Oct 28, 2018
Requirement for Tax Substance in Tax Planning Designs
The concept of substance over the legal form has become crucial in the rightful representation as well as the reliability of info captured in financial statements. The main goal of the concept is ensuring that all business transactions are presented in a manner that demonstrates the real position of the business.
This post demonstrates how the principle applies outside the focus of financial statements. In particular, it looks at how it affects the larger tax planning community.
A closer look at the concept of substance over the legal form
The concept, substance over the legal form enables the tax authorities to set aside the legal form of a business and take a glance at what actually took place in transactions. The aim is preventing the artificial structure from abuse especially through tax avoidance.
For any company to enjoy a beneficial tax regime (jurisdiction with lower tax rates), it is required to comply with tax substance requirements set by the tax authorities. These requirements often vary from one country to another. Here is an outline of these requirements;
A glance at the tax rulings in the Netherlands
The Netherlands, one of the countries with a very advanced mechanism of real substance identification uses a system referred to as tax rulings. The tax ruling is a confirmation from the tax authorities that allow business owners to establish well in advance the tax burden, their rights, and duties in various circumstances.
The tax ruling framework uses two types of agreements from the tax authorities; the advance tax ruling and advance pricing agreement.
In order for a tax ruling to be issued, the tax authorities must ensure that the cross-border transactions where a Dutch company is a party actually took place. Here are the requirements for tax substance.
Steps to make your company demonstrate substance
Having looked at the case of the Netherlands, the main question remains, how can you demonstrate substance in your situation? Like in the Netherlands, the concept of substance is tailor-made. This implies that any attempt to generalize the books or presentation will not work.
The target for your business should be redefining your operational goals and make the operations open. Here are some of the ready solutions to help you demonstrate substance:
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