I. Introduction

On 16 May 2017, the Dutch Secretary of Finance released a draft legislative proposal regarding changes to the Dutch dividend withholding tax ("DWT") rules for holding cooperatives and BVs/NVs (the "Proposal"). The Proposal – subject to public consultation until June 13, 2017 – is largely in line with the DWT changes already announced in the letters of the Dutch Secretary of Finance to Dutch Parliament in September 2016 and December 2016 (discussed in our Tax Alerts of September 2016 and December 2016). However, it contains some new aspects, which can be very relevant also to existing structures. The final version of the Proposal is expected to be submitted to Dutch Parliament in September 2017 and could then enter into effect as per 1 January 2018.

This Tax Alert discusses the scope and main features of the Proposal and its potential impact on Dutch (intermediary) holding structures.

II. Scope of the Proposal

In relation to cooperatives, starting point is that under the Proposal only distributions by holding cooperatives (a "Holding Cooperative") to members that hold a qualifying participation in the Holding Cooperative will become subject to DWT at the standard 15% rate in the same way as distributions by limited liability companies such as the Dutch N.V. (naamloze vennootschap) and B.V. (besloten vennootschap), unless the proposed (extended) exemption from DWT applies. The DWT exemption applies in case of qualifying participations in Holding Cooperatives and limited liability companies that are part of an active business enterprise of the shareholder/member and not abusive, provided that the shareholder/member is located in an EU/EEA or tax treaty jurisdiction. Shareholders/members located in jurisdictions that are not EU/EEA jurisdictions and with which the Netherlands has only concluded a treaty on the exchange of information or a treaty that does not contain a dividend provision, do not qualify for purposes of the proposed DWT exemption.

III. Dutch Holding Cooperative and qualifying participations

A Holding Cooperative is defined as a cooperative whose activities mainly (for 70% or more) consist of the holding of participations and/or the direct or indirect financing of affiliated persons or entities. Therefore, distributions by cooperatives the activities of which consist for more than 30% of other activities than holding participations in subsidiaries or directly or indirectly financing related parties would not be subject to DWT. Pursuant to the Proposal, a cooperative with real economic activities should not be affected by the new rules. Therefore, distributions by these cooperatives to their members should not become subject to DWT.

In determining whether a cooperative qualifies as a Holding Cooperative, the activities conducted by the cooperative in the 12 months preceding the profit distribution will be decisive. Although this test is in principle based on the cooperative's balance sheet total, other factors – such as the assets, liabilities, turnover and the nature of activities conducted by employees – may also be taken into account. For example, a cooperative whose balance sheet total consists for 70% of participations will still not qualify as a Holding Cooperative if it performs a headquarter function with active involvement and sufficient employees. This may also apply in respect of cooperatives used in certain private equity structures with sufficient employees at the level of the cooperative and active involvement at the level of the participations of the cooperative.

A qualifying participation in a Holding Cooperative is a membership interest that entitles the holder thereof to at least 5% of the Holding Cooperative's annual profit or 5% of the liquidation proceeds. In determining whether a member has a qualifying participation, participations in the Holding Cooperative directly or indirectly held by parties related to such member or by other entities that are part of the same cooperating group of such member are also taken into account.

IV. DWT exemption for shareholders/members in tax treaty jurisdictions

Pursuant to the Proposal, the scope of the current DWT exemption for EU and EEA shareholders will be extended to shareholders/members that are located in a tax treaty jurisdiction, provided that the tax treaty contains a dividend provision. The shareholder/member should be a treaty resident (not tax transparent in the treaty jurisdiction), but not meeting e.g. the LOB requirements or the requirements of the dividend provision in the treaty should in principle not affect application of the exemption.

The DWT exemption will be subject to a new anti-abuse rules that is based on the current Dutch ("CIT") anti-abuse rules for foreign taxpayers that hold a qualifying shareholding/membership interest in a Dutch resident company/cooperative, with some additional features including the introduction of a principal purpose test (as provided for under OECD BEPS Action 6). As these rules will in principle be based on the existing Dutch CIT anti-abuse rules, in the Proposal it is indicated that effectively there should be no departure from the current practice.

Under the anti-abuse rules provided for in the Proposal, the DWT exemption is denied if (i) the shareholder/member holds the shareholding/membership interest with the main purpose or one of the main purposes of avoiding Dutch DWT in the hands of another person (the subjective test) and (ii) there is an artificial structure or transaction or a series of artificial arrangements or transactions (the objective test).

Before applying the above subjective test and objective test, it should first be determined whether the shares/membership rights are held as part of an active business enterprise of the shareholder/member or as a portfolio investment. In case they are held as a portfolio investment, distributions by the Dutch company/Holding Cooperative are in principle subject to DWT and the subjective test and objective test seem no longer relevant.

