Changes to the Dutch Dividend Tax: Broader Exemptions and Introduction for Holding Cooperatives
On 16 May 2017, a draft Bill was published by the Dutch Ministry of Finance for public consultation. The draft Bill expands the exemption of dividend withholding tax (DWT) to corporate shareholders resident in tax treaty countries. Further, it introduces an obligation to withhold dividend tax for cooperatives that act for 70% or more as holding and financing entity. The new rules should take effect as from 1 January 2018.
Expansion of the Dividend Withholding Tax Exemption
Currently, dividend distributions by a Dutch company (such as a BV or NV) are exempt from DWT if the recipient is a corporate shareholder that owns an interest of 5% or more in the capital of a Dutch company and in addition the shareholder is a tax resident in a member state of the European Economic Area (EEA), which includes the European Union (EU). The draft Bill expands this exemption to corporate shareholders that are resident in a country with which the Netherlands has concluded a tax treaty, that contains a dividend income clause.
The draft Bill states that the exemption will not apply in case of abuse. Abuse is deemed present if the following conditions are both met:
(i) the shareholder owns the interest in the Dutch company with the main purpose or one of the main purposes to avoid tax which otherwise would have been due by another person (subjective test); and
(ii) the structure or transaction is artificial (objective test). The term 'artificial' means that the structure or transaction is not established or entered into for valid commercial reasons that reflect economic reality. A ministerial regulation will prescribe what is meant by the latter.
The purpose of the anti-abuse rule is to make a distinction between so-called business (active) structures, that should qualify for the DWT exemption, and so-called portfolio (passive) structures, that should not qualify for the exemption.
The subjective test requires that one looks "through the structure above the Dutch company" to the first company that carries out a business enterprise. If the business enterprise of that company aligns with the business enterprise of the Dutch company or of the business enterprise of the subsidiaries of the Dutch company, and that country has a tax treaty with the Netherlands that contains a dividend income clause, then the structure will not be considered abusive and the DWT exemption should apply.
The objective test becomes relevant when the first company above the Dutch company that carries out a business enterprise is not a resident of a tax treaty country with the Netherlands. In that case, the objective test determines that if the direct shareholder of the Dutch company satisfies the already existing minimum substance requirements, and certain new substance requirements (see hereafter), the structure will not be considered abusive and the DWT exemption should apply.
Under the new substance requirements, the direct shareholder must, in addition to the "old substance requirements" have an office space at its disposal with the usual facilities for performing holding activities in its country of residence for a period of at least 24 months. It must also incur salary costs related to that function equal to at least EUR 100,000. These additional substance requirements aim to avoid the interposition of a passive holding company in a tax treaty country to obtain the DWT exemption, that would otherwise not have been available.
Introduction of a Dividend Withholding Tax obligation for Holding Cooperatives
Currently, profit distributions by a cooperative are not subject to DWT, unless the structure is considered abusive. The draft Bill proposes to introduce an obligation to withhold dividend tax (domestic rate: 15%) for cooperatives of which the activities consist usually for 70% or more of owning shareholdings that qualify for the participation exemption and/or granting - directly or indirectly - loans to affiliated companies or persons (holding cooperatives). Through this change, holding cooperatives will be treated in the same way as Dutch BVs and NVs. The obligation to withhold dividend tax applies to profit distributions to a member who is entitled to at least 5% of the profits of the holding cooperative. If however a member is entitled to less than 5%, but belongs to a group that closely works together, the interests in the holding cooperative must be aggregated for this test.
The notes to the proposal state that to determine whether the 70% or more test is satisfied, one should first look at the balance sheet. However, also other aspects play a role, such as the nature of the assets and liabilities on the balance sheet, the turnover, the activities that create the profit as well as the time spent by employees with respect to the holding activities. A top holding cooperative that is actively involved in the management of its subsidiaries, performs certain headquarter functions, has employees and that owns office space may be excluded from the obligation to withhold dividend tax. Another example given in the notes where there could be no obligation to withhold dividend tax is a private equity structure, of which the holding cooperative is actively involved in the management of its targets, has employees and has its own office space. In order to avoid that the substance is increased shortly before the profit is distributed, the less than 70% holding activity test must be fulfilled during a 12 months period prior to the profit distribution.
As a result of the afore mentioned proposals, as from 1 January 2018, profit distributions to members that are entitled to 5% or more of the profits in a holding cooperative and which members are not tax resident in the EEA (EU) and/or tax treaty country, will be subject to 15% DWT.
Non-resident taxation limited to capital gains
As a result of the introduction of the obligation to withhold dividend tax in case of holding cooperatives, there is no longer a need to cover such profit distributions in the non-resident taxation rules (which is a general anti-abuse rule embedded in the Dutch corporate income tax Act). Therefore, as from January 1, 2018, profit distributions received from a holding cooperative by a non-resident taxpayer will no longer be subject to Dutch corporate income tax.
Capital gains realized by a non-resident taxpayer will only be subject to Dutch corporate income tax in case of abuse. Abuse means that (i) the shareholder owns a 5% or more interest in the Dutch company with the main purpose or one of the main purposes to avoid Dutch personal income tax or Dutch dividend withholding tax which otherwise would have been due by another person, and in addition thereto (ii) the structure or transaction is consider artificial. A ministerial regulation will prescribe what is meant by the latter in the same way as stated above.
What should you do?
If your group structure includes a Dutch company or a holding cooperative, we strongly recommend analyzing the potential impact of the draft Bill with your tax counsel and take appropriate action, taking into account the proposed effective date of 1 January 2018.