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back to index backEUROtalk June,  2017


Netherlands to redefine scope of dividend withholding tax act

The Netherlands Ministry of Finance published a consultation document on 16 May 2017 that details proposed changes to the dividend withholding tax (DWT) act. The document proposes to align the domestic DWT 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 DWT to apply to active business structures.

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 counterbalanced by the inclusion of an anti-abuse provision in the DWT act.

Holding cooperatives and DWT

Under current law, dividends distributed by a Dutch cooperative, in principle, are not subject to Dutch DWT, except in certain situations where abuse is present. By contrast, Dutch BVs/NVs, in principle, are 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 DWT 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 falls within 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 would not qualify as a holding cooperative and, therefore, would not fall within the scope of the DWT act. In certain circumstances, some cooperatives in private equity-owned structures could qualify as non-holding cooperatives.

The activity and quantitative ownership criteria for cooperatives would not apply to BVs/NVs; such entities would continue to be within the scope of the DWT act. It should be noted that a Dutch BV/NV, similar to a Dutch holding cooperative, may benefit from a full domestic Dutch DWT exemption.

Broadened DWT exemption

In conjunction with the new withholding tax obligation that would apply to Dutch holding cooperatives, the consultation document also includes a proposal to broaden the scope of the domestic DWT exemption. The exemption would apply to distributions made by BVs/NVs and holding cooperatives (“Dutch entities”) to parent companies that are tax resident in the EU/European Economic Area (EEA) or in a third country that has concluded a tax treaty with the Netherlands that contains “qualifying provisions” relating to DWT. 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 DWT 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% DWT tax rate).

Anti-abuse rule

The consultation document also proposes the introduction of a new anti-abuse rule in the context of the Dutch DWT exemption. For the exemption to apply to recipients that are resident in the EU/EEA and/or in a tax treaty jurisdiction, 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 DWT acts. When the interest in the Dutch entity is considered a passive investment, Dutch DWT, in principle, would be levied.

In entrepreneurial structures, the domestic exemption would 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 the avoidance of Dutch DWT as (one of) the main purpose(s). 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.

Since the passive/active distinction 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 criterion 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 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 foreign intermediary holding company would need to have wages of at least EUR 100,000 and an office, and premises of its own available and being used for its intermediary holding function.

If the DWT exemption does not apply, only treaty relief would be available (full or partial). 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.

Comments

Eliminating the different Dutch DWT treatment of Dutch holding cooperatives and BVs/NVs means that all such entities would be required to withhold tax on distributions, although an exemption likely would 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.

Source: Deloitte - GAI





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