Proposed changes to dividend withholding tax

In a draft bill published on 16 May that is now open for public consultation several changes are proposed that will have a significant impact on the Dutch tax treatment of profit distributions by legal entities that are organized as a cooperatives, BV, NV or another company with share capital. The draft bill is largely in line with previous communication from the Dutch government, but includes some specific elements that require further consideration.

Although the draft bill proposes that profit distributions by a cooperative, BV, NV or another company with share capital, under conditions, become exempt from dividend withholding tax when the recipient is a resident of a tax treaty jurisdiction, it also includes anti abuse rules that are in line with the general anti abuse rule in the EU Parent Subsidiary Directive and the principal purpose test in Action 6 of the BEPS Project. There is abuse if – in short – the shares in the company or the holding company established in the Netherlands are held for the principal purpose of, or one of the whose principal purposes is avoiding dividend withholding tax being levied on another party (subjective test) and that there is an artificial structure or transaction (objective test).

The abuse test involves first establishing whether there is a business structure or portfolio investments. In investment structures dividend withholding tax is, in principle, withheld. The application of the subjective test to business structures looks at whether a withholding exemption would also apply in the first link (corporate layer) above the Netherlands where a business with relevant substance is carried on. If not, then the subjective test has been met. The objective test looks at whether there are valid business reasons which reflect economic reality. Valid business reasons are present if these are reflected in the relevant substance of the company that directly holds the participation in the Dutch company. There is relevant substance if the intermediate holding company in the country where it is established cumulatively meets a number of conditions.

In addition to the well-known substance requirements, the following two new conditions are proposed:

• a payroll expense criterion of at least EUR 100,000 (whereby this amount must be a fee for the holding activities) must also be met, and
• during a period of at least 24 months the intermediate holding company must have its own office equipped with the usual facilities for performing holding activities
   

The proposals are expected to have a significant impact on the use of cooperatives in international structures and on investment structures in which companies established in the EU/EEA invest in Dutch cooperatives, BV, NV or another company with share capital. On the other hand the draft bill offers the opportunity to enjoy an exemption from dividend withholding tax in business structures in which interests in Dutch cooperatives, BV, NV or another company with share capital are held by a company in a tax treaty jurisdiction, where that exemption does not currently apply because it is not provided for in the treaty.

The introduction of a dividend withholding tax obligation for holding cooperatives represents a significant tightening of the current rules. A positive aspect is that a withholding exemption for business structures will, in principle, be included in treaty situations, both for companies with share capital and holding cooperatives. This means that where there is a direct dividend distribution to a shareholder in a non-treaty country, dividend withholding tax will always be withheld, regardless of whether the distribution is made by a holding cooperative, an NV, a BV or another company with share capital.