To be or not to be: Dutch dividend withholding tax

The new coalition agreement has really rocked the boat in the Netherlands. Particularly the proposed abolition of the dividend withholding tax made a wave, by which the 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 puts the people at ease, remains yet to be seen.

 

Bill

It seems that, with the mooted changes, Rutte III is mostly thinking of the well-being of the working population. These benefits are not merely restricted to the working Dutch people, but extended to foreign entrepreneurs as well. This is illustrated by a drop in the corporate tax rate (which will be 21% instead of 25%), and by the discarding of the dividend withholding tax.

As the Netherlands currently levies 15% on dividends, the new Dutch government is of the opinion that its country does not figure highly international entrepreneurs’ list of favorite countries in which to set up their business. Furthermore, regarding the tax on dividends, the Netherlands does not apply a one-size-fits-all regime for both Dutch and foreign shareholders. Therefore, the regime doesn’t meet the principle of free movement of capital within the EU. On top of this, dividend withholding tax is also seen as a burden in the Netherlands as well, since it involves a great deal of administration.

Hence, Rutte III’s Tax Plan to revise 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, in reality, even Rutte III does not have such drastic measurements in mind. Instead of completely discarding the current dividend withholding tax, the government is merely planning some significant alterations.

 

Dividend Withholding Tax: Future Changes

On the one hand, the Rutte III speaks of dismissing the dividend withholding tax by 2019, except for the withholding tax on royalty and interest flows to low-tax jurisdictions. In addition, where abuse is taken place will 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.

Withholding obligation

Starting 2018, Dutch holding corporations will be subject to dividend withholding taxes when at least 70% of the activities they performed in the past years were holding activities and where 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-tradeable membership rights includes 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.

Withholding exemption

On contrary, a withholding exemption is planned to go into effect on January 1, 2018 for companies in third countries. Nevertheless, 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, the Dutch tax authorities will verify whether corporations subject 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. These 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 will the adjustments to the withholding tax obligation and exemption proposed by the current government 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 Rutte III government, 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 can once again divide up 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 with our services.

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