The Netherlands redefines scope of Dutch dividend withholding tax act
The Netherlands Ministry of Finance published a consultation document on 16 May 2017 that details proposed changes to the Dutch dividend withholding tax act. The document proposes to align the Dutch dividend withholding tax treatment of Dutch holding cooperatives with that of private limited liability companies (BVs)/public limited companies (NVs) and to expand the scope of the exemption from Dutch dividend withholding tax to apply to active business structures.
18 May 2017
The consultation document also includes proposed changes to the tax regime applicable to nonresident taxpayers in the Dutch corporate income tax act. The proposals effectively would mean that nonresident taxpayers generally would no longer be subject to Dutch corporate income tax on their Dutch-source dividend income, but only on their capital gains. To some extent, this narrowing of the tax base would be counter-balanced by the inclusion of an anti-abuse provision in the Dutch dividend withholding tax act.
Holding cooperatives and Dutch dividend withholding tax
Under current law, dividends distributed by a Dutch cooperative, in principle, are not subject to Dutch dividend withholding tax, except in certain situations where abuse is present. By contrast, Dutch BVs/NVs are in principle required to withhold a 15% tax on dividends paid to shareholders.
The consultation document contains a proposal that would require a Dutch holding cooperative to withhold Dutch dividend withholding tax where a member of such a cooperative holds a “qualifying interest.” A qualifying interest would exist where a member holds an interest in the cooperative and is thereby entitled to at least 5% of its profits and/or liquidation proceeds. For this quantitative test related party interests, including individuals, should be considered as well. A holding cooperative would be defined as a cooperative at least 70% of whose activities comprise the holding of participations or the direct or indirect financing of affiliated entities. Whether a cooperative meets the definition of a holding cooperative would be determined by taking into account factors such as the nature of the cooperative’s assets, liabilities, turnover and profit generating activities and how its personnel spend their time. A Dutch cooperative that actively manages its investments and has sufficient related substance (e.g. personnel, offices) in the Netherlands potentially will not qualify as a Dutch holding cooperative and therefore would not fall within the scope of the dividend withholding tax act. It is acknowledged that in certain circumstances some cooperatives in private equity-owned structures could qualify as non-holding cooperatives.
It should be noted that the above activity and quantitative ownership criteria set for Dutch cooperatives do not apply to Dutch BVs/NVs. The latter entities continue to be within scope of the Dutch dividend withholding tax act as currently already the case. Kindly note that a Dutch BV/NV may, similar to Dutch holding cooperatives, benefit from a full domestic Dutch dividend withholding tax exemption (also see below).
Broadened Dutch dividend withholding tax exemption
In conjunction with the new withholding tax obligation applicable to Dutch holding cooperatives, the consultation document also includes a proposal to broaden the scope of the Dutch dividend withholding tax exemption. The exemption would apply to distributions made by Dutch BVs/NVs and Dutch holding cooperatives (“Dutch entity”) to parent companies that are tax resident in (i) the EU/European Economic Area (EEA), or (ii) a third country that has concluded a tax treaty with the Netherlands that contains “qualifying provisions” relating to dividend withholding tax. In both instances, the interest in the Dutch entity would have to be an interest that would qualify for the Dutch participation exemption or participation credit if the recipient were resident in the Netherlands.
It should be noted that the full domestic Dutch dividend withholding tax exemption would be applicable even in the case of residents of treaty countries where the relevant treaty provides for a reduced rate of withholding tax rather than a full exemption (e.g. where a treaty with a non-EU/EEA member state provides for a 5% dividend withholding tax rate).
The consultation document also proposes the introduction of a new anti-abuse rule in the context of the Dutch dividend withholding tax exemption. For the exemption to apply to recipients resident in the EU/EEA and/or in a tax treaty jurisdiction, in essence a determination would need to be made as to whether the structure involves an active business (or: entrepreneurial) structure. This determination would be based on the existing rules in the Dutch corporate income tax and Dutch dividend withholding tax acts. When the interest in the Dutch entity is considered to be a passive investment, Dutch dividend withholding tax will in principle be levied.
In entrepreneurial structures, the domestic exemption will not be applicable if the structure or transaction is considered artificial and at the same time the (direct) interest in the Dutch entity is held with (one of) the main purpose(s) the avoidance of Dutch dividend withholding. A structure and transaction is not (deemed) artificial to the extent it is based on valid business reasons which reflect economic reality. This may, for example, be the case if the direct member or shareholder of the Dutch entity itself runs an active trade or business to which the interest can be allocated.
Since the passive/active distinction would be made by reference to the currently already existing rules, also a private equity investment fund could qualify as an active business and thus could result in valid business reasons being present. In addition, if the member or shareholder of a Dutch entity is a so-called top tier holding company that carries out governance, management and/or financial activities with respect to the group, this could qualify as valid business reasons as well. This equally applies to a foreign intermediary holding company with the requisite substance that performs a “linking function” between the business or head office activities of the (ultimate) shareholder and the lower tier companies (whether Dutch or non-Dutch). It should be noted that the factors that would be taken into account in determining whether the foreign intermediary holding company has the requisite substance would be adjusted. In addition to the substance needed to obtain an advance tax ruling (i.e. at least 50% of the board of directors should be Dutch resident, bookkeeping must be maintained in the Netherlands, etc.), the following conditions also would have to be fulfilled: the foreign intermediary holding company would have to have wages of at least EUR 100k and an office and premises of its own available and in use for its intermediary holding function.
If the exemption does not apply, only (full or partial) relief under an applicable tax treaty would be available. However, it already has been announced that it is not intended that the ability to invoke the benefits of a tax treaty should result in a more favorable outcome than that which would occur under domestic rules.
Eliminating the different Dutch dividend withholding tax treatment of Dutch holding cooperatives and BVs/NVs means that all such entities would be required to withhold tax on distributions, although an exemption would likely apply to active business structures where the recipient is tax resident in the EU/EEA or a tax treaty country.
The public consultation period will run through 13 June 2017, after which the Dutch parliament will begin to discuss the proposals. If the proposed measures are adopted, they likely would apply as from 1 January 2018. Thus, potentially affected taxpayers should begin to assess the effect of the changes, which could be beneficial given the broadened exemption but also could be detrimental given that holding cooperatives are now in scope as well and the anti-abuse rule.