On 16 May 2017 the Dutch Ministry of Finance published preliminary proposals to change the Dutch withholding tax (“DWT”) regime as from 1 January 2018. The proposed amendments – if accepted – may have an important impact on certain international structures involving Dutch corporate entities.
The following changes are proposed:
- Profit distributions on membership rights in cooperatives will be subject to DWT if the actual activities of the cooperative usually consist for more than 70% of holding participations or of group financing activities.
- A new attractive DWT exemption will be introduced for dividend distributions by Dutch entities held by companies resident in a state with which the Netherlands has concluded a tax treaty including a dividend article.
- Current and new DWT exemptions will become subject to a revised anti-abuse test.
- More restrictive and more extensive substance requirements will be included in the anti-abuse test.
- The scope of the Dutch non-resident corporate income tax rules for substantial shareholdings will be amended.
The proposed changes, if implemented, will affect structures that involve a foreign shareholder in a Dutch entity. Today, many Dutch cooperatives benefit from an exemption from DWT and this may change. Further, also foreign shareholders in other Dutch entities, like BVs, may be affected. Basically all structures in which foreign shareholders and members hold interests in Dutch entities will need to be reviewed to assess the impact of the proposed changes.
The proposals are open for consultation and are therefore subject to change. A formal legislative proposal is expected later this year. The changes are expected to enter into force on 1 January 2018.
Proposed changes for cooperatives
Profit distributions on qualifying membership rights in cooperatives will be subject to DWT if the cooperative is a “Holding Cooperative”, which is the case if the actual activities of the cooperative usually consist for more than 70% of holding participations or of group financing activities.
- A qualifying membership right concerns an entitlement to at least 5% of the annual profit of the cooperative or the liquidation proceeds (alone or together with related persons or a collaborating group).
- The 70% test should be determined mainly based on balance sheet totals, but also taking into account types of assets and liabilities, turnover, activities and time spent by employees. The relevant testing period for the 70% test is the year preceding the profit distribution.
Proposed changes for DWT exemptions
In addition to the existing DWT exemption in respect of EU shareholders, a new and attractive DWT exemption will be introduced for shareholdings or membership rights held by companies resident, for tax (treaty) purposes, in a state with which the Netherlands has concluded a tax treaty including a dividend article.
For both exemptions, a new anti-abuse rule will be introduced, according to which the exemptions will not apply – and distributions will therefore be subject to DWT under domestic law – if:
- the shares or membership rights are held with the main purpose, or one of the main purposes, to avoid taxation due by another individual or entity, and
- the holding of the shares or membership rights is part of an artificial arrangement or transaction (or a series of artificial arrangements or composite of transactions), which will be the case if there are no valid business reasons reflecting economic reality.
Valid business reasons are present if the shareholding or membership interest is functionally attributable to a business enterprise at the level of the shareholder or member. In the case of a foreign intermediate holding company between the business enterprise and the Dutch entity, valid business reasons will be deemed to be present if the foreign intermediate holding company has ‘relevant substance’. In addition to the current minimum substance requirements, this includes the requirements that the holding company incurs salary costs of at least € 100,000 in relation to its intermediary holding functions, and that the holding company has (for at least 24 months) own office space at its disposal which is in fact used to carry out its intermediary holding functions.
Proposed changes for Dutch non-resident corporate income tax rules
The scope of the Dutch non-resident corporate income tax rules for substantial shareholdings will be limited to capital gains realized on such shareholdings. This is done to avoid an overlap between the substantial shareholding taxation and the new DWT anti-abuse rule. Valid business reasons for a structure are and will continue to be an escape to taxation under these rules. The interpretation of valid business reasons will be equal to the interpretation under the proposed anti-abuse rule for purposes of the DWT exemptions.