Conditional withholding tax on dividend payments proposed | Deloitte Netherlands

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Conditional withholding tax on dividend payments proposed

On 25 March 2021 a legislative proposal was published that details proposed changes to the Dutch conditional interest and royalty withholding tax act 2021. In line with earlier announcements, the bill proposes a new withholding tax on dividend payments to related entities in listed low tax jurisdictions, applicable as from 2024.

26 March 2021

Conditional dividend withholding tax

The Netherlands Ministry of Finance published a legislative proposal on 25 March 2021 that details proposed changes to the Dutch conditional interest and royalty withholding tax act 2021 (DCWHTA), following a public consultation launched in September 2020. In line with earlier announcements, the bill proposes a new withholding tax on dividend payments to related entities in listed low tax jurisdictions, applicable as from 2024. This new withholding tax on dividends (at 25%) will be levied alongside the current Dutch dividend withholding tax (at 15%) with an anti-cumulation provision in place. The rate of the DCWHTA is equal to the headline Dutch corporate income tax rate (currently 25%) which means that this new withholding tax on dividends follows the system for conditional interest and royalty withholding tax. The main purpose of the bill is to cover dividend distributions to related entities in listed low tax jurisdictions that currently are not subject to Dutch dividend withholding tax.


Historical context

The origin of this bill dates back to the government formation agreement in 2017, where the government intention was announced to abolish the regular Dutch dividend withholding tax (at 15%) and to introduce a conditional dividend withholding tax to certain low tax jurisdictions and in abusive situations. Following discussions in Dutch Parliament in 2017 and 2018, the abolishment of regular Dutch dividend withholding tax was withdrawn and the conditional withholding tax on dividend proposal as replacement thereof was reconsidered. By issuing this new proposal for a conditional withholding tax on dividends with an anti-cumulation provision in place, the Dutch government wishes to ascertain that the existing measures against tax avoidance in relation to dividends are improved. No tax budget is estimated from this legislative action as it is expected that holding structures are adjusted to avoid the impact of this bill.


Explanation

The following specific situations are described as the main purpose of this bill:

  1. dividend distributions to related entities located in a listed low tax jurisdiction that has concluded a double tax treaty with the Netherlands and as such the dividend distribution can benefit from the withholding exemption
  2. dividend distributions by a non-holding cooperative (which does not qualify as a withholding agent under the current Dutch dividend withholding tax act) to related entities located in a listed low tax jurisdiction


To the extent relevant, the bill would also increase the dividend withholding tax due by direct distributions to qualifying shareholders in a listed low tax jurisdiction from 15% to effectively 25%. The conditional dividend withholding tax will be levied from all the benefits that also qualify as a regular dividend under the current dividend withholding tax rules. The new withholding tax aims to cover payments by Dutch resident entities to associated entities. Associated entities are entities with decisive influence, either directly or indirectly, alone or acting in concert.

Moreover, the withholding tax will be limited to payments to companies situated in listed jurisdictions, which are jurisdictions that do not levy income tax or levy tax at a statutory tax rate lower than 9%, as well as jurisdictions included in the EU list of non-cooperative jurisdictions. At present the list contains the following jurisdictions: Anguilla, Bahamas, Bahrein, Barbados, Bermuda, British Virgin Islands, American Virgin Islands, Fiji, Guam, Guernsey, Isle of Man, Jersey, Cayman Islands, Palau, Panama, American Samoa, Samoa, Seychelles, Trinidad and Tobago, Turkmenistan, Turkish Caicos Islands, United Arab Emirates and Vanuatu. Reference is made to the Decree dated 31 December 2018 as it applies as per 1 January 2021 and updated annually. For tax treaty jurisdictions entering the list in later years a 3-year transitional period applies before they will qualify as a low tax jurisdiction.

As the conditional withholding tax on dividends is included in the DCWHTA, the anti-abuse rule as already included in the DCWHTA is equally applicable to dividend distributions meaning that also distributions to entities located in a high tax jurisdiction (defined as a non-listed jurisdiction) could be in scope if (in)directly held by an entity located in a listed jurisdiction. Further, withholding tax applies for certain situations in which dividend payments are made to (reverse) hybrid entities. This could even include situations where no low tax jurisdiction is involved.

Tax treaties will be respected (and thus may give an entitlement to a reduced or zero withholding tax rate). However, the Dutch government will seek to re-negotiate tax treaties with low tax jurisdictions.

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