Retroactive effect reintroduced in the proposed conditional exit tax of Dutch dividend withholding tax | Deloitte Nederland


Retroactive effect reintroduced in the proposed conditional exit tax of Dutch dividend withholding tax

Last year, a revised bill proposing an exit tax of dividend withholding tax was submitted to Parliament. In November 2021, the retroactive effect that was removed from the proposal in October 2021, was reintroduced by a third bill of amendment.

7 December 2021

In July 2020, an opposition member of Dutch Parliament submitted a bill to the House of Representatives, proposing the introduction of a conditional exit tax for dividend withholding tax purposes. In September 2020, an amendment to this proposed exit tax was submitted. At the same time, the initiator of the legislative proposal published an accompanying letter with the aim of explaining two misunderstandings regarding the proposal.

Clarifications on tax subject and scope

In the accompanying letter, the initiator addressed some of the criticism that has been voiced in the press and scientific literature against the initial bill. Firstly, it was clarified in the context of the tax subject that the taxpayer of the exit tax is each shareholder, as is the case for regular withholding taxes, instead of the actually departing company. In order to achieve this, the initiator intended to come up with new amendments, which should include the automatic and interest free deferral of payment of exit tax due until future actual dividend distributions. Secondly, the letter clarified that the proposed exit tax will not apply to regional head offices of foreign multinationals present in the Netherlands, which would have to protect the Dutch business climate.

Advice of the Council of State

In September 2020, the Council of State issued its advice on both the initial and the revised proposal. In regular legislative processes, the Council of State’s advice accompanies the proposal and is deemed to be an important opinion for Parliament to consider. The advice has been made public on 9 October 2020. Despite the fact that the Council of State recognizes the political and public debate about the taxation of multinationals, it emphasized that legislation must at all times comply with principles such as due care and legal certainty, and should not conflict with international treaties or EU law. According to the Council of State, the drastic change in the system of Dutch dividend withholding tax entailed by the currently pending bill does not meet these requirements. This brought the Council to the conclusion that it is so unlikely that the proposal will be legally tenable, that introducing the exit tax would not be responsible.

The negative advice is partly based on the fact that the Council of State is of the opinion that it has not been sufficiently demonstrated that there is a valid Dutch tax claim on the undistributed profits in the context of international tax treaties and because there are doubts about the compliance of the exit tax with EU law. With regard to the above discussed amendments, the Council of State notes that these do not change the negative advice on the bill in general.

The initiator is of the opinion that the advice of the Council of State is based on two incorrect assumptions. Firstly, that the company is the taxpayer for the proposed exit tax and secondly that the Netherlands would not have a justified tax claim on the company’s undistributed profits.

Levy system

In response to the advice of the Council of State, a revised proposal was published on 9 October 2020. The proposed levy system is now as follows. The withholding agent must file a dividend withholding tax return within one month after the taxable event has occurred. The Tax Inspector will then impose a protective additional tax assessment on the available clear profit, insofar as it exceeds EUR 50m. Interest-free deferment of payment will be granted for this assessment on request, without the need to provide collateral. Collection will take place insofar as dividends are actually paid out after departure to a qualifying state. However, the company may then set off the final levy due against the dividend to be paid to the beneficiary shareholders, so they eventually bear the levy. Investors established in the Netherlands may, however, credit the tax actually collected against the income or corporate income tax they are due. The amendments discussed above (i.e. regarding the tax subject and scope) are also included in the revised proposal of October 2020.

The conditional settlement obligation does not apply in so far as the withholding exemption would have applied in the event of an actual distribution of profit reserves. This exception primarily concerns regional head offices of foreign multinationals. In addition, a step-up for cross-border transfers of registered offices from abroad to the Netherlands is provided for. The revised legislative proposal does not include the extension of the deemed residence rules to include companies not incorporated under Dutch law. On closer inspection, the initiator sees too little added value in it.

Recent developments

On 12 March 2021 the initiator of the proposed conditional exit tax, in response to questions raised by the Parliamentary Committee, sent another revised proposal accompanied with further guidance to the House of Representatives. This revised proposal contains three amendments compared to the October 2020 bill, which are all of a rather technical nature. It concerns the following proposed amendments:

  • The inclusion of a provision in the Dutch Corporate Income Tax Act based on which the settlement of the dividend tax liability and the proposed corresponding right of recourse are disregarded for Dutch corporate income tax purposes and are therefore not deductible. In addition, the tax liability can only be set-off to the extent that tax is actually paid, i.e. to the extent that the deferral of payment is actually terminated;
  • The introduction of a provision to prevent potential double taxation of dividend withholding tax on the same profit reserves after a cross-border share merger with an acquiring company in a qualifying state; and
  • The inclusion of a delegation provision in the Dutch Dividend Withholding Tax Act on the basis of which rules can be set to prevent a cumulation of the proposed conditional exit tax and the substantial interest scheme in the income tax.

In the further guidance, the initiator frequently refers to a report of the International Bureau of Fiscal Documentation (IBFD), that was prepared upon his request, on exit dividend withholding taxes in other countries. Although the rationale behind this was (amongst other things) to take away the abovementioned concerns on incompatibility of the exit tax with international (tax treaty) and EU law, no such conclusion can in fact be inferred from the report. This has led to an additional response of the Dutch Association of Tax Advisers, in which it has been expressed that the most fundamental aspect of the legislative proposal, being the substantial risk of (international) double taxation, has not been solved. In addition, no Member State applies a similar exit tax within the EU, which is why no conclusions can be drawn from the IBFD report as to whether or not the legislative proposal is contrary to EU law. The Association does not consider it responsible to introduce the conditional exit taxation in its current form.

Retroactive effect

In October 2021, another bill of amendment was published by the initiator, removing the retroactive effect that was included in the original proposal. As it was still uncertain when the House of Representatives would vote on the proposal and considering the already long legislative process, the initiator found it appropriate to take away the legal uncertainty for tax payers by removing the retroactive effect of the proposed exit tax. However, following the initiator’s departure from Parliament, the new defender of the proposed conditional exit tax submitted a third bill of amendment in November 2021. It reintroduces the retroactive effect of the bill, to 15 November 2021 (three o’clock in the afternoon). If the proposed exit tax is enacted, it will now apply to all taxable events that took place on or after that moment. However, to date it is still unclear how other political parties will position themselves regarding this proposal and, as a result, whether a majority on the proposal can be reached.

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