On 19 September 2017, the Dutch government announced several bills containing tax law proposals. Under the legislative proposal (the “Proposal”) changes to the Dutch dividend tax act and the substantial interest taxation rules have been announced. This Tax Update will discuss the main aspects of the Proposal which should become effective as from 1 January 2018.
The following proposals will be addressed:
- Dutch corporate income tax anti-abuse rules;
- Dividend withholding tax obligation for qualifying membership rights in (passive) holding cooperatives;
- Expanding the current dividend withholding tax exemption;
- New anti-abuse rules.
What will change?
Dutch corporate income tax anti-abuse rules
Under the current Dutch corporate income tax (“CIT”) anti-abuse rules, income derived by a foreign shareholder from a substantial interest in a Dutch tax resident company may be subject to Dutch CIT in case the structure is considered abusive following the application of the Subjective Test and the Objective Test. Under the Proposal the Subjective Test has been amended such that it will only apply if Dutch individual tax is avoided. The rationale for this being that the avoidance of Dutch dividend withholding tax (“DWT”) is addressed in the new DWT anti-abuse rules.
The above implies that income derived from a substantial interest is subject to Dutch CIT in case both of the below conditions apply:
- The substantial interest is held with the main purpose (or one of the main purposes) to avoid Dutch individual tax of another person (“Subjective Test”); and
- The structure can be considered an artificial arrangement or a series of artificial arrangements (“Objective Test”).
Dividend withholding tax obligation for qualifying shareholder/membership rights in holding cooperatives
Presently, distributions of profit (in any form) made by Dutch NVs and BVs are generally subject to 15% Dutch dividend withholding tax, while distributions of profit made by cooperatives are generally exempt from this withholding obligation (except in abusive situations). The Proposal aims to eliminate the difference in tax treatment between Dutch cooperatives (coöperaties) and Dutch public limited liability companies (Naamloze Vennootschappen or “NVs”) and Dutch private limited liability companies (Besloten Vennootschappen or “BVs”).
Distributions by holding cooperatives to shareholders or 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 NV and BV, unless the proposed (broadened) exemption from DWT applies.
A cooperative qualifies as a Holding Cooperative if the actual activities of the cooperative mainly consist of more than 70% of holding participations and/or the direct or indirect financing of affiliated persons or entities. The activities conducted by the cooperative in the 12 months preceding the profit distribution will be decisive. Besides the cooperative’s balance sheet total, other factors such as types of assets and liabilities, turnover, activities and time spent by employees should also be taken into account.
A qualifying participation in a Holding Cooperative concerns an entitlement to at least 5% of the annual profit or the liquidation proceeds of the cooperative. Participations in the Holding Cooperative directly or indirectly held by related parties (to such member or by other entities that are part of the same cooperative group of such member) are also taken into account.
Please note that distributions made by Holding Cooperatives may still be exempt from Dutch dividend tax if the members meet the requirements of the newly introduced exemption (discussed below).
Expanding the current dividend withholding tax exemption
Under the Proposal, the scope of the current DWT exemption for EU and EEA shareholders will be extended to shareholders that are located in a tax treaty jurisdiction, provided that the tax treaty contains a dividend provision.
The extended DWT exemption may also apply to distributions to a hybrid entity, provided certain conditions are met. A hybrid entity can be explained as an entity that is transparent in one country and opaque in the other country. A distinction must be drawn between two different situations:
- A hybrid entity (e.g. an US LLC or a fund) that is non-transparent for Dutch tax purposes but is transparent under its local tax legislation. If the participants in the hybrid entity are qualifying residents of a tax treaty country the exemption may continue.
- A hybrid entity resident in a qualifying jurisdiction that is tax transparent for Dutch tax purposes, but is non-transparent under its local tax legislation. If the hybrid entity is treated as the beneficial owner of the dividend under its local tax legislation, the exemption may continue.
New anti-abuse rules
Under the new anti-abuse rules the DWT exemption is denied if:
- The shareholder holds the shareholding with the main purpose or one of the main purposes to avoid taxation due by another individual or entity (“Subjective Test”); and
- The holding of the shares or membership rights is part of an artificial structure 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 (“Objective Test”)
Regarding application of the Subjective Test it must be assessed whether the direct shareholder of the Dutch company/Holding Cooperative has been interposed 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 must be determined whether there is an artificial structure, transaction or a series of artificial arrangements that have not been put in place for valid commercial reasons reflecting economic reality. Whether an arrangement has been put into place for valid commercial reasons may depend on the substance at the level of the shareholder. Valid commercial reasons may, inter alia, be present if the shareholder:
(a) conducts an active business (with an own office and own employees) and the shareholding is part of that business’ assets;
(b) is a top holding company that carries out material management, policy and financial functions for the active business group it heads; or
(c) functions as an intermediary holding company of a top holding in the meaning of (b) above (in relation to the relevant subsidiary) and performs a linking function between its shareholder that conducts the active business enterprise and the Dutch company.
If the business enterprise is carried out by the indirect shareholder, and the direct shareholder is a foreign intermediate holding company that does not carry out a business enterprise, valid business reasons will only be considered present if the foreign intermediate holding company has ‘relevant substance’.
An intermediary holding company is considered to have relevant substance in case all the below conditions are fulfilled:
- At least half of the company’s board members should reside in the jurisdiction of the intermediary holding company;
- The board members resident in the jurisdiction of the intermediary holding company should possess the required professional knowledge to properly perform their tasks (including at least decision-making decisions);
iii. The company should have qualified staff to execute and register the intermediary holding company’s transactions adequately;
- Decisions by the board should be made in the jurisdiction of the intermediary holding company;
- The most important bank accounts should be held/managed in the jurisdiction of the intermediary holding company;
- The bookkeeping should be done in the jurisdiction of the intermediary holding company;
vii. The business address should be in the jurisdiction of the intermediary holding company;
viii. The intermediary holding company should not, to the best of its knowledge, be considered a tax resident of another country;
- The intermediary holding company should incur wage costs in relation to performing the linking function of at least the local equivalent of EUR 100,000 under Dutch wage standards; and
- 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.
The last two requirements are new under the Proposal and will only apply as of 1 April 2018.
Why is this relevant?
Within one month after each dividend distribution, the dividend distributing Dutch company/Holding Cooperative has to provide the Dutch tax authorities with information to enable them to ascertain whether the DWT exemption has been applied correctly. If the DWT exemption is not applicable, then the DWT may still be mitigated under a tax treaty (as long as it doesn’t contain an anti-abuse provision).
We recommend reviewing the consequences of the proposals for DWT and non-resident corporate income tax rules, as they may benefit or suffer from the changes. We are more than willing to assist you in reviewing your structures to ensure their future effectiveness.