Dividend Withholding Tax. The key changes are as follows:
- The exemption at source is extended to corporate shareholders in treaty jurisdictions
- A general anti-abuse rule (GAAR) is included in this exemption
- A dividend withholding tax liability is introduced for distributions by cooperatives primarily engaged in holding and financing activities to 5% or more equity holders that do not qualify for the above exemption
The changes to the Dutch withholding tax rules particularly benefit non-EU multinationals that have already structured their EU operations via the Netherlands and will further increase the attractiveness of the Netherlands as a location for regional headquarters and joint ventures. International investment fund structures and certain offshore structures – used by mostly US corporates – run the risk of a Dutch dividend withholding tax liability and will have to restructure.
Corporate Income Tax. Amendments are also proposed closing several perceived loopholes in the Dutch Corporate Income Tax Act. These include the anti-base erosion restriction applicable to interest on related party debt.
Wage Tax. The 75% wage tax levy on excessive severance payments is amended, and the wage tax treatment of non-executive directors in one-tier boards will also change.
QUESTIONS & ANSWERS
- Dutch dividend withholding tax
What are the key benefits of the expanded source exemption from Dutch dividend withholding tax?
The expanded exemption offers more flexibility and allows for the simplification of international corporate structures. This will benefit in particular non-EU multinationals that have already structured their EU operations through the Netherlands and will further increase the attractiveness of the Netherlands as a location for regional headquarters and joint ventures.
The Netherlands has an extensive network of double taxation treaties. Many treaties already provide for (and Dutch treaty policy is aimed at), a full exemption from withholding tax on dividends to significant corporate shareholders. However, there are also many treaties do not provide for a full exemption. And while treaties do provide for it, they are subject to stricter conditions than those that apply to the expanded exemption (see below). For example, the treaty with the US requires the US corporate shareholder: to hold an 80% or more equity interest in the Dutch company (5% under the expanded exemption) for a period of at least 12 months (no holding period under the expanded exemption), and to meet one of the limitation on benefit tests (not applicable under the expanded exemption). With the introduction of the expanded exemption, the US corporate shareholder no longer needs to rely on and satisfy the conditions under the US – Netherlands treaty in relation to dividends from Dutch 5% or more subsidiaries, but can claim the exemption per Dutch domestic tax law.
What are the conditions of the exemption?
The proposal extends the existing exemption for EU corporate shareholders implementing the EU Parent-Subsidiary Directive to corporate shareholders that are tax resident in a country that entered into a double taxation treaty with the Netherlands. The following conditions apply to both EU and treaty shareholders under the expanded exemption:
- the shareholder is an entity that is exclusively a tax resident of an EU member state or a country that entered into a double taxation treaty with the Netherlands;
- the shareholder or one of its related entities holds 5% or more of the nominal paid-up share capital of the Dutch company;
- the shareholder is not comparable to an exempt investment institution;
- the shareholder is the beneficial owner of the dividends; and
- the new GAAR (see below) does not apply.
Within one month following each dividend to which the exemption applies, the Dutch company must provide a statement to the tax authorities from the relevant shareholders that all conditions are satisfied together with certain information that is to be detailed in a decree.
How does the exemption operate in relation to hybrid entities?
If the direct shareholder of the Dutch company is treated as opaque for Dutch tax purposes, but as transparent in its home country, the exemption applies if: (i) the country of the participant treats the direct shareholder as transparent; and (ii) the participant would have been eligible for the exemption had it held its participation in the Dutch company directly.
If the direct shareholder of the Dutch company is treated as transparent for Dutch tax purposes, but as opaque in the country of its participants and its own home country, the hybrid entity may be eligible for the exemption.
The proposed statutory wording of and the explanatory notes to these hybrid rules are not yet clear for hybrid structures involving participants from multiple jurisdictions.
Based on these rules, CV-BV and similar structures will not be eligible for the exemption. In relation to the US, qualifying US participants in CV-BV structures can rely on a unilateral decree pursuant to which the Netherlands will apply the dividend article in the double taxation treaty. However, the question is how long this decree will remain in force.
What is the purpose and background of the new GAAR?
The introduction of the GAAR in the Dutch Dividend Withholding Tax Act aims to continue implementing the GAAR in the EU Parent-Subsidiary Directive. In addition, it seeks to align the Dutch dividend withholding tax rules with the principal purpose test developed by the OECD as part of the BEPS project. This test will likely be included in many double taxation treaties through the multilateral instrument or through another instrument in the coming years. Pending implementation of the principal purpose test in double tax treaties, shareholders resident in treaty countries may, as a fall back, still apply tax treaty relief for dividends if the expanded exemption based on Dutch domestic law is not available per the new GAAR, i.e. no treaty override.
