Thoughts on the new Dutch coop regime
Autumn 2015, the Dutch government announced changes in the Dutch tax law in order to equalize cooperatives and limited liability companies for dividend withholding tax purposes. We expect that the changes will be made public in September 2016 and we hope this will benefit the Dutch investment climate.
Members of coops and shareholders in B.V.’s or N.V.’s (Dutch limited liability companies) are different in the sense that members in a coop need to work together to generate a benefit. It has strong characteristics of a partnership. Some countries view the coop even as a flow-through entity. With Dutch corporate income tax liability and no dividend withholding tax obligation, the coop is in all essence an odd man out.
During the last 10-15 years, many international companies establish coops because of their strong tax attractiveness: they were not subject to Dutch dividend withholding tax. The usage of the coop by international companies is a thorn in the side of the European Commission. Although within the EU the parent-subsidiary directive prevents dividend withholding tax accumulation, non-EU companies are not allowed to take advantage of this benefit.
Dutch B.V.’s and N.V.’s are held to withhold 15% dividend withholding tax from payments to shareholders. This obligation is dropped when the participation exemption is in play – that is (simply put), when dividends are paid to shareholders with an interest over 5% residing in an EU country. On dividends to portfolio shareholders or to shareholders in a non-EU situation, dividend tax withholding depends on treaty stipulations. In some cases, there is no treaty at all, and 15% tax will be withheld.
A cooperative, on the other hand, has no dividend tax withholding obligation, except in abuse situations. The legislation pertaining to abusive situations has changed several times in the past couple of years which allowed for uncertainty for businesses. In our tax practice, we see that mainly Canadian multinationals have established Dutch cooperatives as the Netherlands is allowed to levy 5-15% withholding tax from dividend payments from Dutch B.V.’s and N.V.’s to Canadian shareholders, whereas it does not levy dividend withholding tax from non-abusive cooperatives at all.
In the officious race to have the best investment climate the UK and some other EU countries do not levy dividend tax. From a tax technical perspective, this makes sense. Interest and royalties are deductible for corporate income tax purposes and have a withholding tax agent, whereas dividends are not deductible and therefore not subject to a withholding tax.
The alternatives which improve the Dutch investment climate, reduce international discrimination and may be more in line with EU state aid rules are:
- Abolishing dividend withholding tax altogether, introducing interest or royalty withholding tax to compensate the loss of tax income;
- Treat all participating dividend structures equal (EU and Non-EU), this would be tax neutral as no one in corporate structures actually pays Dutch dividend tax;
- Treat all participating dividend structures equal (EU and Non-EU), in case a tax treaty is applicable, this would also be tax neutral.
The Netherlands has always been willing to forego its right to levy dividend withholding tax in order to remain an attractive place for doing international business. The dividend withholding tax abolishment (in part) has the unique benefit of attacking tax avoidance one side and make the Netherlands a more attractive place to do business. Although hope is often delayed disappointment, I strongly hope that the Netherlands takes on this challenge.