Dividend withholding tax exemption: what are the (regulatory) constraints?
Written by: Jimmy Cox
The first of January 2018 was the effective date of expansion of the Dutch dividend tax withholding regime. It was also the date of duty notification being imposed regarding the application of the taxation exemption in respect of dividends paid out to non-Dutch based recipients. This blog discusses said newly introduced duty of notification by elaborating on the following themes: “Dividend withholding tax specification”, “Dividend withholding tax exemption conditions”, “Abuse of dividend withholding tax exemption” and “Artificial construction in connection with dividend withholding tax”.
It is compulsory within one month of the dividend payment date to notify the Dutch Tax Authorities accordingly – using the designated “Dividend withholding tax specification” form – where use is being made of the dividend withholding tax exemption. The Tax Authorities use the relevant information in assessing whether the distributing company or holding cooperative has rightly availed itself of withholding exemption. Please note that the tax authorities are authorised to impose default surcharges of up to € 5,278 each for tardy notification or failure altogether to effect notification, as well – worse still – as negligence penalties for intent or gross culpability, in amounts of up to 100% of the outstanding taxes. (Whether or not the tax service’s practice in this respect is entirely EU proof remains to be seen. Then again the institution of proceedings to find out can be a costly affair.)
The following information is required to be filled in using the designated “Dividend withholding tax specification” form, for subsequent filing within one month of the dividend payment date.
Information pertaining to the distributing company or holding cooperative:
◦ details concerning the distributing company or holding cooperative;
◦ the nominal value of the paid-in capital;
◦ the number of voting shares held by the taxpayer in question;
◦ the aggregate amount in exempted dividend payments;
◦ the precise dividend payment date.
Information pertaining to the beneficiary:
◦ beneficiary’s name, address, and state of residence;
◦ share of nominal value of the distributing company’s paid-in capital;
◦ number of voting shares in the distributing company’s capital;
◦ percentage of voting rights in the distributing company’s capital;
◦ disclosure as to whether Section 4(9) or 4(10) of the Netherlands Dividend Tax Act 1965 (on the topic of hybrid entities) applies. If it does, this will require the names of the underlying participants (ultimate beneficiaries or UBO’s) rather than that of the recipient entity is included in the “Dividend withholding tax specification” form.
The person having completed the “Dividend withholding tax specification” form is required at the bottom of the form to confirm on behalf of the distributing company that the full complement of conditions as per Sections 4(2), 4(3) and 4(4) of the Dividend Withholding Tax Act have been complied with.
Dividend withholding tax exemption will only granted if the following conditions are met. The beneficiary must be established (i) in any one of the EU Member States, (ii) in any one of the EEA Member States, or (iii) in any country with which the Netherlands has concluded a double taxation convention of which a dividend clause forms part. The participation exemption or holding compensation applies to any such payments as accrued to the beneficiary. No abuse may be involved (as would be the case where tax evasion had been (one of) the principal goal(s) of the set-up in question); a subjective and an objective test are required to be carried out to assess whether or not there has been any question of abuse.
The subjective test is used to assess at the moment of payment whether the tax charge to be paid by the entity having dividend entitlement has turned out lower than that due and payable by the underlying entity (entities) had the Dutch-based intermediate holding entity or holding cooperative not formed part of the construction. That said, it is not until the cumulative objective test has confirmed the construction in question as artificial that the assumption of dividend withholding tax exemption abuse is made.
The objective test is used to determine the artificiality (or sincerity) of the construction or transaction in question. If the arrangement is found to have lacked valid commercial reasons reflecting the actual situation, this could be interpreted as a sign of artificiality. Carrying on a material business venture at the level of the entitled entity is accepted as a valid commercial reason, nor will the construction be dismissed as artificial where the entitled entity has been acting as a link and has been found to be fully substance requirement compliant. In another one of our blogs, we list the substance requirements predating the implementation of the tax withholding exemption. Two additional requirements were added on the occasion of the broadening of the tax withholding exemption, in that it was made compulsory for the beneficiary (i.e., the direct shareholder in or cooperative member of the Dutch entity) (i) to have its own office space for a minimum 24-month term and (ii) meet the wage bill criterion (typically to the tune of €100,000). The beneficiary’s compliance with the full complement of pre-existing and newly introduced substance requirements confirms it as having passed the objective test, which opens the door to it claiming tax withholding exemption.
Please do not hesitate to contact us if you have any questions or comments regarding the above, or if you are keen to find out whether your construction is in alignment with the latest conditions for laying claim to tax withholding exemption.