While the introduction of the GAAR in the Dutch Dividend Withholding Tax Act is new, the application of a GAAR to non-resident corporate shareholders of a Dutch company is not. Under current Dutch domestic tax law, non-resident corporate shareholders holding a 5% or greater stake in a Dutch company are subject to Dutch corporate income tax in abusive structures aimed at avoiding Dutch dividend withholding tax or personal income tax through the use of intermediary holding companies.
How does the new GAAR work?
According to its statutory wording, the GAAR applies if: (i) one of the main objectives of the direct shareholder holding the shares in the Dutch company is to avoid Dutch dividend withholding tax (subjective test); and (ii) there is an artificial structure (objective test).
The official commentary states that the GAAR will, in any event, not apply if either of the following tests are satisfied for the company holding the shares in the Dutch company:
- the direct or indirect shareholder of the holding company qualifies for the expanded exemption or an exemption under a tax treaty if it had held the shares in the Dutch company directly. The substance of the holding company is irrelevant for application of this look-through approach;
- the holding company carries out a business enterprise to which the shares in the Dutch company are attributable; or
- the holding company does not carry out a business enterprise, but: (i) its direct or indirect shareholder either carries out a business enterprise or performs substantial head office functions while (ii) the holding company itself satisfies certain reinforced substance requirements (see below).
The commentary suggests that the above tests operate as safe harbours but do not exclude other structures from application of the exemption by default. This could be particularly relevant for passive investment structures, such as passive real estate investments, which do not qualify as business enterprise based on Dutch standards. In view of the aim to bring the exemption in line with the EU Parent-Subsidiary Directive and the OECD based principal purposes test, this change in the commentary is appropriate because it seems likely that these investment structures do not by default qualify as abusive under EU or OECD standards.
What new substance requirements apply to intermediary holding companies?
The substance requirements are largely comparable to the current requirements that apply to intermediary holding companies for the purpose of applying the existing GAAR in the Dutch corporate income tax rules (see below). There are two key new requirements. First, the holding company has to incur at least EUR 100,000 in salary expenses annually in relation to its intermediary holding activities. This requirement may also be satisfied through intra-group secondments. Second, the holding company must have and use its own office space, appropriate for its activities. The holding company must have the office space at its disposal for at least 24 months. If a distribution is made within the 24-month period, this requirement will still be satisfied if continued use is contemplated until at least the end of the 24-month period. You will find a full list of the substance requirements in the annex.
And what about the existing GAAR in the Dutch Corporate Income Tax Act?
The existing GAAR in the Dutch Corporate Income Tax Act will no longer apply to structures aimed at avoiding Dutch dividend withholding tax. This GAAR will, however, be maintained to combat the avoidance of Dutch personal income tax by foreign individuals in relation to 5% or more interests in Dutch companies through the interposition of a foreign intermediary holding company.
Who should be concerned about the new GAAR?
Although each structure involving Dutch holding companies should be assessed individually, we expect fund structures of foreign investment managers to be especially affected and in need of follow-up action if they use Dutch holding companies held by vehicles in EU or treaty countries with no or limited relevant substance.
This follow-up action should also address the implications of changes to relevant tax rules and treaties arising from the OECD BEPS project, such as the introduction of the principal purpose test in many double taxation treaties.
Which amendments are proposed for Dutch cooperatives?
The Tax Bill 2018 also introduces a withholding tax liability for holding cooperative distributions to 5% or more equity holders. The background of this revision is that the current exempt treatment of distributions by cooperatives may be perceived as state aid under the EU state aid rules because distributions by Dutch public companies and limited liability companies carrying on similar activities are in principle subject to Dutch dividend withholding tax. The proposal aims to respect the current exempt treatment “true” cooperatives, for example, in agriculture, banking and insurance sectors.
Cooperatives are considered holding cooperatives if they are engaged for 70% or more in holding or group financing activities, measured with reference to: the composition of the balance sheet, the activities performed by employees and other factors. The test should be applied to the cooperative on a stand-alone basis, even if the cooperative forms a fiscal unity with one or more Dutch group companies. Distributions to equity holders resident in the EU or a treaty country may be exempt based on the exemption as described above.
Who should be concerned about the amended dividend withholding tax rules for distributions by cooperatives?
Although each structure involving Dutch holding cooperatives should be assessed individually, we expect multinational groups to be especially affected and in need of follow-up actions if they hold interests in Dutch holding cooperatives through one or more offshore vehicles that are not resident in the EU or in a treaty country.
