. If the answer is uncomfortable, it is far better known before implementation than discovered afterwards. Then model the charge on a defensible valuation and test how sensitive it is to timing, particularly where carry forward losses are about to be absorbed. Map the shareholder consequences in parallel, so that every individual with an interest of five per cent or more knows what to expect and what to file.
After that the sequence is largely practical. Any restructuring of the shareholding is generally cleaner before the migration than after, when a deferred assessment is outstanding. Set aside the cash for the exit charge and agree the payment and security framework with the tax authorities at an early stage. Build the substance in the new country from the migration date onwards and document it as you go. Where the amounts justify it, seek advance certainty on the position after the migration and keep a well reasoned position in the file either way.
Relocating a company is entirely feasible, and for many entrepreneurs it is the right commercial decision. It is, however, a settlement with the Dutch tax authorities as much as a move, and that settlement extends to the shareholders personally. Planned early it is manageable and predictable. Planned late it is expensive and, in places, difficult to undo. If you are considering moving the management of your company out of the Netherlands, or you would like to know what an exit charge would look like in your situation, we are happy to think it through with you.
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The unbusinesslike loan: when a write-down on a loan to your own company is not deductible
Lending money to your own company is one of the most common things an entrepreneur does. A holding company funds its subsidiary, an owner-director tops up the working capital of the operating company, or a buyer finances an acquisition through a newly incorporated company. In good times nobody gives it a second thought. The problem only surfaces when the borrower runs into difficulty and the loan has to be written down.
At that point a specific piece of Dutch tax case law comes into play: the doctrine of the unbusinesslike loan (in Dutch, onzakelijke lening). Where it applies, the loss on the loan is simply not deductible, even though the loan is real and the money is genuinely gone. In this article we explain what an unbusinesslike loan is, how the Dutch Supreme Court tests for it, what the consequences are, and above all how to structure and document a related-party loan so that the classification does not catch you out. This is not a complete legal handbook, but a practical overview to help you have a focused conversation with your tax adviser before you lend, and before you write anything down.
Table of contents
1. What is an unbusinesslike loan and why it matters
2. First question: is it a loan at all?
3. The core test: the unbusinesslike debtor risk
4. Direction matters: downward, upward and sideways
5. Can the right interest rate fix it? The guarantee analogy
6. The consequence: a non-deductible write-down
7. Special situations: the owner-director and cross-border loans
8. When an unbusinesslike loan becomes a gift
9. Recent developments (2024-2025)
10. How to prevent the classification: a practical checklist
1. What is an unbusinesslike loan and why it matters
An unbusinesslike loan is a loan between affiliated parties that carries a debtor risk which an independent third party would never have accepted. The starting point is that the money really is a loan, both under civil law and for tax purposes. The Dutch Supreme Court accepts that the loan exists, that the interest is deductible for the borrower and taxable for the lender, and that repayment is genuinely owed. What it does not accept is a deduction for the loss when the loan turns out to be worthless.
The doctrine dates back to a landmark decision of the Supreme Court of 9 May 2008. The facts were familiar: there was no written loan agreement, no security had been provided, there was no repayment schedule, and the interest was never actually paid but simply added to the principal. On those facts the court held that the lender had accepted a risk that only a shareholder would accept, not an independent financier. The consequence was that the impairment could not be deducted.
This matters because the situation is so ordinary. Owner-directors who lend to their own private limited company (BV), holding companies that fund a subsidiary, and acquisition structures in which a new company borrows to buy a business are all exposed. The interest keeps flowing through the tax return without any issue for years. It is only when the value falls away that the classification becomes expensive, and by then the terms of the loan can no longer be changed.
2. First question: is it a loan at all?
Before you even reach the question of an unbusinesslike debtor risk, there is a prior question: is the money a loan at all for tax purposes? As a rule the civil-law form is decisive. If the parties have agreed a loan and documented it as such, it is treated as a loan. There are three exceptions where a so-called loan is in reality equity, and where a write-down is off the table from the start.
The first is the sham loan (schijnlening): the parties present the funding externally as a loan but have privately agreed to treat it as capital. The second is the bottomless-pit loan (bodemlozeputlening): at the moment of provision it is already clear that the borrower will never be able to repay, so the money can only have been provided because of the shareholder relationship. The third is the participation loan (deelnemerschapslening): the terms are so close to the characteristics of equity that the loan is treated as equity, for example where the interest is profit-dependent, the loan is deeply subordinated, and there is no fixed maturity.
In each of these three cases the funding is reclassified. Money provided by a shareholder to the company becomes a capital contribution, which increases the acquisition price of the shares for a private individual and the cost base of the participation for a corporate shareholder. Money provided by the company to the shareholder becomes a distribution. Only if none of these three exceptions applies do you move on to the unbusinesslike debtor risk.
3. The core test: the unbusinesslike debtor risk
The heart of the doctrine is a single question. Would an independent third party, on the same terms and in the same circumstances, have accepted the same debtor risk in return for a fixed interest rate? If the risk is so high that no independent party would have taken it, or would only have taken it against an interest rate so high that the interest effectively becomes a share in the profits, then the loan carries an unbusinesslike debtor risk. The lender has accepted that risk in its capacity as shareholder, not as a financier.
The assessment is in principle made at the moment the loan is provided. That is important: a loan that was businesslike when it was granted does not automatically become unbusinesslike simply because the borrower later gets into trouble. However, a loan can become unbusinesslike during its term, for instance if the conditions are amended, the amount or maturity changes, or the borrower's financial position deteriorates and the lender fails to call the available security or to take timely enforcement action. The burden of proving that a healthy loan later became unbusinesslike lies with the tax inspector, and case law shows that this burden is a heavy one.
Two practical points deserve emphasis. First, a loan is assessed as a whole. You cannot argue that only part of a one million euro loan carries an unbusinesslike risk and that the remainder may still be written down. As soon as part of the loan is unbusinesslike, the entire loan is tainted and no impairment is possible, not even on the businesslike part. That is a reason to consider splitting a large facility into separate loan agreements, so that each is assessed on its own. Second, the factors that matter are exactly the ones an independent lender would care about: a written agreement, adequate security, a realistic repayment schedule, interest that is actually paid rather than rolled up, a sensible term, the ranking against other creditors, and a credible business plan at the time of lending.
4. Direction matters: downward, upward and sideways
The tax consequence of an unbusinesslike loan depends on the direction in which the money flows. A loan runs downward when a parent company or shareholder lends to the company, upward when the company lends to its shareholder, and sideways when one sister company lends to another.
For a downward loan, the non-deductible loss is treated in the capital sphere: it is regarded, in economic terms, as an informal capital contribution to the borrower and it increases the cost base of the participation. For an upward loan, an uncollectible unbusinesslike claim is treated as a distribution by the company to its shareholder, which may fall within the participation exemption. A sideways loan between sister companies is analysed through the common shareholder, as if the money first went up to the shareholder and then down to the other company. Getting the direction right is essential, because it determines both where the loss lands and whether any relief, such as the participation exemption, is available.
5. Can the right interest rate fix it? The guarantee analogy
A natural reaction is to think that the problem can be solved by charging a higher interest rate. Unfortunately it cannot. The whole point of an unbusinesslike loan is that the debtor risk is so high that no fixed interest rate could compensate for it without the interest becoming, in substance, a share in the profits. You cannot price your way out of an unbusinesslike risk.
What the case law does provide is a method for setting the interest that still applies to the loan. The arm's length rate is determined using the guarantee analogy (borgstellingsanalogie): you look at the interest a third party would have charged if the parent or shareholder had guaranteed the loan. That, generally lower, rate remains deductible for the borrower and taxable for the lender. In other words, the interest continues to run on businesslike terms, but the loss of principal, the write-down itself, remains outside the profit and loss account.
6. The consequence: a non-deductible write-down
The central consequence is straightforward and painful: the impairment on the loan is not deductible. The value has really been lost, but that loss cannot be set against taxable profit or income. For a company the loss falls in the capital sphere and is treated much like a participation, so it does not reduce the corporate income tax base.
There is a mirror image on the borrower's side. Because the lender cannot take the loss, the borrower does not have a taxable gain when the same unbusinesslike loan is later released or waived. The two sides are treated consistently: no deductible loss for the lender, and no taxable release for the borrower. This symmetry is a deliberate feature of the doctrine and can occasionally work in the taxpayer's favour, but it is no substitute for the deduction that has been lost.
7. Special situations: the owner-director and cross-border loans
The doctrine has a particular edge for the owner-director who lends privately to their own company. Such a loan falls under the rules for assets a substantial-interest holder makes available to their own company, which are taxed in box 1. The unbusinesslike loan doctrine applies there too, so a write-down in box 1 is refused. The loss is not always gone for good: it typically shifts to the acquisition price of the shares in box 2, where it can still be relieved later, for example on a sale or liquidation. The timing and the box change, which makes early advice worthwhile.
