17 May 2017 Global Tax Alert Dutch Government launches internet consultation to amend the Dividend Withholding Tax Act EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: www.ey.com/taxalerts Expansion of domestic Dutch dividend withholding tax exemptions and abolishment of the current exemption for Dutch holding cooperatives Executive summary Following its letter published on 20 September 2016 regarding the proposed alignment of the Dutch dividend withholding tax treatment of profit distributions made by Dutch Cooperatives and limited liability companies, on 16 May 2017, 1 the Dutch Ministry of Finance launched an internet consultation and published its proposed amendments to existing corporate income tax and withholding tax legislation. In short, the consultation document contains the following two key proposals: 1. A broader domestic dividend withholding tax exemption for dividend distributions to corporate entrepreneurial shareholders resident in a treaty jurisdiction.
2 Global Tax Alert 2. Dutch cooperatives (Co-op) that act as holding companies should no longer fall within a separate general dividend withholding tax exemption for Co-ops, but will be treated the same as companies with capital divided into shares (BVs and NVs). After the public internet consultation, new legislation will be formally proposed with the aim to enact it by 1 January 2018. Detailed discussion Background On 16 May 2017, the Dutch Ministry of Finance published a consultation document regarding a number of proposed amendments to the Dutch Corporate Income Tax Act 1969 and Dutch Dividend Withholding Tax Act 1965. The purpose of this consultation document is as outlined in the Policy Paper published on Budget Day in September 2016 to expand the current domestic exemptions from Dutch withholding tax for dividend distributions made within an entrepreneurial group and to ensure that dividend distributions by a Dutch Co-op functioning as a pure holding company, will be subject to Dutch dividend withholding tax. Expansion of Dutch domestic dividend withholding tax exemption The consultation document proposes to further update and expand the domestic exemptions outlined in the Dutch Dividend Withholding Tax Act 1965, to ensure that within entrepreneurial groups, the domestic Dutch dividend withholding tax exemption is broadened. Under the proposals, no Dutch dividend withholding tax will be due on distributions made by a Dutch NV, BV or Co-op if all of the following criteria are met by the shareholder/member: Hold(s) at least 5% in the distributing company (or even lower in certain circumstances) Is resident of the European Union (EU)/European Economic Area (EEA) or a country that has concluded a tax treaty with the Netherlands covering dividends Is not considered a transparent entity for tax purposes in the country of residence And this shareholder/member: Does not hold an interest in the distributing entity with the main purpose or one of the main purposes to avoid the levy of Dutch dividend withholding tax (Subjective-test); or The arrangement or series of arrangements is not considered wholly artificial whereby: An arrangement can consist of various steps or components An arrangement or series of arrangements is considered artificial to the extent that they are not put into place for valid commercial reasons which reflect economic reality (Objective-test). The Subjective-test can be met if within the chain of ownership, a business enterprise is carried out by a treaty resident or resident of the EU/EEA. This means that the dividend withholding tax rate in the respective tax treaty or any other conditions (e.g., Limitation on Benefits (LOB) provisions, holding period etc.) would no longer be relevant as such shareholder can benefit from the domestic exemption. For all other situations, there should be valid business reasons that commensurate with the economic reality in order to meet the Objective-test. Valid business reasons are deemed present if the (EU/EEA or treaty resident) shareholder meets one of the following: Carries on an active business enterprise Performs headquarter activities of the parent entity Is an intermediate holding company that performs a linking function between the business operations and the operations of the lower-tier subsidiaries and does have relevant substance Based on further guidance provided in the consultation documents, intermediate holding companies will be considered to have relevant substance if the Dutch minimum substance requirements are met and they have at least 100,000 of (related party) labor costs relating to the relevant holding activities and own/rent an office space that is used to perform their activities for at least 24 months. Reference is made to the Principle Purpose Test of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 6 and the General Anti-Abuse Rule (GAAR) of the EU Parent- Subsidiary Directive. The Netherlands in this context intends to no longer give treaty benefits to wholly artificial arrangements. It is to be expected that other countries will come out with similar rules/explanations.
