The Netherlands redefines scope of Dutch dividend withholding tax act  | Budget Day | Deloitte

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The Netherlands redefines scope of Dutch dividend withholding tax act

2018 Tax plan - Budget Day

The Netherlands Ministry of Finance published a legislative proposal on 19 September 2017 that details proposed changes to the dividend withholding tax act. The legislative proposal also includes changes to the tax regime applicable to nonresident taxpayers in the Dutch corporate income tax act.

19 September 2017

The Netherlands Ministry of Finance published a legislative proposal on 19 September 2017 that details proposed changes to the dividend withholding tax act. The document proposes to align the domestic 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 dividend withholding tax to apply to parent companies resident in treaty countries. The legislative proposal also holds specific rules regarding interests held in a Dutch BV/NV or a holding cooperative through hybrid entities.

The legislative proposal also includes changes to the tax regime applicable to nonresident taxpayers in the Dutch corporate income tax act. The proposals effectively would mean that nonresident taxpayers holding a substantial interest in a Dutch BV/NV or cooperative generally will only be subject to Dutch corporate income tax on their Dutch-source dividend income and on their capital gains if the interest is held with (one) of the main purpose(s) the avoidance of Dutch personal income tax at the level of the (indirect) shareholder. To some extent, this narrowing of the tax base would be counter-balanced by the inclusion of an anti-abuse provision in the dividend withholding tax act. The entry into force is scheduled for 1 January 2018.

Holding cooperatives and 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.

Under the legislative proposal a Dutch holding cooperative will be required to withhold dividend withholding tax where a member of the 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. In determining whether this quantitative test is met, the interests of related parties, including those of related individuals, also would be taken into account.

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 in principle be determined based on the balance sheet of the year prior to the year of the distribution. However, in this respect also other factors should be taken into account such as the nature of the cooperative’s assets and 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 would 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.

The above activity and quantitative ownership criteria for cooperatives do not apply to BVs/NVs. The latter entities would continue to be within the scope of the dividend withholding tax act. It should be noted that a Dutch BV/NV may, similar to a Dutch holding cooperative, benefit from a full domestic Dutch dividend withholding tax exemption (see below).

Broadening of dividend withholding tax exemption

If a foreign parent company holds an interest in a BV/NV or a holding cooperative (‘Dutch entity’) through a Dutch permanent establishment to which the interest can be allocated, already under current law a domestic dividend withholding tax exemption applies provided the interest qualifies for the Dutch participation exemption or participation credit. Besides, in conjunction with the new withholding tax obligation applicable to Dutch holding cooperatives, the legislative proposal includes a provision to broaden the scope of the current domestic dividend withholding tax exemption applicable to EU/ European Economic Area (‘EEA’) parent companies. The exemption would apply to distributions made by BVs/NVs and holding cooperatives to parent companies that are tax resident in (i) the EU/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 legislative proposal is accompanied by a concession in relation to an interest held in a Dutch entity through a hybrid entity which qualifies as non-transparent for Dutch tax purposes, however transparent in its country of residence. Even though from a Dutch tax perspective the recipient of the dividends does not qualify for the exemption, as the recipient is not a tax resident in the EU/EEA or a tax treaty jurisdiction, the exemption will be applicable provided all participants in the hybrid entity treat the hybrid entity as transparent and would qualify if they would have held the Dutch entity directly. Particularly in situations where a US Inc. holds the interest in the Dutch entity through a disregarded LLC, the exemption could also be available. On the other hand, if the hybrid entity qualifies as transparent for Dutch tax purposes, but as non-transparent from the perspective of the participants, it is stipulated that the participants do not qualify as the recipients from a Dutch tax perspective. Hence, for the exemption to apply, the hybrid entity itself should qualify as a tax resident in the EU/EEA or a tax treaty jurisdiction.

Anti-abuse rule

The legislative proposal also introduces 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 (direct) interest in the Dutch entity is held with (one of) the main purpose(s) the avoidance of Dutch dividend withholding (‘subjective test’), and if so, whether the structure or transaction is considered artificial (‘objective test’). A structure and transaction would not be (deemed) artificial to the extent it is based on valid business reasons that reflect economic reality. This could be the case, for example, if the direct member or shareholder of the Dutch entity itself runs an active trade or business to which the interest can be allocated. When the interest in the Dutch entity is considered to be a passive investment, the exemption will only be applicable if the subjective test is not met.

Since the determination of the valid business reasons that reflect economic reality would be made by reference to the existing rules, a private equity investment fund could qualify as an active business and thus satisfy the valid business reason criterion. In addition, if the member or shareholder of a Dutch entity is a top tier holding company that carries out governance, management and/or financial activities with respect to the group, this could satisfy the valid business reason criterion. The criteria also could be satisfied by 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).

The factors that would be taken into account in determining whether the foreign intermediary holding company has the requisite substance will 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 would have to be fulfilled: the foreign intermediary holding company would have to have wages of approximately EUR 100,000 relating to either own or hired group personnel and an office and premises of its own available both being used for its intermediary holding function. The legislative proposal foresees in a transitional period of three months in relation to the additional substance requirements.

It should be noted that if the dividend withholding tax exemption does not apply, treaty relief would still be available (full or partial).

Comments

Eliminating the different Dutch dividend withholding tax treatment of Dutch holding cooperatives and BVs/NVs means that all such entities would in principle be required to withhold tax on distributions. However, an exemption applies to business structures with the requisite substance in the Netherlands, either in a Dutch cooperative or in a Dutch permanent establishment to which the interest in the Dutch entity can be allocated. An exemption also applies to active business structures where the recipient is tax resident in the EU/EEA or a tax treaty country. Under circumstances substance requirements should be fulfilled at the level of the intermediate holding company holding an interest in the Dutch entity.

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