Cross-border structures add a further layer. A Dutch holding company that lends to a foreign subsidiary faces both the unbusinesslike loan doctrine and the arm's length principle in transfer pricing, and the interaction with the participation exemption needs to be mapped out carefully. In the other direction, an owner-director who has emigrated cannot write down a claim on a Dutch company against Dutch-source income. For internationally mobile entrepreneurs these points are easy to overlook and expensive to get wrong.
8. When an unbusinesslike loan becomes a gift
A more recent development is that providing an unbusinesslike loan can, in some situations, contain a gift from the outset. In a decision of 5 April 2024 the Supreme Court accepted that a gift can be embedded directly in the granting of an unbusinesslike loan. Where one company lends on unbusinesslike terms to another, the enrichment can be treated as a gift from one shareholder to the other; where a parent lends on unbusinesslike terms to a company owned by their child, the enrichment can be a gift to the child.
The practical significance is that a single transaction can trigger two separate consequences at once: a non-deductible loss for income or corporate tax purposes, and a gift for gift tax purposes. Whether a gift actually arises depends closely on the facts, in particular on who is enriched and by how much, but the possibility should be on the radar whenever family members or their companies fund one another.
9. Recent developments (2024-2025)
The doctrine continues to develop through both case law and published positions of the Dutch tax authorities. In particular, the knowledge groups of the tax authorities have published a series of positions that sharpen the practice. These cover, among other things, when a gift arises on an unbusinesslike loan to a child, how interest that is settled after the event is treated, and how an unbusinesslike loan affects the cost base of a participation and the liquidation loss that may eventually be claimed.
The common thread is a steady increase in scrutiny of write-downs on loans within a group or family. In practice the tax authorities are quick to argue that a related-party loan is unbusinesslike, and the taxpayer then carries the burden of showing otherwise. That makes the quality of the file, drawn up at the time of lending rather than reconstructed years later, the single most important factor in the outcome.
10. How to prevent the classification: a practical checklist
The good news is that the classification is largely within your control. An unbusinesslike loan is, in the end, a loan that was not documented and administered the way an independent lender would have insisted on. The following points, applied at the moment of lending rather than afterwards, make all the difference:
Put the loan in a written agreement at inception, and record the facts and the purpose of the loan. Agree an arm's length interest rate and actually pay it, rather than simply adding it to the principal. Set a realistic repayment schedule and make the repayments. Provide adequate security wherever possible, and document why the borrower is creditworthy, ideally with a business plan or forecast. If the borrower's position deteriorates, act on it: call the security or take enforcement steps that the agreement allows. Consider splitting a large facility into separate loans so that each is assessed on its own. Where you can, keep evidence that a third party, such as a bank, would have been willing to lend on similar terms. And review the position annually, recording any change in creditworthiness and the action taken.
The unbusinesslike loan is a technical and highly fact-driven area, and the difference between a deductible and a non-deductible loss often comes down to the file that was, or was not, built at the start. If you are about to lend to your own company or group, or if a loan already on your books is at risk of being written down, it is well worth reviewing the position before you act. We work closely with you to make sure the tax and the documentation are fully aligned.
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The Dutch will in 2026: which building blocks are available to you?
For many people, a will is something you draw up once and then forget about. For entrepreneurs, individuals with significant wealth and families with an international footprint, that rarely turns out to be enough. Tax rules evolve, family circumstances change and businesses grow. What looked like a watertight will ten years ago may now produce unnecessarily high tax bills, or worse, lead to distributions among heirs that no longer match the testator's intentions.
In this article we set out the main building blocks that a Dutch civil-law notary and a tax adviser have available to construct a will tailored to the situation. We start at the default position under Dutch intestate succession law and then work our way through progressively more specific instruments. This is not a complete legal handbook, but a practical overview that helps you have a focused follow-up conversation with a tax adviser or notary.
Table of contents
1. The statutory default as the starting point
2. The surviving-spouse will and the quasi-statutory distribution
5. The topping-up legacy and the interest clause
8. The living will as a complement
10. How these building blocks work together
1. The statutory default as the starting point
If you die without a will and you leave behind a spouse or registered partner together with one or more children, Dutch intestate succession applies automatically. This is governed by article 4:13 of the Dutch Civil Code. In practice, it means the surviving spouse receives all assets of the estate, and the children receive a monetary claim on the surviving spouse equal in value to their share of the estate. That claim becomes due, in principle, only upon the death of the surviving spouse, or if the surviving spouse becomes bankrupt.
At first glance this looks like a workable arrangement. The surviving spouse can continue life undisturbed, and the children receive their inheritance later. In practice, however, this construction often falls short. The statutory interest on the claim is fixed at the legal interest rate minus six percent, with a floor of zero. That sounds attractive because no interest accrues, but for tax purposes it is actually unfavourable. Because no interest accrues, the value of the claim does not grow between the two deaths, so at the second death the children pay inheritance tax on a larger share of the parental estate.
In addition, the statutory default makes little allowance for blended families, business owners with substantial company holdings, or wealth intended to remain in the family for several generations. For these reasons, in virtually any situation involving significant wealth, deviating from the statutory default by means of a will is worthwhile.
2. The surviving-spouse will and the quasi-statutory distribution
The surviving-spouse will is the building block most people are familiar with. At its core it confirms the statutory default, but with one important addition. The interest on the children's monetary claim can be set by will at a tax-efficient level, typically six percent compound. This means the children's claim against the surviving spouse grows in value, so that at the second death the inheritance tax payable on the parental estate is reduced. At the same time the surviving spouse remains protected, because the claim is not due during her or his lifetime.
Many modern surviving-spouse wills go a step further and contain a quasi-statutory distribution. This is a testamentary construction in which the statutory default is in fact excluded, and the surviving spouse is given the power, via a choice clause or a settlement administration, to subsequently divide the estate as if the statutory default applied. The advantage is flexibility. Unlike the statutory three-month deadline, the surviving spouse can take more time to determine which interest rate, which division and which tax outcome best fits the actual circumstances at the time.
In situations where you cannot predict how the family or wealth situation will look at the moment of death, this construction offers the broadest scope for tailoring.
3. The usufruct will
The usufruct will is a fundamentally different building block. Instead of letting the surviving spouse inherit everything, the children immediately receive bare ownership of the estate, while the surviving spouse receives the usufruct. That means the surviving spouse may continue to use what belongs to the estate, including rental income and dividend income, while legal ownership passes directly to the children.
The tax effect works in a particular way. The value of the usufruct is determined by reference to an age-based factor from the Dutch Inheritance Tax Implementation Decree, combined with a deemed annual return of six percent. For a spouse aged around forty, the value of her usufruct is set at approximately 84 percent of the estate's value. The remaining 16 percent is the value of the bare ownership that passes immediately to the children. As the surviving spouse ages, the usufruct percentage decreases and the bare ownership percentage rises accordingly.
At the moment of the surviving spouse's death, the usufruct ceases and the children's bare ownership accretes to full ownership without further taxation. This is where the tax strength of the usufruct will lies. The children pay inheritance tax only on the initial bare ownership and not again on the value of the usufruct at the second death.
In the early years after the first death, this form costs more in tax than the statutory default, because the children have to pay inheritance tax immediately on their share. As time passes and the estate grows, the balance shifts. In our experience, the usufruct will becomes the more tax-efficient option from a horizon of roughly 25 years onwards, provided the wealth continues to grow.
We often combine this form in practice with a differentiated remarriage clause, to which we return below.
4. The two-step disposition
The two-step disposition is a building block for situations in which a specific asset is to land first with one person, and on that person's death is to pass on to other specified persons. Under Dutch civil law this is governed by article 4:141 of the Civil Code. In the will you designate a first beneficiary, the burdened, who initially acquires the asset, and one or more expectants who acquire the asset only at the moment the first beneficiary dies.
A classic example is a family farm or a family residence that you wish to bequeath initially to one child but which, on that child's death without descendants, should fall back to your other children. The first beneficiary in principle cannot alienate the asset, and the expectants have an enforceable right. To strengthen this further, a complementary administration is often included, so that the asset is also protected against unwanted external influence.
For tax purposes, the two-step disposition is less favourable than a usufruct will applied to the entire estate, because in principle the inheritance tax is levied twice. First on the first beneficiary at the full value, and then again on the expectants at the full value, because they inherit directly from the original testator rather than from the first beneficiary. For that reason a two-step disposition is typically used for a specific asset and not for the entire estate.
A Dutch Supreme Court decision from 2026 has refined the analysis of the depressing effect of two-step conditions on the imputation against the forced heirship share. In certain situations the value for the forced share is not the same as the tax-based usufruct valuation. For anyone considering a two-step disposition combined with disinheritance of a child, this is a point of attention for the notarial drafting.
5. The topping-up legacy and the interest clause
The topping-up legacy is a tax optimisation technique that ensures the child exemption of EUR 26,230 for 2026 is fully used at the first death. In the statutory default, children only receive a monetary claim on the surviving spouse. That claim is deducted from the surviving spouse's estate and no inheritance tax is payable on it. But if the value of the claim remains well below the child exemption, part of that exemption is wasted.