Global Tax Alert 3 Amendment of the Dutch dividend withholding tax treatment of Co-ops Under the current legislation, a distinction is made between Co-ops and companies with capital divided into shares (like BVs and NVs). Dividend distributions by BVs and NVs are in principle subject to a 15% dividend withholding tax (although reductions and exemptions might be applicable based on treaties, EU-legislation or domestic legislation), while dividend distributions by Co-ops are in principle not subject to dividend withholding tax (except for abusive situations). The consultation document proposes to eliminate the difference between distributions by Dutch limited liability companies (NVs and BVs) and Dutch co-operatives that act as holding companies (Holding Co-op). This means that only distributions by Holding Co-ops become subject to dividend withholding tax. Distributions by a Dutch Co-op that does not qualify as a Holding Co-op should still remain exempt from Dutch dividend withholding tax. A Holding Co-op is defined as a co-op that is part of an international holding structure and predominantly (more than 70%) performs holding activities and/or intercompany financing activities. It is explicitly mentioned that in two situations a Co-op should not be considered to be a Holding Co-op: A TopCo Co-op holding more than 70% investments in subsidiaries which actively holds these subsidiaries, has employees on the payroll and performs other headquarter activities A Co-op that is used in private equity structures holding more than 70% investments in subsidiaries, might also not be considered to be a Holding Co-op based on the other facts and circumstances such as employees, office space and active involvement in the business of the subsidiaries As a result, only distributions made by a Holding Co-op to (affiliated) members that (directly or indirectly) hold a membership interest of at least 5% shall become subject to 15% statutory Dutch dividend withholding tax similar as those out of a BV or NV. This means that for those distributions all other domestic or treaty based exemptions are applicable, unless the relevant tax treaty contains an anti-abuse provision. Realignment Dutch corporate income tax for foreign taxpayers Due to the proposed anti-abuse provisions for Dutch dividend withholding tax purposes, the substantial interest rules for foreign tax payers as set forth in the Dutch Corporate Income Tax Act 1969 would from 1 January 2018 only apply for capital gains. The Subjective-test and Objective-test and explanation thereto would equally apply. Next steps The consultation is open to the public until 13 June 2017. After the consultation, the proposed law will formally be presented to Parliament and undergo the normal Parliamentary procedures. It is envisaged that the changes will become effective on 1 January 2018. Implications The expansion of the Dutch dividend withholding tax exemption should be seen as an important step in further strengthening the Dutch fiscal investment climate. At the same time, the proposed changes address the outcome of the OECD s BEPS Action 6. Therefore, the requirements to benefit from the proposed domestic dividend withholding tax exemption could be seen as the Dutch implementation of the Principal Purpose Test of BEPS Action 6, as well as the GAAR of the EU Parent-Subsidiary Directive. Endnotes 1. See EY Global Tax Alert, Dutch Government publishes 2017 Budget Proposal, dated 20 September 2016.
4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young Belastingadviseurs LLP, International Tax Services, Amsterdam Danny Oosterhoff +31 88 407 1007 danny.oosterhoff@nl.ey.com Dirk Stalenhoef +31 88 407 8505 dirk.stalenhoef@nl.ey.com Ernst & Young Belastingadviseurs LLP, International Tax Services, Rotterdam Michiel Swets +31 88 407 8517 michiel.swets@nl.ey.com Ernst & Young LLP, Netherlands Tax Desk, New York Dirk-Jan Sloof +1 212 773 1363 dirkjan.sloof@ey.com Ernst & Young LLP, Netherlands Tax Desk, Chicago Erwin Sieders +1 312 879 2338 erwin.sieders@ey.com Ernst & Young LLP, Netherlands Tax Desk, San Jose Sebastiaan Boers +1 408 918 5877 sebastiaan.boers1@ey.com Ernst & Young LLP, Netherlands Tax Desk, Beijing Yee Man Tang +86 10 5815 3765 yeeman.tang@cn.ey.com Ernst & Young LLP, Netherlands Tax Desk, Hong Kong Jeroen van Mourik +852 2846 9788 jeroen.van.mourik@hk.ey.com Ernst & Young LLP, Netherlands Tax Desk, London Jelger Buitelaar +44 20 795 15648 jbuitelaar@uk.ey.com
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