From 2018 the scope of the Dutch dividend withholding tax exemption is extended to shareholders resident in jurisdictions that have a tax treaty with the Netherlands.
On 19 September 2017 the Dutch caretaker government published its Tax Plan 2018. One of the main topics is a positive overhaul of the dividend withholding tax regime. From 1 January 2018, the scope of the Dutch dividend withholding tax exemption will be extended to shareholders resident in jurisdictions that have a tax treaty with the Netherlands. An exemption from Dutch dividend withholding tax is currently only available to corporate residents of the European Union or European Economic Area. 'Holding’ Cooperatives (whose activities consist for more than 70% of holding or group financing activities) will become subject to Dutch dividend withholding tax, while ‘operational’ Cooperatives remain outside of the scope of Dutch dividend withholding tax. One of the examples in the legislative proposal of an operational Cooperative is a Cooperative with holding activities with the relevant substance to actively manage its subsidiaries, such a private equity companies.
The proposal means that foreign shareholders resident in the EU/EEA or a tax treaty country with an interest of at least 5% in a Dutch companies with a capital divided into shares (eg. NVs/BVs) or an interest in a holding Cooperatives can benefit from the Dutch dividend withholding tax exemption, provided that the principal purpose test is met.
In line with the OECD BEPS Action 6 and the recent changes to EU Parent-Subsidiary Directive, the exemption from Dutch dividend withholding tax would be subject to the principal purpose test. This principal purpose test contains a subjective test and an objective test which cumulatively needs to be met for the exemption to be disallowed.
The subjective test is met if the foreign shareholder is interposed to avoid the Dutch dividend withholding tax. This test considers the entire ownership structure, and is deemed not to be met if the indirect shareholder carries out a business enterprise and is resident in EU/EEA or a treaty country.
The objective test is met if the foreign shareholder is part of an artificial arrangement. This test considers the activities of the direct shareholder, and is deemed not to be met if the foreign shareholder:
- Carries out a business enterprise, or
- Acts as an intermediary holding company and meets specific substance requirements.
These substance requirements consist of the existing minimum Dutch substance requirements with the following two additional substance requirements:
- The foreign shareholder needs to have labour costs of at least €100,000 and
- The foreign shareholder needs to own or rent an office space for performing its activities for at least 24 months.
Along with this change to the Dutch Dividend Withholding Tax Act, certain reparative Dutch corporate tax measures were announced in the 2018 Tax Plan, including:
- Changes on the Dutch non-resident income tax
- Interest limitation rules
- Rules for liquidation losses on participations
- Rules to avoid double use of losses in fiscal unity situations.
The effect of these improved rules will be felt by all structures currently using the Dutch Cooperative to lower Dutch dividend withholding tax as the shareholders are resident in a non-EU/EA and non-tax treaty country (eg. investment funds resident in a non-treaty country investing directly in Netherlands). Dividends distribution to these shareholders will become subject to 15% Dutch dividend withholding tax, unless the Dutch Cooperative qualifies as an operational Cooperative.
The proposal requires all other companies (NV, BV, and holding Cooperatives) with foreign corporate shareholders – resident in the EU/EEA or a tax treaty country - to consider the principal purpose test before they can rely on the dividend withholding tax exemption. In particular, Dutch companies currently held by intermediary holding companies resident in EU/EEA (such as Cyprus or Luxembourg) should start considering the principal purpose test after this measure becomes effective.
Foreign shareholders resident in a country with a tax treaty that does not provide for 0% WHT on dividend will be able to rely on the domestic exemption from Dutch dividend withholding, which is a significant improvement to the Dutch investment climate. Examples of these countries are China, Russia, Korea, India, Israel and Canada.
As such, these measures contribute to the prevention of tax treaty shopping and at the same time improve the investment climate in the Netherlands for real businesses.