With a topping-up legacy, the value of what the child receives can be topped up to exactly the amount that can be received tax-free. With two children, this produces a tax-free shift of approximately EUR 52,460 in 2026 from the surviving spouse to the children, and that amount stays out of the second-death taxation. That sounds modest, but applied across several children and a large estate, the effect is significant.
It is important to recognise that the topping-up legacy fits most naturally in a will using the statutory default or in a choice will. In a pure usufruct will it is less self-evident, because the children already acquire substantial bare ownership. In that case the topping-up legacy can be made optional through a choice legacy. The surviving spouse may then choose between usufruct over the entire estate, or full ownership combined with a topping-up legacy to the children. That flexibility is valuable in practice, because the optimal variant only becomes clear at the moment of death.
The interest clause runs in parallel. By setting a testamentary interest rate on the children's non-callable claim, typically six percent compound, the claim grows in value and the inheritance tax payable at the second death is reduced.
6. Tailored legacies
A legacy is a testamentary commitment of a specific asset, amount or right to a designated person. Unlike an heir, who shares in all assets and liabilities of the estate, a legatee receives only what is described in the legacy. Several forms exist that are often combined in practice.
The specific-asset legacy
The specific-asset legacy is the bequest of a particular item, for example the shares in an operating company, a house or a specific painting. For the inheritance of shares to an individual, this form is often more tax-efficient than a cash legacy under a duty to purchase, because the real estate transfer tax on the inheritance of shares by an individual is, on the basis of article 3, paragraph 1, sub a of the Dutch Real Estate Transfer Tax Act, in principle zero. By contrast, a forced purchase by a BV triggers the regular real estate transfer tax.
The cash legacy
The cash legacy is a commitment of a fixed monetary amount. The cash legacy under a duty to purchase is a variant where the legatee receives the amount under an obligation to use it to buy a specific asset, for example shares in the family company. Since a Dutch Supreme Court decision of April 2026, this variant has become less attractive in the context of real estate companies, because the subsequent purchase is, under Dutch civil law, a purchase rather than an inheritance and therefore does not fall under the inheritance exemption.
The choice legacy
The choice legacy gives a person, often the surviving spouse or executor, the authority to choose from a predefined group of assets or heirs. This is an excellent flexibility tool, because the optimal choice only becomes clear at the time of death.
The percentage legacy
The percentage legacy is a commitment of a percentage of the net balance of the estate. It functions effectively as an heir designation, but without the legatee being involved in the estate administration. For situations where you want a large number of persons to share in the estate at different percentages, this is a commonly used form.
The maintenance legacy
The maintenance legacy is a commitment of a periodic payment, typically monthly, in favour of a person who is in financial or care-related need of support. It is often used for an elderly parent, a child with a disability or a close relative who is not able to provide for themselves.
The grandchild legacy
The grandchild legacy is a variant where grandparents include a direct legacy in favour of their grandchildren, often combined with a topping-up legacy up to the grandchild exemption. This prevents the wealth from being taxed first in the children's generation and then again when it passes on to the grandchildren.
7. Protective clauses
In addition to the main building blocks above, a number of clauses are included in virtually every modern will to safeguard the testator's wishes.
Testamentary administration
The testamentary administration ensures that the heir cannot freely dispose of the inheritance. The administrator manages the assets until a specified age is reached, typically 25 years. For children who are young at the time of death, this prevents them or others from inadvertently disposing of substantial amounts. Administration can also be put in place for life, for example for a child with a mental disability.
Substitution
The substitution clause, plaatsvervulling in Dutch, sets out what happens if a designated heir predeceases the testator or rejects the inheritance. Under article 4:11 of the Dutch Civil Code, the descendants of that heir then take their place. We recommend including this provision explicitly for legacies as well, because the statutory rule does not automatically apply to legatees.
Executor appointment
The executor appointment places the administration of the estate in the hands of a trusted person. For business owners and families with complex wealth, it is important to designate an executor who has the overview and who can take decisions promptly and thoughtfully. In some situations we recommend appointing a business partner or the family's own adviser.
Remarriage clause
The remarriage clause determines what happens to the surviving spouse's usufruct if she or he remarries. In the differentiated variant, the usufruct over business assets lapses on remarriage, while the usufruct over the marital home is preserved. This prevents a new partner from sharing in the family wealth, while at the same time guaranteeing the surviving spouse's housing security.
Long-term care clause
The long-term care clause, referred to in Dutch practice as the WLZ clause, ensures that if the surviving spouse enters a long-term care facility, the children's monetary claim against the surviving spouse becomes immediately callable. This prevents the parental wealth from being consumed by the personal contribution to long-term care, which in 2026 can rise to approximately EUR 3,062 per month.
8. The living will as a complement
Despite the name, a living will is not a will in the legal sense. It is a notarial power of attorney that governs what happens while you are still alive but no longer able to make decisions yourself. It addresses two areas, financial matters and medical matters.
On the financial side, you can designate a representative to manage your affairs, for example continuing to run your business or making payments on your behalf. On the medical side, you set out your wishes regarding invasive treatments and, if desired, euthanasia. That last point is particularly relevant in situations where dementia develops and you may no longer be able to express your wishes later in life.
We typically advise clients to draw up the living will at the same time as the revised will. For business owners, the living will is at least as important as the will itself, because the continuity of the business in case of incapacity or prolonged illness depends directly on it.
9. The codicil
For a number of items, a notarial deed is not required and a handwritten and dated document, the codicil, will suffice. Under article 4:97 of the Dutch Civil Code, you can use a codicil to allocate specific items of clothing, jewellery and personal effects to named individuals. The codicil is not a substitute for a will, but a useful supplementary instrument for distributing personal items of emotional value, without having to execute a separate notarial deed.
10. How these building blocks work together
A well-drafted will is rarely a choice between one of the above forms, but a combination of them. The usufruct will can be combined with a differentiated remarriage clause, a two-step disposition for specific assets, an administration up to a defined age and an executor appointment. In addition, a living will can be drafted at the same time, to provide for situations in which you are still alive but no longer able to make decisions.
The value of a tailored will lies in the interaction between the building blocks. Which building blocks fit best depends on the family situation, the composition of the wealth, any business interests and the wishes regarding succession. For one client the priority is tax optimisation, for another the protection of a specific asset or a specific person. In virtually every case the same advice applies, look not only at the moment of death but at the horizon of twenty to thirty years thereafter, and build in flexibility for circumstances you cannot currently foresee.
The result is a document that is future-proof for decades, that minimises the tax burden, that anchors the testator's wishes and that protects the heirs against unwanted influence.
If you would like to explore which combination of building blocks best fits your situation, please feel free to get in touch with our team. In every case we work closely with a specialist civil-law notary, and we ensure that the tax and legal sides are fully aligned.
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Asset protection: what it is and how it works
Every entrepreneur who has built something of value eventually faces the same question: how do I protect what I have built? Asset protection, the discipline of structuring personal and business wealth so that it remains insulated from future claims, is one of the most consequential decisions a business owner can make. It determines whether years of hard work can withstand a creditor claim, a divorce, a sudden death, or a regulatory event, and whether the next generation inherits anything at all.
Yet asset protection is widely misunderstood. Many entrepreneurs associate it with offshore secrecy or aggressive tax planning. In reality, modern asset protection is built on full transparency towards tax authorities, banks and regulators, while creating legal distance between the entrepreneur's personal sphere and the assets being preserved. A business owner setting up a foundation in Liechtenstein after selling part of their company, a family establishing a Cook Islands trust to safeguard long-term investments, or an entrepreneur moving to the UAE and using a DIFC foundation as the central vehicle for family wealth: all of these are asset protection structures designed to outlast the events of an entrepreneur's lifetime.
This article explains what asset protection is, how it works, and why it matters. We cover the difference between foundations and trusts, the distinction between common law and civil law jurisdictions, the leading jurisdictions used in practice, the principle of separation, governance, and the tax considerations that always sit alongside the structuring. While the topic is international in nature, we pay particular attention to issues that affect Dutch entrepreneurs and those who plan to relocate, including the Dutch ten-year tail on gift and inheritance tax.
Table of contents
2. Why business owners need it
6. The principle of separation
10. How to approach this for your business
1. What is asset protection?
Asset protection is the discipline of structuring personal and business wealth so that it remains insulated from claims that may arise during a business owner's lifetime or upon transfer to the next generation. It sits at the intersection of corporate law, civil law, tax law and private banking. Done well, it allows an entrepreneur to continue running an active business while ensuring that the bulk of accumulated wealth is held in a separate legal vehicle that does not get pulled into operational disputes.
The purpose of asset protection is not secrecy. Modern asset protection is built on transparency towards tax authorities, banks and regulators, while creating legal distance between the entrepreneur's personal sphere and the assets that are being preserved. Where older planning often relied on opacity, today's structures rely on robust governance, well-drafted constitutional documents and a clear separation between operating risk and accumulated capital.
