Netherlands expands withholding tax for 2018 but may repeal in 2019
TAX ALERT |
Dutch dividend withholding tax 2018
Recently, the Dutch government enacted new legislation with respect to the Dutch dividend withholding tax. On the one hand these new rules expand the scope of Dutch dividend withholding tax and on the other hand the law provides a new dividend withholding tax exemption for third country (non-EU) shareholders.
As of Jan. 1, 2018, the Netherlands will broaden the scope of the dividend withholding tax by applying it to qualifying membership rights in cooperatives that qualify as a, “Holding Coop.” A Holding Coop is a cooperative that predominantly (at least 70 percent) consists of holding or intra-group financing activities. For the purpose of this test, the balance sheet is of prime importance but other factors should be taken into account as well.
On the other hand, a new unilateral dividend withholding tax exemption will be introduced for shareholders or members in a Dutch limited liability company or cooperative that have their tax residency in third countries (countries outside the EU).
In short, the exemption applies if the following conditions are satisfied:
- The non-resident shareholder or member is a tax resident in a jurisdiction that has concluded a tax treaty with the Netherlands that includes a dividend article; and
- The direct shareholder or member of the Dutch company does not hold the shares with a principal motive to avoid Dutch dividend withholding tax (subjective test) and if the subjective is not met; and
- The structure is not (part of) an artificial arrangement (objective test).
To determine whether the receipient is a resident of a country that has a treaty with the Netherlands, the recipient does not need to satisfy the provision of a Limitations on Benefits article in the treaty. Instead, it receipient need only be subject to taxation as a resident under local law.
For purposes of the subjective test above, the principal purpose requirement is satisfied if interposing the an entity in a treaty country results in a benefit under the treaty, e.g., where the treaty provides a reduced dividend withholding rate. Thus, this test is generally not satisfied if the ultimate parent is a resident of a non-treaty country and the direct shareholder of the Netherlands entity paying the dividends is resident in a treaty country.
If the principal purpose test is not satisfied, withholding tax will not apply if the artificial arrangement test is satisfied. The Dutch government clarified that an artificial structure is deemed to exist if there are no valid business reasons for setting up the structure in this manner. In this regard, the rules require that there be an actual business in the structure that uses labor and capital to make a profit. If the direct shareholder of the Dutch company has no such business but there is a business at the level of the ultimate parent, the structure will not be deemed as artificial provided that there is sufficient substance at the level of the direct shareholder.
If the exemption applies and the Dutch entity distributes a dividend, a notification that all aforementioned conditions are met should be made to the Dutch Tax Authorities within a month of the distribution.
Due to the change in law, existing Advance Tax Rulings (“ATR”) of Dutch entities will in principle be terminated as of Jan. 1, 2018. Taxpayers that wish to extend their ATR past 2018 can refile their ATR request untill April 1, 2018 to comply with the new legislation without losing the withholding tax exemption.
Companies should carefully review the new dividend withholding tax rules before a dividend distribution is made in 2018. For completeness’ sake, we note that the statutory withholding tax rate in the Netherlands is 15 percent.
Dutch dividend withholding tax as from 2019
On Oct. 10, 2017, the new Dutch government announced a plan to partially abolish the Dutch dividend withholding tax act as per Jan. 1, 2019. Based on the wording of the new government proposal, Dutch dividend withholding will only apply on distributions to low taxed jurisdictions and in case of abuse. No specific legislation has been proposed as of yet, therefore few details are presently available regarding this proposal.