To Be or Not to Be: Dutch Dividend Withholding Tax

The new coalition agreement rocked the boat in the Netherlands. Especially the alleged abolishment of the dividend withholding tax made a wave. By abolishing this tax, 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. He illustrated his point of view with the DTS-page on European tax rates. Whether or not the final ruling of the First Chamber might put the people at ease, remains yet to be seen.

Bill

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. Discarding the dividend withholding tax illustrated the latter.

The Netherlands currently levy 15% over dividends. According to Rutte III, The Netherlands does not make international entrepreneurs’ list of favorite countries to settle their business in because of this tax rate. Second, 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 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 its 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.

Future changes

On the one hand, the Rutte III speaks of dismissing the dividend withholding tax. This will not be the case for 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, the following recent adjustments of withholding obligation and exemption rules entail the preserving of dividend withholding tax.

Withholding obligation

Dutch holding corporations are now obligated to dividend withholding taxes when they meet two conditions. First, at least 70% of the activities they performed in the past years must be holding activities. Second, they should possess 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 includes the interest on deposits, distributions of profits and remunerations for the holding corporation’s capital provided by its members.

In addition,  the withholding obligation is also imposed on non-holding corporations. This is only the case, though, when they have membership rights comparable to the capital divided into shares.

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, since January 1, 2018, companies in third countries are exempt from dividend withholding tax. 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 hybrid entities settled in third countries are exempt as well.

In accordance with the anti-abuse ruling, Dutch tax authorities verify unjustly make use of the exemption when paying out dividends to the entitled foreign bodies. If that is indeed the case, they will request a justification of these actions within a set timeframe. After this deadline, corporations might face a default penalty. This may amount to no less than EUR 5.278.

Furthermore, Rutte III aims to avoid future tax avoidance and abuse. Therefore, The government imposes substance requirements on intermediary holdings. These should account for sufficient labor costs and utilize their own office space. A holding that does not meet these conditions, qualifies as an artificial construction to avoid taxes In the Netherlands. As mentioned before, such artificial constructions and transactions are not exempt, as mentioned before.

Current status

December 19, 2017, when the final ruling of the First Chamber took place. With the approval of the First Chamber, the adjustments to the withholding tax obligation and exemption proposed by the previous government have indeed gone into effect. Hence, the withholding tax itself will not be discarded yet.

However, the abolishment of the withholding tax is indeed a bill by the new government Rutte III. 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.