For most clients we work with, the conversation begins after a liquidity event, a sale of part of the business, or a move to a new jurisdiction. In each case the question is the same: how do we keep what has been built, and how do we make sure that future events such as creditor claims, divorce, succession or operational liabilities do not undo the work of a lifetime?
2. Why business owners need it
Three forces drive the demand for asset protection among entrepreneurs.
The first is operational exposure. A business owner with a single trading entity often has personal wealth that sits very close to the operating risk of that entity. A product liability claim, a supplier dispute, a platform suspension or a regulatory investigation can put the entire net worth of the entrepreneur at risk if the legal distance between personal wealth and operational vehicles is insufficient.
The second is succession. As an entrepreneur accumulates wealth, the question of what happens at death or incapacity becomes more pressing. Without planning, a sudden event can freeze bank accounts, halt corporate decision-making and force the family into a probate process that may take months or longer. A properly designed structure allows the wealth to continue being managed by an independent body, with clear instructions on how and to whom distributions are to be made.
The third is mobility. Entrepreneurs increasingly move between jurisdictions, often for tax, lifestyle or family reasons. Without a vehicle that holds the wealth independently of personal residence, every move triggers a new analysis of exit taxes, anti-abuse rules and bank acceptance. A well-structured vehicle stays in place across moves and provides continuity of governance regardless of where the entrepreneur resides.
For each of these reasons, the structure has to do more than offer a tax advantage. It has to function as a long-term governance and continuity vehicle for the family wealth.
3. Foundations and trusts
Two legal forms dominate the international asset protection landscape: the foundation and the trust.
A foundation is a legal entity with its own legal personality, established by a founder who transfers assets to it and sets out its purpose and beneficiaries in a constitutional document. The foundation is governed by a council, often supported by an independent guardian. Because it is an entity, the foundation can hold bank accounts, sign contracts and litigate in its own name. Civil law jurisdictions have used foundations for over a century. More recently, several common law jurisdictions have introduced foundation legislation to combine the recognisable corporate form with common law trust principles.
A trust is a legal relationship rather than an entity. A settlor transfers assets to a trustee, who holds them on behalf of beneficiaries under fiduciary duties set out in a trust deed. The trust itself has no legal personality and acts through its trustee. Trusts originated in English common law and remain the dominant private wealth instrument in jurisdictions that follow that tradition.
Both forms can achieve the same functional result: separating assets from the personal sphere of the founder and managing them for the benefit of designated persons. The choice between them depends on the rules of the jurisdiction, the preference of the entrepreneur for an entity-based or relationship-based form, and the acceptability of each form in the banking and audit environment where the structure will operate.
Within each form there are further design choices. A discretionary structure leaves distribution decisions to the council or trustee, which provides the strongest creditor protection because beneficiaries hold no enforceable claim. A fixed interest structure gives beneficiaries a specific entitlement, which provides legal certainty but exposes that entitlement to creditor attack. An irrevocable structure cannot be undone by the founder, which strengthens the asset protection effect. A revocable structure leaves the founder in a position of control, which weakens the protection and usually causes the structure to be treated as transparent for tax purposes.
4. Common law and civil law
The choice of jurisdiction is shaped by whether that jurisdiction operates under a common law or a civil law system.
Common law jurisdictions include the United Kingdom and the majority of its former overseas territories. The trust has been recognised in these jurisdictions for centuries and the case law is rich. Within these jurisdictions, financial centres such as the British Virgin Islands, the Cayman Islands, Jersey, Guernsey, Isle of Man, the Bahamas and Singapore have developed specialised trust legislation that adapts the classical trust to modern wealth planning needs.
Civil law jurisdictions include continental Europe, much of Latin America and large parts of Asia. These jurisdictions traditionally do not recognise the trust as a domestic instrument, although many have ratified the Hague Trust Convention which allows foreign trusts to be recognised under local law. Civil law jurisdictions traditionally use the foundation. Liechtenstein has the oldest continental foundation tradition and remains a benchmark for private wealth foundations.
The distinction matters in practice for two reasons. First, banks and auditors in continental Europe are often more comfortable with a foundation than with a trust, and this affects onboarding and ongoing administration. Second, the legal protection offered by the structure is determined by the law of the jurisdiction, so the strength of the firewall provisions, the limitation periods for creditor claims and the recognition of foreign judgments differ materially between systems.
The financial free zones in the United Arab Emirates, namely the Dubai International Financial Centre and the Abu Dhabi Global Market, are an interesting hybrid. They sit in a civil law country but operate under their own English common law systems, with their own courts and their own foundation legislation. For an entrepreneur who is resident in the UAE, this offers the combination of common law governance and local presence that very few other places provide.
5. The leading jurisdictions
In our practice we work most often with the following jurisdictions.
The Dubai International Financial Centre offers a foundation regime with strong statutory firewall provisions that were further strengthened in 2024. Its three year limitation period for clawback claims, its express exclusion of foreign forced heirship claims and its duress provisions make it one of the most attractive jurisdictions for entrepreneurs who are resident in the UAE or who plan to relocate there. The Abu Dhabi Global Market offers a similar foundation regime, with a pure English common law system and the option of a single-member council.
Liechtenstein remains the European reference point for private foundations. Its limitation period of one year for ordinary creditor actions, extending to five years where the creditor can establish intent to defraud, is shorter than that of most other European jurisdictions. The mandatory involvement of a licensed local trustee adds cost but also adds professionalism and a regulatory layer that European banks recognise.
The Crown Dependencies of Jersey, Guernsey and the Isle of Man have mature trust regimes that are well accepted internationally. Their firewall provisions are robust and their trust law has been refined through decades of case law. The trustee-driven nature of these regimes means the founder retains less direct control than in a foundation, which suits some clients and not others.
The Cook Islands and Nevis are best known for the strongest statutory asset protection in the world. Limitation periods of one to two years, criminal-standard evidence requirements and outright non-recognition of foreign judgments make them the most difficult jurisdictions for a creditor to attack. The price of that protection is reputational. Major private banks in Europe and Asia are frequently reluctant to onboard structures based in these jurisdictions, which means the structure often needs to be combined with bank accounts in other places.
Singapore and Hong Kong combine a developed trust framework with first tier financial centres. They are particularly appropriate for clients with strong commercial ties to Asia. The cost of structures in Singapore is typically higher than offshore alternatives, reflecting the regulatory and substance requirements imposed on licensed trust companies.
The United States offers a relatively new family of structures known as domestic asset protection trusts, with South Dakota, Nevada, Wyoming and Delaware leading the field. These structures provide strong creditor protection under state law and offer one notable feature that no other major jurisdiction offers: the United States does not participate in the Common Reporting Standard, so a US trust does not feed information into the international exchange network in the same way that a structure elsewhere would. For non-US founders, however, the US tax rules are complex and require careful planning to avoid unintended exposure.
Within the European Union, Cyprus, Malta and Luxembourg each offer interesting structuring options, although recent and forthcoming European transparency and reporting legislation will continue to shape what is feasible in those jurisdictions. The Bahamas, BVI, Cayman and Belize each have well developed legislation, although they sit on the same spectrum of banking and reputational considerations as the Cook Islands and Nevis. Mauritius is sometimes used for clients with an Indian or African nexus. Switzerland does not have its own trust legislation but recognises foreign trusts and is widely used as a banking and trustee jurisdiction alongside a structure formed elsewhere. Panama remains in use for some Latin American families but carries the reputational legacy of earlier exposures.
6. The principle of separation
The single most important principle in asset protection is separation. The structure must be legally, operationally and administratively separate from the personal sphere of the founder. If the personal sphere and the structure become entangled, a court is likely to disregard the structure altogether, and the entire protection collapses.
Separation has four dimensions in practice. The first is legal. The structure has its own constitutional documents, its own bank accounts, its own auditors where required and its own decision-making body. It is not a vehicle that the founder uses interchangeably with their own balance sheet.
The second is operational. Operating businesses are held in operating entities. They generate operating revenue, pay operating costs and distribute dividends to the shareholder. The structure receives those dividends only after they have flowed through the shareholder personally, or it receives them directly through a clearly documented intermediate holding layer. The structure does not pay supplier invoices, does not contract with customers and does not employ staff for the operating business.
The third is administrative. Cash flows of the structure are recorded separately from personal cash flows. Investment decisions are taken by the council or trustee and documented in minutes. Distributions to beneficiaries are processed through clear formal channels.
The fourth is documentary. The source of the funds entering the structure and the long term source of the wealth must be capable of being demonstrated to a bank or auditor at any time. This is not a one-off exercise at onboarding. It is a continuous discipline that allows the structure to withstand external review.
Where these four dimensions are respected, the structure functions as intended. Where they are not, the structure exists on paper but offers no real protection, and the founder is often worse off than if they had not set anything up at all.
7. Governance and control
Good governance is what makes the structure credible. It is also what allows the founder to sleep at night, because it ensures that the structure will continue to operate sensibly even if the founder is no longer able to be involved.
