Don Quixote versus Dutch windmills: A symbolic battle against international tax avoidance

Anti-abuse in general

The fight against tax avoidance is often portrayed as a modern version of Don Quixote’s battle against windmills. Legislators and tax authorities, including those in the Netherlands, continue to sharpen their instruments to dismantle artificial arrangements that erode the tax base. Central to these efforts are anti-abuse rules, intended to ensure that tax advantages are only available where there is genuine economic substance. The challenge lies in applying these rules fairly – on the one hand, preventing aggressive tax planning that undermines the system, while on the other, respecting the freedom of businesses to structure their international activities in a way that serves legitimate commercial goals.

Dutch Supreme Court: Curaçao and Belgium

This tension was recently addressed by the Dutch Supreme Court in cases concerning withholding tax exemptions on dividend payments routed through holding companies in Curaçao and Belgium with participation in the Netherlands. The Dutch tax authorities considered these structures abusive because the holdings primarily acted as conduits without significant activities of their own. The Supreme Court took a narrower view. 

The Court ruled that anti-abuse legislation can only deny the exemption where tax avoidance is the decisive motive. Where a taxpayer can demonstrate the arrangement is supported by genuine business reasons – such as centralising investments, facilitating financing, or organising regional management – the exemption remains available. Crucially, taxpayers must be given the opportunity to present and substantiate their motives, underlining that intent and evidence play a decisive role.

Application of EU law

The Court’s reasoning aligns with established principles under EU law. The Court of Justice of the European Union has consistently emphasised that the prohibition of abuse must be interpreted strictly. While purely artificial arrangements lacking economic reality can be disregarded, structures with a legitimate commercial rationale are protected under fundamental freedoms such as the freedom of establishment and the free movement of capital. 

For Dutch taxpayers, this means the motives behind the design of an international holding structure must be carefully documented. Transparency in decision making, board minutes, and evidence of genuine business functions are not just formalities, but essential safeguards to demonstrate the structure is more than a tax-saving exercise.

Conclusion

The broader lesson is clear. Structuring international activities through the Netherlands requires an active holding company with real substance and meaningful functions. A mere paper entity risks being dismissed as an empty conduit, leaving the taxpayer to battle legal “windmills” with little chance of success. The Netherlands can only serve as a valuable link in an international chain when its presence is commercially justified and operationally relevant. 

In drawing these boundaries, the Supreme Court has signalled that the fight is not against every instance of tax planning, but specifically against arrangements where tax avoidance is the sole driver. For international advisers and businesses alike, the message is both restrictive and reassuring: anti-abuse rules are powerful, but they are not limitless.