27 October 2023

Possible introduction of dividend withholding tax on share buybacks as of 2025

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Florian hahn S8 Xhi P Ctt Y unsplash

A 15% dividend withholding tax on the deemed distribution of taxable reserves in share buyback transactions is likely to be adopted in the Netherlands as of 1 January 2025.

Currently, share buy-backs are exempt from dividend withholding tax by law, subject to conditions and limitations. A new government to be formed after November 2023 elections can decide in 2024 to not abolish the exemption.

In this update, we explain:

  1. How the tax would work,
  2. In which situations the tax would be relevant – and when it would not, and
  3. What alternative transactions might be available for companies that become subject to the withholding tax.

Whatever happens, the Netherlands will remain an attractive jurisdiction for listed holding companies and Euronext Amsterdam will continue to be an attractive listing venue for local and international businesses.

Proposed new dividend withholding tax on share buybacks

Pursuant to the proposal, if shares are repurchased for cancellation, the excess, if any, of the price paid by the issuer to the seller of the share over the average amount of fiscally recognised paid-in capital per share would become subject to dividend withholding tax.

Generally, the fiscally recognised capital of a Dutch company is "stepped up" for the fair-market value of any contribution in cash or in kind to the Dutch company, including any increase in the fair-market value of the equity of the company resulting from a cross-border share-for-share transaction, legal merger or certain other corporate transactions, regardless of the accounting of these transactions in the company's annual report.

Because it is generally not possible to actually withhold the tax from the purchase price paid to the seller in stock exchange transactions, the dividend withholding tax liability will have to be assumed by the company to the benefit of the seller. Therefore, the tax is due by the company on a grossed-up basis, resulting in an effective tax rate of 17.65%.

Who is affected by the repeal of the exemption?

As only companies that are tax resident in the Netherlands would become subject to this tax (or, more formally, their shareholders), the repeal will not be an issue for foreign companies deciding to list on Euronext Amsterdam only.

The tax will also not be relevant for companies that redomicile to the Netherlands but that have or maintain their exclusive tax residence in another jurisdiction, something that already happens frequently. (QEV Technologies being a recent example).

The same would apply for a Dutch holding company that is used to merge two listed foreign groups, provided the merger company maintains an exclusive tax residence outside the Netherlands.

Netherlands-based joint venture companies should generally also not suffer adverse effects – even if their tax residence is in the Netherlands. This is due to possibilities to not withhold, or credit, the tax based on Dutch law or applicable tax treaties.

Finally, even Dutch issuers that have their tax residence in the Netherlands may, based on their specific circumstances, not suffer any ill effects from a repeal of the statutory buy-back exemption.

Alternatives for Dutch tax resident issuers

For companies that might be affected, a number of alternatives may be available to return cash to shareholders and to counter dilution.

Synthetic buy-back

Groups with significant fiscally recognised share premiums – particularly those that have migrated or spun-off to the Netherlands, or that entered into one or more major corporate transactions – may be able to do a "synthetic buy-back".

This would involve distributing share premium to all shareholders alike in a formal operation involving the increase and subsequent decrease of the nominal par value of the shares followed by a share combination in a tax-free manner. This is a proven and tested procedure: TomTom, AkzoNobel, Qiagen, and Royal AholdDelhaize are among issuers that have used the synthetic buy-back in the past.

This type of tax-free repayment could be combined with a reverse stock split, aimed at reducing the number of outstanding stock after the procedure, substantially resulting in the same number of shares that would have been left outstanding if the relevant cash amount had been used for a regular buy-back and cancellation of shares.

Buy-back for purposes other than cancellation

Companies will also still be able to buy back shares on a tax-free basis for certain purposes other than the permanent reduction of the share capital; for example, buying back shares in the context of employee incentive plans or for building a war chest for M&A.

Reducing the dilutive effect of stock dividends

Although not identical to a share buy-back, reducing the dilutive effect of a stock dividend may also improve earnings per share. Instead of giving a stock dividend to all shareholders, an issuer could offer its shareholders a choice between a taxable cash dividend and a de facto tax-free distribution of bonus shares. Issuers may consider means to incentivise shareholders to increasingly elect cash and by making cash dividends the default option.

Selective buy-back from major shareholders

If a company has a large number of genuine, Dutch tax resident shareholders, it could consider buying back shares for cancellation exclusively from these shareholders as they might be able to claim a full exemption, credit or a refund of the dividend withholding tax (unlike regular shareholders, they might not mind being paid the net purchase price only).

Second trading line

In other jurisdictions, issuers have created dedicated trading lines where shares are bought back net of withholding tax. We have not seen this yet in the Netherlands, and we would expect serious scrutiny of any such trading structure in view of dividend stripping concerns. Nonetheless, it will likely be something that market participants will study carefully.

Every issuer is different

The tax consequences and the effectiveness of any alternative measures will vary greatly from issuer to issuer. It may be that if the exemption is repealed, Dutch tax resident issuers will create bespoke arrangements combining multiple alternatives, including some of those described above.