The roles within a typical foundation are the following. The founder transfers the assets and sets out the foundation's purpose, beneficiaries and governance rules in the constitutional documents. The founder may sit on the council but should not be the sole decision-maker. The council is the governing body and takes the day-to-day decisions on investments, distributions and contracting. A guardian, sometimes called a protector, sits above the council and has supervisory powers, often including the right to veto certain decisions or to remove and replace council members. The beneficiaries are the persons for whose benefit the foundation exists. In a discretionary foundation they do not have an enforceable right to a distribution; their interest is contingent on the exercise of the council's discretion.
In a trust the roles are similar, with settlor replacing founder, trustee replacing council and protector replacing guardian.
The letter of wishes is an instrument that bridges the founder's personal vision and the council's formal decision-making. It is a non-binding document in which the founder expresses how they would like the council to exercise its discretion in particular scenarios. Although not legally binding, the letter of wishes is followed in practice in the vast majority of cases. It is the way an entrepreneur communicates to a council of professional bodies that their teenage children should not receive significant distributions before a certain age, that a future spouse should be protected if there are children, or that a particular charitable cause should be supported.
The balance between control and independence is what separates a structure that works from a structure that does not. Too much control retained by the founder turns the structure into an extension of the founder personally, with all the legal consequences that follow. Too little control, and the founder loses any meaningful voice in the management of what is, after all, family wealth. The right balance is achieved through a thoughtful constitutional document, an independent guardian or protector and a clear letter of wishes.
8. Tax considerations
Asset protection is not primarily about tax, but tax is always part of the analysis. Three jurisdictions matter: the jurisdiction of the structure, the jurisdiction of the founder and the jurisdiction of the beneficiaries.
The jurisdiction of the structure determines the local tax treatment. Most jurisdictions used for asset protection levy no tax on a non-resident foundation or trust, although several apply a small minimum charge. Where the structure is taxable locally, the analysis becomes more complex and the structure is rarely competitive.
The jurisdiction of the founder determines whether the transfer of assets into the structure triggers a taxable event and whether the income and gains of the structure are attributed back to the founder under anti-abuse rules. Most developed jurisdictions have rules that look through structures controlled by their residents, sometimes referred to as transparent treatment, attribution rules or controlled foreign company rules. A founder who is resident in such a jurisdiction will typically be taxed as if the structure did not exist.
The jurisdiction of the beneficiaries determines how distributions are taxed in their hands. A beneficiary resident in a high tax jurisdiction will normally pay tax on the distributions they receive, regardless of where the structure sits. A beneficiary resident in a no tax jurisdiction such as the UAE will normally receive distributions without further taxation.
For founders who emigrate, the jurisdiction of departure usually retains a tail of taxing rights for a defined period. The Netherlands, for example, applies a ten year fiction for gift and inheritance tax after emigration, regardless of where the assets sit. This is not a reason not to plan; it is a reason to plan with full awareness of what events trigger taxation and when the tail ends.
The interplay between these jurisdictions is best mapped out in the design phase, before any commitment is made. Adjustments after the fact are often costly and sometimes impossible.
9. Common pitfalls
Several recurring issues compromise the effectiveness of asset protection structures. Recognising them at the design stage is far less expensive than fixing them after they have arisen.
- Sham characterisation: a structure in which the founder retains every meaningful decision-making power, or which is used as a personal current account, will not withstand challenge. Courts in many jurisdictions look at the actual conduct of the parties, not the words of the trust deed.
- Banking acceptance: not all jurisdictions are equally well received by tier one private banks. A structure that is legally bulletproof but cannot open and maintain bank accounts loses much of its practical value. Pre-clearance with the intended bank is an essential step before setting up the structure.
- Late filings: structures often depend on annual filings to maintain their tax status. A foundation that fails to confirm its transparent status with the local tax authority within the prescribed window can lose that status, with material tax consequences for the following financial year.
- Overlapping anti-abuse rules: international tax cooperation continues to expand. Substance requirements, anti-mismatch rules and minimum tax frameworks have all changed the cost and feasibility of structures that were standard a decade ago. A periodic review of the structure against current rules is essential.
Each of these pitfalls is avoidable with careful design, but each can compromise a structure entirely if ignored.
10. How to approach this for your business
For business owners considering asset protection, the practical starting point is a conversation about objectives. Protection against what, for whom, over what time horizon, and how much complexity is acceptable in exchange for that protection. There is no single answer and the right structure is always the one that fits the situation, not the most elaborate or the most fashionable.
The typical sequence is the following. A first assessment maps out the entrepreneur's residence, family situation, sources of wealth, operating activities and likely future moves. A second phase narrows down the choice of jurisdiction and vehicle. A third phase compares quotes from licensed service providers and confirms acceptance by the intended bank. Only then do the constitutional documents get drafted, the structure get formed and the wealth get transferred. The whole process usually takes between two and three months from first conversation to functioning structure, although it can be longer where the underlying assets or family situation are more complex.
Throughout the process, the structure is documented as if it will be reviewed by a sceptical third party at some point in the future. That third party may be a tax authority, an auditor, a bank, a future spouse, a future creditor or a future generation. Designing for that review at the start is what gives the structure its long term value.
If you are exploring asset protection for your wealth or your business, we are happy to discuss what would be appropriate in your situation. Our team works with structures across all of the jurisdictions mentioned in this article and we can talk through the options before you commit to any one of them.
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Business succession scheme 2026: key changes every DGA and entrepreneur needs to know
Business succession is one of the most consequential fiscal events in the life of a Dutch entrepreneur. Whether you are planning to transfer your company to the next generation during your lifetime or arranging the transfer upon death, the tax consequences can determine whether the business survives intact or whether a forced sale becomes necessary. To prevent that outcome, Dutch tax law has long provided two important facilities: the bedrijfsopvolgingsregeling (BOR) and the doorschuifregeling (DSR). Together, they allow entrepreneurs to transfer a business with very substantial tax relief. As of 1 January 2026, however, both facilities have been significantly tightened as part of a multi-year legislative overhaul.
The 2026 changes are the most far-reaching phase of that overhaul. They affect who qualifies, which shares are covered, how long the possession period runs, and how the rules interact with corporate structures that many DGA's rely on in practice. For any entrepreneur, director-shareholder or estate planner who has not yet reviewed their situation in light of the new rules, the changes warrant close attention.
Table of contents
1. Why the BOR and DSR matter for Dutch business owners
3. A phased overhaul: changes across 2024, 2025 and 2026
4. The ordinary shares requirement: who still qualifies?
5. Letter shares and the risk of unintended reclassification
6. Extended possession periods: the age-related tightening
7. Anti-abuse rules and the double-BOR prohibition
8. Relaxed restructuring rules: a positive development
1. Why the BOR and DSR matter for Dutch business owners
When a business is transferred by gift or inheritance, two separate tax claims can arise at once, sometimes on the same underlying value. On one side, the recipient may face a gift tax (schenkbelasting) or inheritance tax (erfbelasting) obligation on the value of the business assets received. On the other side, the transferring entrepreneur may owe income tax on the embedded capital gain built up over the years the business was owned. In a scenario without any relief, this combined burden can be large enough that a business would need to be partially liquidated or sold simply to pay the tax bill. The resulting disruption can be devastating, particularly where the business is a family enterprise that provides livelihoods for multiple people.
The Dutch legislature recognised this problem decades ago and introduced two facilities specifically designed to allow businesses to transfer without forcing a sale. The BOR significantly reduces the gift and inheritance tax burden on qualifying business assets. The DSR defers the income tax claim by allowing the transferor's fiscal cost basis to be passed on to the successor rather than triggered at the moment of transfer. When both facilities apply, the immediate tax cost of passing a business to the next generation can be reduced to a fraction of what it would otherwise be.
That is why the BOR and the DSR are routinely among the most heavily planned-around provisions in Dutch fiscal law. Business owners with substantial companies often begin structuring their succession years in advance. But the rules governing these facilities have never been static, and the changes introduced in 2026 are among the most significant the system has seen.
2. The BOR and DSR explained
The bedrijfsopvolgingsregeling (BOR)
The BOR is a facility within Dutch gift and inheritance tax law (the Successiewet 1956). It provides a large conditional exemption when qualifying business assets are transferred by gift or upon death to a business successor. The idea behind the facility is straightforward: because a business is not a liquid asset, the beneficiary cannot necessarily pay tax on its full value without disrupting the enterprise. The BOR therefore allows a substantial portion of that value to be transferred without triggering an immediate gift or inheritance tax charge.
To qualify for the BOR, several conditions must be satisfied. The assets being transferred must constitute an active business or a qualifying shareholding in a company. The transferor must have held the interest for a minimum period (the bezitseis, or possession requirement). And the recipient must continue operating the business for a specified number of years after the transfer (the voortzettingsvereiste, or continuation requirement). Where those conditions are met, the BOR provides very significant tax relief on the transfer.
