To be or not to be: Dutch dividend withholding tax
Door: Lisbeth De Laet
The new coalition agreement rocked the boat in the Netherlands. Especially the alleged abolishment of the dividend withholding tax made a wave by which government Rutte III hopes to attract more international entrepreneurs to the Netherlands. Even the renowned tv-host Lubach discussed the country’s international appeal in his show Zondag met Lubach, using our own DTS-page on European tax rates as an illustration. Whether or not the final ruling of the First Chamber might put the people at ease, remains yet to be seen.
It seems that with changes ahead, Rutte III mainly has the benefit of the working population in mind. This benefit is not restricted to the working Dutch people, but to foreign entrepreneurs as well. The latter is not only illustrated by a drop in the corporate tax rate (which will be 21% instead of 25%), but also by discarding the dividend withholding tax.
As the Netherlands currently levy 15% over dividends, the new Dutch government is of the opinion that their country does not make international entrepreneurs’ list of favorite countries to settle their business in. Second, regarding the tax on dividends, the Netherlands do not apply one and the same regime for both Dutch and foreign shareholders. Therefore, the regime doesn’t meet the principle of free movement of capital within the EU. Thirdly, dividend withholding tax is seen as a burden in the Netherlands as well, since it involves a great deal of administration.
Hence, Rutte III’s Tax Plan includes a revision of the dividend withholding tax. When the Dutch Cabinet announced the Tax Plan, the news that the tax on dividends would be abolished altogether, costing the government no less than 1.4 million euros, rapidly got around. Yet, even Rutte III has not got such drastic measurements in mind. Instead of completely discarding the current dividend withholding tax, the government plans some profound alterations.
On the one hand, the Rutte III speaks of dismissing the dividend withholding tax by 2019, except for the withholding tax on outgoing royalty and interest streams to low tax jurisdictions. In addition, situations of abuse will also be met with withholding tax.
On the other hand, several tax plans concerning the withholding obligation and exemption, entail the existence of the dividend withholding tax. In particular, the preservation of these taxes is assumed by the following changes to the current system, proposed by the current government.
Starting 2018, Dutch holding corporations will be obligated to dividend withholding taxes when at least 70% of the activities they performed in the past years were holding activities and they are in the possession of qualifying membership rights. Together with the rights of other connected members, these entitle the holder to 5% of the annual profit or to repayments in case of liquidation.
The revenue of these freely tradable membership rights include the interest on deposits, distributions of profits and remunerations for the holding corporation’s capital provided by its members.
In addition, when in possession of membership rights comparable to the capital divided into shares, the withholding obligation is also imposed on non-holding corporations.
Finally, the coalition agreement maintains the withholding obligation for the profit of fiscal investments enterprises if they pay (part of) their profit out to exempt bodies. Such enterprises will be able to request a recovery of the withheld tax. Yet, the government still has to rule in favor of this bill. The date of the ruling has not been set, though.
On contrary, a withholding exemption is planned to go into effect on January 1, 2018 for companies in third countries. However, the exemption only applies when the third country has entered into an agreement with the Netherlands that concerns dividend withholding tax. In addition, the residence country of the (physical) body entitled to the profit should meet additional conditions.
In the future, hybrid entities are exempt from withholding tax on their profits as well. It still remains to be seen whether or not hybrid entities settled in third countries will be exempt as well.
In accordance with the anti-abuse ruling, Dutch tax authorities will verify whether corporations obligated to dividend withholding tax do apply the exemption when paying out dividends to the entitled foreign bodies. If that is indeed the case, they will request the corporations to justify their actions within a set timeframe. After this deadline, corporations might face a default penalty, amounting to no less than EUR 5.278.
Furthermore, Rutte III aims to avoid future tax avoidance and abuse by imposing substance requirements on intermediary holdings. They should account for sufficient labor costs and utilize their own office space. When a holding does not meet these conditions, it will be regarded as an artificial construction set up to avoid taxes In the Netherlands. Such artificial constructions and transactions will therefore not be exempt from the dividend withholding tax, as mentioned before.
December 19, 2017
An important date to remember, is December 19, 2017, when the final ruling of the First Chamber should take place. Only after approval of the First Chamber, the adjustments to the withholding tax obligation and exemption proposed by the current government will go into effect. Hence, the withholding tax itself will not be discarded yet.
However, the abolishment of the withholding tax is indeed a bill in the coalition agreement by the new government Rutte III, not a revision proposed by the current government. Therefore, Rutte III may only start its negotiations regarding the bill in 2018. If the government comes to an agreement, the dividend withholding tax will not be abolished before 2019. It will thus be a while before Dutch and foreign shareholders may once again manage their dividends in peace.
Please do not hesitate on contacting us if you have any questions about the upcoming changes or taxes in general. We at DTS are happy to provide you our services.