Anti-abuse rules announced on dividend payments to low tax jurisdictions

On 29 May 2020, the Dutch Ministry of Finance announced plans to introduce new anti-abuse rules based on which dividend payments to low tax jurisdictions will be subject to a new Dutch conditional withholding tax on dividends (CWT) from 1 January 2024 onwards. The Dutch Ministry of Finance aims to finalize the new anti-abuse rules during the term of the current government which ends on election day (which is currently expected in March 2021). 

Background
In the past years significant legislative changes have taken place in Dutch tax laws aimed at discouraging the use of artificial structures and arrangements and to prevent tax avoidance. Examples thereof include measures following the Anti-Base Erosion and Profit Shifting (BEPS) Project, the introduction of the Multilateral Instrument, the adoption of the EU Anti-Tax Avoidance Directives and the introduction of a conditional withholding tax on interest and royalties as per 1 January 2021. At the same time, the Dutch government tried to improve the business climate for businesses with operational activities in the Netherlands inter alia by reducing the headline corporate income tax rates and by expanding the Dutch dividend withholding tax (DWT) exemption in specific situations. The new CWT on dividends would be in line with these international developments.

Summary of the current rules
Based on the Dutch DWT Act 1965, dividend distributions from a Dutch resident company to an EU resident company or a company resident in a Dutch tax treaty jurisdiction (Recipient) are exempt from DWT provided that the Recipient owns at least 5% of the nominal paid-up share capital of the Dutch company.

This exemption does however not apply if certain tests are met including the subjective or objective test. The subjective test decides whether non-resident corporate shareholders hold shares in Dutch taxpayers with the main purpose or one of the main purposes of avoiding Dutch tax, while the objective test decides whether the situation qualifies as an artificial arrangement or transaction. If one or more of the tests would be met, 15% DWT should be due. This rate may be reduced under the application of a tax treaty between the Netherlands and the jurisdiction of the Recipient.
 
Expected changes
It seems that in addition to the existing DWT, a CWT will be introduced on dividend distributions. In general, the announcement of the Dutch Ministry of Finance does not include details on the scope of the announced new anti-abuse rules. However, it appears that the new anti-abuse rules will target dividend payments effectively (in other words, directly and indirectly) paid to recipients in low tax jurisdictions in a way similar to the conditional withholding tax on interest and royalties. It is unclear at this stage how a cumulation of Dutch CWT and DWT will be treated and how such CWT could override arrangements under bilateral tax treaties.

The list with low tax jurisdictions already exists for other purposes and includes jurisdictions which levy no corporate income tax at all or at a rate of less than 9% or jurisdictions that are included in the EU blacklist of non-cooperative jurisdictions. The blacklist is published annually by the Dutch Ministry of Finance before the start of the relevant year. Further it seems that the list to be published will be exhaustive.

Currently the list includes, Anguilla, Bahama’s, Bahrein, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Fiji, Guernsey, Guam, Isle of Man, Jersey, Oman, Samoa, Trinidad and Tobago, Turkmenistan, Turks and Caicos Islands, United Arab Emirates, US Samoa, US Virgin Islands and Vanuatu.

Take away
Considering the envisaged changes in the Dutch tax legislation with respect to dividend payments, we recommend to assess whether the announced changes in Dutch tax legislation may impact existing corporate structures and arrangements and whether any steps should be taken to mitigate adverse tax consequences, if any.