Dividend Withholding Tax

24-05-2018 - Bridge Consulting

Dividend withholding tax

More than all other proposals, the alleged abolishment of the dividend withholding tax made a wave in the Netherlands. However, the abolishment of the withholding tax is still possible, since it is indeed a bill in the coalition agreement 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.

The implementation of the EU Anti-Tax Avoidance Directive (ATAD) is not part of the 2018 Tax Plan. It is expected that in the first quarter of 2018 the Dutch government will present a formal proposal to the Dutch parliament.  

Dividend withholding tax obligation

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 favour of this bill. The date of the ruling has not been set, though.

Dividend withholding exemption

In 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.

Hybrid entities

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.

The new withholding tax exemption:

In addition to the existing dividend withholding tax exemption in respect of EU/EEA shareholders, the Dutch government proposes to expand the dividend withholding tax exemption for dividends distributed by Dutch companies to third countries where their non-resident shareholder is an entity that: 

  1. holds an interest of at least 5 percent in the Dutch company and
  2. resides (for tax treaty purposes) in a jurisdiction that has concluded a tax treaty, including a dividend article, with the Netherlands.

The second condition may also be met by members/shareholders that are hybrid entities. The condition is met if the direct member/shareholder of the hybrid entity would individually qualify for the withholding exemption and income of the hybrid is picked up as income at the level of  that member/shareholder (specific mention was made of US LLC structures). 

If the income of the hybrid entity is not picked up by its member/shareholder, then the exemption will not be applicable and the situation defaults back to the current situation, allowing the possibility of tax treaty application to reduce Dutch dividend withholding tax