The doorschuifregeling (DSR)
The DSR operates in a different tax dimension. When a business owner transfers shares or a business interest, any latent capital gain built up over the years of ownership would ordinarily be realised and taxed. The DSR allows that tax claim to be deferred: instead of triggering the gain in the hands of the transferor, the fiscal cost basis of the interest is passed on to the recipient. The income tax obligation is carried forward rather than extinguished, meaning the successor will ultimately pay it, but only when they in turn dispose of the interest.
Like the BOR, the DSR attaches conditions, including a continuation requirement and, from 2026, a requirement that the transferred interest consists of qualifying shares.
Why both matter together
In practice, DGA's and family business owners use both the BOR and the DSR together to minimise the combined tax cost of succession. The BOR handles the gift or inheritance tax; the DSR handles the income tax. Together they make it possible to transfer a business across generations without a forced sale. Because both are conditional on the type of interest being transferred and how long it has been held, the 2026 changes to those conditions have broad practical implications.
3. A phased overhaul: changes across 2024, 2025 and 2026
The changes to the BOR and DSR did not arrive all at once. The legislature spread the overhaul across three years, giving entrepreneurs a staged tightening rather than a single sharp shift.
In 2024, the first phase focused on limiting the BOR to interests in genuine operating companies. The rule that investment assets held within a company could benefit from the BOR alongside genuine business assets was narrowed. The threshold for this absorption was reduced, meaning more investment assets now fall outside the facility.
The 2025 changes brought adjustments that were broadly welcomed, including the shortening of the continuation requirement for recipients. Under the previous rules, a business successor had to continue the business for five years to maintain the benefit of the BOR. From 2025, that period was reduced to three years, making it somewhat easier for successors to adjust the business structure post-transfer. The possession requirement for the transferor was also refined in 2025.
The 2026 package, which is the focus of this article, introduced the most technically demanding changes. It brought the ordinary shares requirement, the age-related extension of possession periods, the double-BOR prohibition, and greater flexibility for restructurings. Each of these is examined in the sections that follow.
4. The ordinary shares requirement: who still qualifies?
Perhaps the most impactful change introduced in 2026 is the restriction of the BOR and DSR to ordinary shares. Until the end of 2025, both facilities applied to any qualifying interest that met the general conditions, regardless of the exact type of share. From 1 January 2026, the facilities apply only to what the law defines as gewone aandelen, or ordinary shares.
What counts as an ordinary share?
The legislation defines an ordinary share by exclusion. A share is ordinary if it does not carry preferential rights regarding the distribution of profits or the proceeds of liquidation. Shares that do carry such rights are classified as preferential shares (preferente aandelen) and no longer qualify for the BOR or DSR as a matter of principle.
Specifically excluded from the definition of ordinary shares are:
- Preference shares: shares with a priority right over other shareholders in profit distributions or liquidation proceeds
- Tracking stocks: shares whose return is tied to the performance of a specific part of the business rather than the whole
- Profit participation certificates (winstbewijzen): instruments that participate in profits without carrying voting rights or full share characteristics
- Options and other derivative interests in share capital
The exclusion of preference shares aligns with a long-standing concern that certain structures were designed primarily to shelter investment or passive assets behind a business facade. Requiring ordinary shares pushes the BOR back towards its original purpose: facilitating the genuine transfer of active business interests.
Preference shares from phased successions
There is an important exception for preference shares that arose in the context of a phased succession (gefaseerde bedrijfsopvolging). In many family business successions, a parent converts ordinary shares into preference shares as part of a structured handover process. These succession preference shares often represent a deferred purchase price or a retained economic interest while the business is gradually transferred to the next generation. Shares of this type remain eligible for the BOR and DSR under the 2026 rules, provided they satisfy the applicable conditions.
The distinction matters in practice: preference shares created to implement a genuine business succession remain within the system, while preference shares that existed for other commercial or tax reasons do not. The boundary between these two categories requires careful analysis in each specific situation.
5. Letter shares and the risk of unintended reclassification
The ordinary shares requirement has a particularly significant knock-on effect for DGA's who use letteraandelen, or letter shares. Letter shares are a widely used structure in the Netherlands. Instead of holding a single class of shares, shareholders hold different classes, typically labelled A, B, C and so on. Each class carries the same nominal value and the same voting rights, but the dividend policy for each class can be set independently. This allows shareholders to take different amounts of dividend in different years according to their personal circumstances.
This flexibility has made letter shares attractive, particularly in structures with multiple shareholders who have different tax positions or different liquidity needs.
When letter shares become preference shares
Under the 2026 rules, a letter share can unintentionally be reclassified as a preferential share. The mechanism is subtle. If one shareholder takes a large dividend from their letter class while another shareholder does not, the retained profits attributable to the non-distributing class build up in the company. Over time, if the retained balance in one class significantly exceeds that of another, the share linked to the higher-reserve class may effectively carry a priority right over liquidation proceeds. At that point, the share risks being classified as a preferential share rather than an ordinary share, with the result that it no longer qualifies for the BOR or DSR.
Any company with two or more shareholders, multiple letter share classes, and a history of different dividend distributions should review whether a reclassification risk has already arisen or is at risk of arising in the near future. The only reliable way to avoid the risk is to ensure that per-class reserves remain equal across all letter classes, which requires coordinating dividend distributions carefully.
6. Extended possession periods: the age-related tightening
The BOR and DSR have always included a possession requirement: the transferor must have held the business interest for a minimum period before the transfer in order for the facilities to apply. From 2026, the possession requirement has been tightened for transferors who are of more advanced age at the time of transfer. The change responds to concerns about rollator constructions: situations where an elderly individual converts non-business assets into a business interest shortly before death or donation, specifically to claim the BOR on wealth that was never genuinely part of an active enterprise.
For inheritances, the extended possession requirement begins to apply for deceased persons who were at least three years past the pension age (AOW-leeftijd) at the time of death. For each additional year of age beyond a certain threshold, the required possession period increases by six months. For gifts, a similar extension applies for donors who are at least seven years past the pension age.
The age-related extension is unlikely to affect most entrepreneurs who have built their businesses over a long career and plan succession at or shortly after retirement. Where it has more impact is in scenarios involving later-life restructuring or the acquisition of new business interests at an advanced age.
7. Anti-abuse rules and the double-BOR prohibition
From 2026, the BOR can only be applied once per enterprise per chain of succession. If the BOR was used on a first transfer, a subsequent transfer of the same enterprise does not qualify for the BOR until a full possession period has elapsed from the moment of the first facilitated transfer. This prevents structures that were designed to strip the inheritance or gift tax base through multiple facilitated transfers in quick succession.
The rollator construction measures described in the previous section complement this prohibition. Together, these provisions reflect a clear legislative intent: to maintain the BOR and DSR as genuine facilities for business continuity, while closing off avenues that allow them to be used as general wealth transfer vehicles. The exemptions remain large and valuable, but the conditions attaching to them are now more precisely targeted at the transactions they were designed to benefit.
8. Relaxed restructuring rules: a positive development
The 2026 changes were not uniformly restrictive. On one significant point, the rules were actually made more favourable: the interaction between internal restructurings and the possession requirement. Under the previous rules, certain forms of internal restructuring could inadvertently restart the possession period. If a business owner undertook a legal merger, demerger, share conversion or similar transaction within their corporate structure, the restructured interest was in many cases treated as a new interest, meaning the clock restarted and the possession requirement had to run again from the beginning.
From 1 January 2026, restructurings that do not change the proportional entitlement of the transferor no longer cause the possession period to restart. If the entrepreneur emerges from a merger, demerger, conversion, share issuance or share buyback with the same proportional economic interest in the underlying enterprise, the possession period continues to run without interruption.
This change allows business owners considerably more freedom to reorganise their corporate structures during the period leading up to a succession. In-house mergers, holding restructurings, and other common reorganisations can now be implemented without the fear of inadvertently resetting the possession clock. The relaxation also extends to the continuation requirement on the successor's side, giving more room for restructuring during the continuation period as long as the nature of the enterprise being continued does not fundamentally change.
9. Planning steps to take now
Given the scope of the 2026 changes, there are several areas where existing structures should be reviewed. The following are not recommendations for any specific situation, but an indication of the areas most likely to require attention.
- Review the share structure: Any company with letter shares or multiple share classes should review whether per-class reserves have remained equal. Where they have diverged, specialist advice is needed to assess the reclassification risk and identify remediation options.
- Check the possession period: Business owners approaching retirement should verify that the possession period has been satisfied for each interest they hold, and confirm whether any recent restructurings affected the clock under the old or new rules.
- Consider the age-related rules: Entrepreneurs significantly past pension age, or those acquiring new business interests at a late stage, should assess whether the extended possession periods apply to their situation.
- Assess the double-BOR prohibition: Where a family business has already been the subject of a BOR-facilitated transfer, check whether a subsequent planned transfer falls within the prohibition.
- Coordinate dividend policy: If a letter share structure is to be maintained, establish a clear protocol for coordinating dividend distributions to ensure per-class reserves remain equal. In some cases, simplifying to a single share class may be more efficient.
