On 16 December 2016, the Dutch State Secretary of Finance sent a letter to Dutch Parliament which provides further details on the proposed changes to the Dutch dividend withholding tax ("DWT") regime for holding cooperatives pursuant to which distributions are expected to become subject to 15% DWT as from 1 January 2018 (the "16 December Letter").
In the 16 December Letter, the Dutch State Secretary of Finance addresses questions raised in Dutch Parliament with respect to his letter of 20 September 2016 in which he outlined these proposed changes (the "20 September Letter"), see our Tax alert of last September for further background on these changes. Furthermore, in the 16 December Letter he has indicated that the Dutch Government aims to publish the draft legislative proposal for internet consultation in the first half of 2017.
Below, we summarize our main takeaways from the 16 December Letter.
The 16 December Letter
Starting point is that only distributions by holding cooperatives to members that hold a qualifying participation in the cooperative will become subject to DWT at the standard 15% rate, unless the proposed (extended) exemption from DWT applies. According to the 16 December Letter, a holding cooperative is a cooperative the activities of which consist for 70% or more of holding participations in subsidiaries or directly or indirectly financing related parties. 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.
A qualifying participation in a holding cooperative is a participation that entitles the holder thereof to 5% or more of the holding cooperative's annual profits or 5% or more of the holding cooperative's liquidation proceeds. In determining whether this 5% threshold is met, (non-qualifying) participations in the holding cooperative directly or indirectly held by parties related to the holder thereof are also taken into account. In this respect, it is noted that under the 2017 Budget proposals entities that are part of a so-called 'cooperating group' will also be considered related for Dutch tax purposes (see our Tax alert of last September for further background on these changes). The 16 December Letter clarifies that the new concept of cooperating group will also apply for purposes of this 5% threshold test.
Under the proposed changes, for qualifying participations in holding cooperatives as well as NVs and BVs in active business structures that are not abusive, an exemption from DWT will be introduced if the shareholder/member is located in an EU/EEA or treaty jurisdiction. Based on the 16 December Letter, it seems that shareholders/members located in jurisdictions with which the Netherlands has only concluded a treaty on the exchange of information do not qualify for purposes of the proposed DWT exemption.
Due to some ambiguities in the 20 September Letter, some members of Parliament questioned whether or not the (extended) exemption from DWT would also apply to qualifying participations held by shareholders/members in non-treaty jurisdictions, in line with the current regime where members of cooperatives in non-treaty jurisdictions can qualify for the exemption from DWT.
However, in the December 2016 Letter the Dutch State Secretary of Finance takes away any doubt in this respect by underlining that the DWT exemption will not apply if the members of the holding cooperative are not located in an EU/EEA or treaty jurisdiction, because otherwise holding cooperatives on the one hand and NVs/BVs on the other hand would still not be treated equally. Therefore, distributions by holding cooperatives to such members will become subject to 15% DWT without any exemptions being available, irrespective of whether or not it concerns an active business structure that is (currently) not considered abusive.
The 16 December Letter clarifies that the revised DWT regime will likely provide for an anti-abuse provision that is based on the OECD BEPS Principal Purpose Test. If so, the exemption from DWT would not apply if obtaining the DWT exemption is one of the principal purposes of the structure/transaction/arrangement involving the holding cooperative or NV/BV and its members or shareholders, unless it is established that granting the DWT exemption under the relevant fact pattern is not in conflict with the scope and purport of such DWT exemption (see our recent Tax alert for further background on the OECD BEPS Principal Purpose Test).
The Principal Purpose Test based anti-abuse provision would further tighten the current anti-abuse provision(s) underlying the DWT exemption that were only introduced on 1 January 2016 as part of the implementation of the revised EU Parent-Subsidiary Directive in the Netherlands (see our Tax alert of September 2015 for further background on these anti-abuse provisions).
The extension of the DWT exemption to qualifying participations held by shareholders/members that are located in treaty jurisdictions improves the position of shareholders that are located in treaty jurisdictions 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 treaty jurisdictions 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 treaty rate.
However, distributions by holding cooperatives to members in non-treaty jurisdictions such as the Cayman Islands, Bermuda, etc. are expected to become subject to 15% DWT as from 1 January 2018 without any exemptions being available, irrespective of whether it concerns an active business structure that is (currently) not considered abusive. This is a departure from the current situation where in these type of non-abusive active business structures, distributions by holding cooperatives are not subject to DWT at all. In these type of situations, a restructuring of the participations held in the holding cooperative should be considered.