For the application of the subjective test it will have to be assessed whether the direct shareholder of the Dutch company/Holding Cooperative has been interposed between the Dutch company/Holding Cooperative on the one hand, and the shareholder/member up the corporate chain that conducts the active business enterprise on the other hand, with the main purpose or one of the main purposes to avoid DWT. This would be the case if distributions by the Dutch company/Holding Cooperative would have been subject to DWT had the direct shareholder/member not been interposed. If so, the DWT exemption does not apply, unless the shareholder qualifies under the objective test (see below).

Under the objective test, it needs to be determined whether there is an artificial structure, transaction or a series of artificial arrangements or transactions that have not been put in place for valid commercial reasons reflecting economic reality. Valid commercial reasons (reflecting economic reality) are generally present if the direct shareholder conducts a business enterprise to which the interest in the Dutch company is attributable. In case the direct shareholder/member of the Dutch company/Holding Cooperative is an intermediary holding company, valid commercial reasons are present if the intermediary holding company (i) performs a "linking function" between its shareholder that conducts the active business enterprise and the Dutch company/Holding Cooperative and (ii) meets the new relevant substance requirements in the jurisdiction where it is located.

The new relevant substance requirements are based on the existing Dutch minimum substance requirements with two additions. The first addition is a substance requirement pursuant to which the intermediary holding company will need to incur wage costs of at least EUR 100,000 for employees that perform the linking function at the level of the intermediary holding company. The employees may be hired from group companies (whereby the relevant wages may be allocated to the intermediary holding company through a salary split arrangement), while they need to perform their activities in the jurisdiction where the intermediary holding company is established. The second addition is a substance requirement pursuant to which the intermediary holding company will need to have its own office space at its disposal in the jurisdiction where it is established during a period of at least 24 months whereby this office space needs to be equipped and used for the linking function.

In relation to the existing minimum substance requirements, we note that the current requirement that the participation in the Dutch company/Holding Cooperative is financed with at least 15% of equity is not included in the substance requirement list provided in the explanatory notes to the Proposal.

V. Dutch corporate income tax anti-abuse rules

Under the Dutch current domestic corporate income tax anti-abuse rules, dividends and capital gains derived by a foreign shareholder/member from a substantial interest (generally a shareholding/membership interest of 5% or more) are subject to Dutch CIT if the following two cumulative conditions are met (i) the shares/membership rights are held by the foreign shareholder/member with the main purpose of avoiding Dutch tax in the hands of another person (anti-abuse test) and (ii) there is an arrangement or a series of arrangements that have not been put into place for valid commercial reasons reflecting economic reality (the objective test). Under the Proposal, this test will be aligned with the new DWT anti-abuse rules (see above) and to avoid an overlap of the CIT and DWT anti-abuse rules, the scope of the CIT anti-abuse rules will be limited to capital gains derived from the shareholding. As a result, dividend distributions will no longer be subject to Dutch CIT if the Dutch CIT anti-abuse rules apply (but solely subject to Dutch DWT).

VI. Impact on international holding structures

Based on the Proposal, under Dutch domestic DWT rules distributions by Holding Cooperatives to members in non-treaty jurisdictions such as the Cayman Islands, BVI, etc. will in principle become subject to 15% DWT as from 1 January 2018. In these type of situations, a restructuring of the participations held in the Holding Cooperative before 1 January 2018 should be considered, e.g. by making the Holding Cooperative "active" (sufficient employees, office space, involvement in the participations, etc.).

In addition, under Dutch domestic rules distributions to intermediary holding companies in EU/EEA/tax treaty jurisdictions such as Luxembourg or the UK may in principle also become subject to 15% DWT as from 1 January 2018, unless the DWT exemption applies. This requires that these intermediary holding companies satisfy the new relevant substance requirements. In existing intermediary holding structures that satisfy the existing Dutch minimum substance requirements, this means that the EUR 100,000 wage and 24 month office space substance requirements will also need to be satisfied. If the DWT exemption is not applicable, then the DWT may still be mitigated under a tax treaty. By their terms tax rulings will likely terminate as from 1 January 2018 if the intermediary holding company does not meet the relevant substance requirements on such date. Possibly, in these situations, but perhaps also in non-ruling situations, intermediary holding companies may be allowed to meet these substance requirements at a later point in time (e.g. a few months after 1 January 2018). Although the current Proposal does not contain transitional rules yet, hopefully the final Proposal will.

Finally, the extension of the DWT exemption to qualifying participations directly or indirectly held by shareholders/members with an active business enterprise that are located in tax treaty jurisdictions improves the position of shareholders/members that are located in tax treaty jurisdictions. This will inter alia be the case where the treaty does not provide for an exemption from Dutch DWT, such as the tax treaties with Canada or the PRC that only provide for a reduction of the Dutch DWT to 5%, or where the treaty provides for extensive limitation on benefits provisions, such as the tax treaties with the US and Japan. In both cases, the DWT exemption would apply irrespective of the tax treaty rate.