- Verify succession preference shares: Entrepreneurs holding preference shares arising from a genuine phased succession should confirm that those shares satisfy the conditions for the succession preference share exception.
10. Conclusion
The BOR and DSR remain among the most generous succession planning facilities available to Dutch entrepreneurs and DGA's. The underlying principle has not changed: business continuity is valuable, and tax law should not force a sale to fund a succession tax bill. But the conditions attaching to those facilities are now considerably more technical than they were even three years ago, and the 2026 changes in particular have introduced a set of rules that interact in non-obvious ways with common corporate structures.
The ordinary shares requirement, the reclassification risk for letter shares, the age-related extension of possession periods, the double-BOR prohibition, and the relaxed restructuring rules all need to be considered together in the context of each individual structure. A structure that worked well under the pre-2026 rules may require adjustment. A structure that was set up with succession in mind may have been overtaken by legislative changes that were not anticipated at the time.
For any business owner who has not yet done so, now is the time to review the structure and the plan with a specialist who can assess the current position and identify any issues before they become problems. The complexity of the 2026 rules is an argument for early action rather than deferred attention.
Please feel free to reach out to our team if you would like to discuss your situation.
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Transfer pricing: what it is, how it works, and why it matters
Every cross-border transaction between related companies raises a fundamental question: is the price right? Transfer pricing, the set of rules governing how multinational groups price their intercompany transactions, is consistently ranked as the most important tax issue facing international businesses. It determines how profits are allocated across jurisdictions, how much tax is paid and where, and whether a business is exposed to adjustments, penalties, or double taxation.
Yet transfer pricing is widely misunderstood. Many entrepreneurs and business owners associate it exclusively with large multinationals or aggressive tax planning. In reality, transfer pricing applies to any business that conducts transactions with a related party in another country, regardless of size. A Dutch BV paying a management fee to a foreign holding company, a subsidiary purchasing inventory from its parent, or a group company licensing a trademark to an affiliate: all of these are transfer pricing transactions that must comply with the arm’s length principle.
This article explains what transfer pricing is, how it works, and why it matters. We cover the arm’s length principle, the main pricing methods, documentation requirements, the role of intangibles, and what happens when things go wrong. While the rules are international in nature, we pay particular attention to how they apply in the Netherlands and highlight developments that business owners should be aware of.
Table of contents
3. Transfer pricing methods: how prices are tested
4. The functional analysis: functions, assets and risks
5. Intangibles and the DEMPE framework
6. Documentation requirements: master file, local file and country-by-country report
7. Transfer pricing in the Netherlands
8. Business restructurings and transfer pricing
9. Enforcement, penalties and dispute resolution
10. Getting transfer pricing right
1. What is transfer pricing?
Transfer pricing refers to the prices charged in transactions between related parties, typically companies that belong to the same multinational group. These transactions can involve goods, services, the use of intangible assets such as trademarks or technology, financial arrangements such as intercompany loans, or any other commercial or financial dealing between entities under common control.
When two independent companies transact with each other, the price is determined by market forces: supply, demand, negotiation, and competition. When two related companies transact, those market forces may be absent or weakened. The parent company and its subsidiary do not negotiate at arm’s length in the same way that unrelated parties would. This creates the risk that the prices set on intercompany transactions do not reflect what the market would produce, which in turn affects how profits are distributed across the countries where the group operates.
Transfer pricing rules exist to prevent this profit shifting. They require that intercompany transactions be priced as if the parties were independent, ensuring that each country collects its fair share of tax on the economic activity taking place within its borders. The international consensus on transfer pricing is set out in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, most recently revised in January 2022, and implemented through domestic legislation in over 140 countries.
2. The arm’s length principle
At the heart of all transfer pricing rules lies the arm’s length principle. This principle, codified in Article 9 of the OECD Model Tax Convention and incorporated into virtually every bilateral tax treaty, provides that conditions in commercial and financial relations between associated enterprises should be consistent with those that would have been agreed between independent enterprises in comparable transactions under comparable circumstances.
In practice, this means that a multinational group must price its intercompany transactions as if each entity were dealing with an unrelated party. If a Dutch subsidiary purchases goods from its German parent, the price must reflect what the subsidiary would have paid if it had bought the same goods from an unrelated supplier under similar conditions. If a holding company charges a management fee to its operating subsidiaries, that fee must correspond to what an independent service provider would charge for equivalent services.
The arm’s length principle treats each entity within a group as a separate enterprise. This separate entity approach ensures broad parity of tax treatment between multinational groups and independent businesses operating in the same markets. It also prevents the artificial shifting of profits from higher-tax to lower-tax jurisdictions by requiring that the allocation of profits follows the allocation of economic functions, assets and risks.
Why not just use a formula?
An alternative to the arm’s length principle that is sometimes proposed is global formulary apportionment: dividing a group’s total worldwide profit among countries based on a predetermined formula, such as the proportion of sales, employees, or assets in each country. The OECD and its member countries have consistently rejected this approach. A formula would be inevitably arbitrary, difficult to agree upon internationally, and would fail to account for the specific facts and circumstances of individual transactions. It would also create significant risks of double taxation where countries disagree on the formula or its inputs.
3. Transfer pricing methods: how prices are tested
The OECD Guidelines describe five transfer pricing methods, divided into two categories. The goal is always to select the method that is most appropriate to the circumstances of the case, taking into account the nature of the transaction, the availability of reliable comparable data, and the degree of comparability between the controlled and uncontrolled transactions.
Traditional transaction methods
- Comparable Uncontrolled Price (CUP) method compares the price charged in a controlled transaction directly to the price in a comparable transaction between independent parties. This is the most direct method and is preferred whenever reliable comparables exist. It is particularly effective for commodity transactions where quoted market prices are available.
- Resale Price Method (RPM) starts from the price at which a product purchased from a related party is resold to an independent customer, then subtracts an appropriate gross margin for the reseller. It is most useful for distribution activities where the reseller does not add substantial value to the product.
- Cost Plus Method (CPM) begins with the costs incurred by the supplier in a controlled transaction, then adds an appropriate markup. It is commonly applied to contract manufacturing arrangements and intercompany services where the supplier performs routine functions.
Transactional profit methods
- Transactional Net Margin Method (TNMM) examines the net profit that a taxpayer earns from a controlled transaction relative to an appropriate base, such as costs, sales or assets, and compares it to the net profit earned by comparable independent enterprises. TNMM is a one-sided method: it tests only the less complex party (the "tested party"). It is the most commonly applied method in practice because net profit indicators are generally less sensitive to transactional differences than prices or gross margins.
- Transactional Profit Split Method identifies the combined profits from a controlled transaction and divides them between the parties based on their relative contributions. It is most appropriate when both parties make unique and valuable contributions, such as when each contributes significant intangible assets, or when the operations are so highly integrated that a one-sided method cannot reliably isolate the contribution of either party.
There is no strict hierarchy among these methods, but the OECD Guidelines indicate that traditional methods are generally preferred over transactional profit methods when both can be applied with equal reliability, and that the CUP method is preferred over all others when a comparable uncontrolled transaction can be identified.
4. The functional analysis: functions, assets and risks
The foundation of any transfer pricing analysis is the functional analysis. Before selecting a method or identifying comparables, it is essential to understand what each entity within the group actually does: what functions it performs, what assets it uses, and what risks it assumes. This analysis determines the characterisation of each entity and, consequently, the level of profit it is entitled to earn.
An entity that performs routine distribution functions, uses limited assets, and bears minimal risk is characterised as a limited-risk distributor and is entitled to earn only a routine margin. An entity that develops products, owns valuable intellectual property, makes strategic decisions, and bears the entrepreneurial risk is entitled to the residual profit, the return above the routine compensation paid to limited-function entities.
The five comparability factors
The OECD Guidelines identify five factors that must be examined when comparing a controlled transaction to an uncontrolled transaction:
- Contractual terms of the transaction, recognising that the actual conduct of the parties prevails over written agreements where the two are inconsistent
- Functions performed, assets used, and risks assumed by each party, which is the core of the functional analysis
- Characteristics of property or services transferred, including physical features, quality, availability, and volume
- Economic circumstances of the parties and the market in which they operate, including market size, competition, consumer purchasing power, and regulatory environment
- Business strategies pursued by the parties, such as market penetration, product diversification, or risk aversion
Risk analysis
Risk is a central element of the functional analysis. The party that controls a risk and has the financial capacity to assume that risk is entitled to the return (or loss) associated with that risk. A party that neither controls nor assumes a risk is not entitled to any share of the upside or downside returns from that risk. Under the OECD framework, risk is analysed through a six-step process that examines who identifies economically significant risks, who contractually assumes them, who actually controls the risk through decision-making, and who has the financial capacity to bear the consequences. If a party lacks control over a risk that it contractually assumes, the risk is reallocated to the party with both control and financial capacity.
5. Intangibles and the DEMPE framework
Intangible assets, including patents, trademarks, know-how, trade secrets, customer relationships, and proprietary technology, are often the most significant drivers of value in a multinational group. How the returns from intangibles are allocated among group entities is one of the most contested areas of transfer pricing.
The OECD defines an intangible for transfer pricing purposes as something that is not a physical asset or a financial asset, that is capable of being owned or controlled for use in commercial activities, and that would be compensated if transferred between independent parties. Importantly, this definition is broader than accounting or legal definitions: internally developed intangibles that do not appear on a balance sheet, such as the cumulative value of years of marketing expenditure, may still be relevant for transfer pricing purposes.
The DEMPE framework
The OECD introduced the DEMPE framework to determine which entity within a group is entitled to the returns from intangible assets. DEMPE stands for the five key functions related to intangibles:
- Development of the intangible, such as product R&D or brand creation
- Enhancement of the intangible, including improvements and updates over time
- Maintenance of the intangible’s value through quality control and ongoing investment
- Protection of the intangible through legal measures such as trademark registration, patent filings, and enforcement of IP rights
- Exploitation of the intangible to generate revenue, such as commercialising a product or licensing a brand
The critical insight of the DEMPE framework is that legal ownership of an intangible, by itself, does not entitle the owner to the income generated by that intangible. An entity that merely registers a trademark or holds legal title to a patent but performs none of the DEMPE functions is not entitled to the residual profits. Instead, it is entitled to no more than a risk-adjusted return on its funding contribution, if it provides any funding at all. The entity that actually performs the important DEMPE functions, controls the associated risks, and has the financial capacity to bear those risks is entitled to the intangible-related returns.
This principle has far-reaching implications for structures in which intellectual property is held by a shell company in a low-tax jurisdiction while all development, marketing and strategic decision-making occurs elsewhere. Under the DEMPE framework, such arrangements may not withstand scrutiny.
6. Documentation requirements: master file, local file and country-by-country report
The OECD recommends a standardised three-tier approach to transfer pricing documentation, adopted by the majority of jurisdictions worldwide:
Master file
The master file provides a high-level overview of the multinational group’s global business operations, organisational structure, intangible assets, intercompany financial activities, and overall transfer pricing policies. It is designed to give tax authorities a comprehensive picture of the group’s global operations and how transfer pricing policies fit within that context. The master file covers five categories: organisational structure, business description, intangibles strategy, intercompany financial activities, and the group’s financial and tax positions.
Local file
The local file supplements the master file with detailed information on material intercompany transactions involving the local entity. It includes a description of the local entity, its management structure and business strategy, a detailed functional analysis for each material intercompany transaction, the transfer pricing method selected and the rationale for that selection, the comparability analysis including benchmarking data, and the financial information used to apply the selected method. The local file is where the substance of the transfer pricing analysis resides.
Country-by-country report
The country-by-country report (CbCR) provides aggregate, jurisdiction-by-jurisdiction information on the global allocation of income, taxes paid, employees, and tangible assets. It is intended for high-level risk assessment by tax authorities and is explicitly not to be used as a basis for transfer pricing adjustments or formulary apportionment. The CbCR is required for multinational groups with consolidated group revenue of at least EUR 750 million.
7. Transfer pricing in the Netherlands
The Netherlands has been an early adopter of the arm’s length principle and maintains a transfer pricing framework that closely follows the OECD Guidelines. The Dutch framework is built on several legal foundations.
Article 8b of the Corporate Income Tax Act
The arm’s length principle was codified in Dutch law through Article 8b of the Wet op de vennootschapsbelasting 1969 (Corporate Income Tax Act), effective 1 January 2002. This article provides that where conditions agreed between related entities differ from those that would have been agreed between independent parties, taxable profit is determined as if arm’s length conditions had applied. Article 8b also introduces a documentation requirement: taxpayers must include information in their records demonstrating how transfer prices were established and that they are consistent with what independent parties would have agreed.
The 2022 anti-mismatch rules
Since 1 January 2022, the Netherlands has introduced Articles 8ba through 8bd of the Corporate Income Tax Act, which significantly changed the Dutch transfer pricing landscape. These provisions were designed to prevent situations of double non-taxation that could arise from unilateral downward transfer pricing adjustments.
Under the new rules, a downward adjustment of the Dutch tax base is only permitted to the extent that the corresponding upward adjustment is included in the taxable base of the related party in the other jurisdiction. The burden of proof lies with the Dutch taxpayer, which must demonstrate that the counterparty is indeed taxed on the higher amount.
Documentation obligations
Article 29g of the Corporate Income Tax Act implements the OECD’s three-tier documentation framework for the Netherlands. Multinational groups with consolidated group revenue of at least EUR 50 million are required to maintain both a master file and a local file. These documents must be prepared in Dutch or English and completed by the filing deadline of the corporate income tax return. The country-by-country reporting obligation applies to groups exceeding the EUR 750 million threshold.
8. Business restructurings and transfer pricing
Business restructurings, the cross-border reorganisation of functions, assets, and risks within a multinational group, are one of the most complex areas of transfer pricing. Common examples include converting a full-fledged distributor into a limited-risk distributor, transforming a manufacturer into a contract manufacturer, centralising intellectual property in a single group entity, or consolidating procurement, logistics, or back-office functions in a shared service centre.
The OECD Guidelines require that the arm’s length principle be applied not only to the post-restructuring transactions but also to the restructuring itself. If value is transferred from one entity to another, for example through the surrender of a profitable distribution right or the transfer of customer relationships, the transferring entity must receive arm’s length compensation for the value it gives up.
Profit potential and compensation
The concept of "profit potential" plays an important role. When a full-fledged distributor with a history of high and variable returns is converted into a limited-risk entity earning a fixed routine margin, the question arises whether the distributor is being adequately compensated for the profit potential it surrenders. The analysis depends on the options realistically available to the restructured entity: would an independent enterprise in the same position have accepted the same terms, or would it have negotiated indemnification or other compensation?
9. Enforcement, penalties and dispute resolution
Tax authorities worldwide have significantly increased their focus on transfer pricing in recent years. Audit activity has expanded, specialised transfer pricing units have been established, and information exchange between jurisdictions has intensified, particularly through the automatic exchange of country-by-country reports.
Audit triggers
Common audit triggers include persistent losses in a local entity despite group-level profitability, significant intercompany transactions relative to total turnover, payments to related parties in low-tax jurisdictions, recent business restructurings, and inconsistencies between the local file and other publicly available information. Country-by-country reports give tax authorities a high-level view of the group’s global profit allocation, which they use to identify potential mismatches between where profits are reported and where value is created.
Penalties
Most jurisdictions impose penalties on transfer pricing adjustments, particularly where the taxpayer has failed to maintain adequate documentation. In the Netherlands, the general penalty framework for corporate income tax applies. Where a taxpayer has maintained proper contemporaneous documentation and can demonstrate reasonable efforts to comply with the arm’s length principle, penalties are generally avoidable. However, the absence of documentation can shift the burden of proof to the taxpayer and expose it to both adjustments and penalties.
Double taxation and dispute resolution
One of the most significant consequences of a transfer pricing adjustment is the risk of double taxation. If one country increases the taxable profits of a group entity by adjusting a transfer price upward, and the corresponding country does not make a matching downward adjustment, the same income is taxed in both countries. To address this, most tax treaties include a mutual agreement procedure (MAP) under which the competent authorities of the two countries negotiate to eliminate double taxation. More recently, the EU Arbitration Convention and the Multilateral Instrument (MLI) have introduced binding arbitration mechanisms to ensure that disputes are resolved within defined timescales.
10. Getting transfer pricing right
Transfer pricing is not merely a compliance exercise. It is a core element of how a multinational business structures its operations, allocates its resources, and manages its tax risk. The businesses that approach transfer pricing proactively, rather than reactively, are consistently better positioned to withstand audit scrutiny, avoid double taxation, and maintain commercial flexibility.
The key principles to keep in mind are:
- Every intercompany transaction must be priced at arm’s length, supported by a functional analysis that accurately reflects the functions performed, assets used, and risks assumed by each party
- The entity that performs the important value-creating functions, controls the associated risks, and has the financial capacity to bear those risks is entitled to the residual profit
- Documentation must be contemporaneous, meaning it should be prepared at the time the transaction is entered into or, at the latest, by the time the tax return is filed
- Transfer pricing policies must be consistent with the actual conduct of the parties, not merely with what is written in intercompany agreements
- Business restructurings that transfer value between group entities require arm’s length compensation for the value transferred
- Advance pricing agreements (APAs) can provide certainty for material or complex intercompany arrangements
Every situation is different. The right transfer pricing approach depends on the specific facts of the business, the jurisdictions involved, the nature of the intercompany transactions, and the commercial objectives of the group. Transfer pricing arrangements must reflect genuine economic substance and be supported by robust, contemporaneous documentation.
At Taxboutiq, we specialise in transfer pricing, international tax structuring, and cross-border advisory for entrepreneurs and businesses. Whether you are setting up your first intercompany arrangement or reviewing an existing transfer pricing policy, we work as part of your team to implement solutions that are both compliant and commercially effective.