In addition, fund structures of foreign fund managers using Dutch cooperatives may be affected as well, and similar as in relation to the GAAR further developments should be taken into account in any follow-up action.
Is any grandfathering available?
Yes, but very limited only. The two new substance requirements will apply as of 1 April 2018, giving holding companies relying on the substance requirements more time to make necessary arrangements. No other grandfathering is available and both existing retained profits and new profits will be captured by the new rules.
My holding company has an advance tax ruling (ATRs) for its interest in a Dutch group company or a cooperative. Is it safe from the new rules?
No, tax rulings become invalid after a relevant change in law. Depending on the basis of your existing ruling, the revised rules could be a relevant legal change that would invalidate your ruling.
If having a tax ruling is important, then you should consider requesting an update from the Dutch tax authorities subject to the implementation of any necessary restructuring actions.
- Dutch corporate income tax
What will change in terms of interest deduction restrictions?
Not much for now. One proposed change, further to a Supreme Court ruling earlier this year, would close a perceived loophole in the anti-base erosion restrictions that apply to interest on related party debt. These restrictions apply to related party debt connected to certain tainted transactions, such as acquisitions of exempt subsidiaries, capital contributions or distributions subject to certain exceptions. One exception applies if the taxpayer demonstrates that both the tainted transaction and financing with related party debt is driven predominantly by valid business reasons (the double business reasons test). In the Supreme Court case, the tax inspector argued that if the taxpayer demonstrated that the related party has been financed back-to-back by a third party on substantially the same terms, it would still need to demonstrate that the tainted transaction was entered into for valid business reasons as well. The Supreme Court disagreed and ruled that in the case of de facto third-party financing, the anti-base erosion restrictions do not apply. The proposed change “repairs” the Supreme Court ruling and requires the taxpayer to demonstrate that the tainted transaction was entered into for valid business reasons, even in cases where a third party de facto provided the relevant financing.
Will existing financing structures be grandfathered under the revised base-erosion restriction?
No. Hence, it is important to assess any existing financing structures that rely on the de facto third-party financing exception and determine if valid business reasons for the relevant tainted transaction can be demonstrated going forward.
What changes are proposed to the fiscal unity rules?
Two relevant changes are proposed. The first aims to combat the following structure that could give rise to a double deduction of effectively the same losses:
Tax losses incurred by X BV can be deducted from the taxable profits of the parent of the fiscal unity, M BV, or any other fiscal unity members. In addition, M BV can claim a tax loss on any corresponding decrease in value of the receivable from Y BV or, upon liquidation of Y BV, its equity investment in Y BV. The latter is based on the liquidation loss regime which allows a Dutch taxpayer to deduct losses on an exempt Dutch or foreign participation upon liquidation and subject to certain conditions. The proposed change aims to exclude these losses incurred by M BV from deduction by the fiscal unity.
The second change is aimed at mismatches arising in relation to the exemption of profits attributable to a foreign permanent establishment of a Dutch fiscal unity member. In principle, the amount of foreign profits to be exempt for Dutch corporate income tax purposes is calculated on a consolidated basis. Payments by the fiscal unity member (which has the foreign permanent establishment) to other fiscal unity members could result in the situation that the amount of foreign profits exempt from Dutch corporate income tax purposes is higher than the amount of foreign profits subject to tax in the relevant foreign jurisdiction. This is a result of the foreign jurisdiction allowing deduction of the intra-fiscal unity payment while these payments are disregarded for Dutch tax purposes. An anti-mismatch rule already applies for intra-fiscal unity interest payments. However, as confirmed in a Supreme Court ruling, this does not apply to other intra-fiscal unity payments, such as rent and royalties. The proposed change aims to repair this loophole.
- Dutch wage tax
What is the excessive severance payments levy about?
As of 1 January 2009, the Netherlands introduced a levy aimed at discouraging excessive severance payments that are aimed at taxing the top salaries of, amongst others, directors and executives. Dutch employers must, in addition to any Dutch wage tax to be withheld for the account of the relevant recipient, pay a 75% levy on excessive severance payments to statutory directors (except for supervisory and non-executive directs of listed companies) and employees who received fixed and variable compensation exceeding € 540,000 in the second year before the year of termination of their (deemed) employment (T-2).
The basis for the levy is not determined with reference to any payments actually linked to the termination, but on the following formulary basis. The excessive severance payment amount is considered equal to the aggregate amount of any fixed or variable compensation received in T-1 and subsequent years minus twice the aggregate compensation in T-2. In practice, this formulary approach can, amongst others, have serious implications in connection with M&A transactions that result in the dismissal or leave of executives in particular if the transaction results in acceleration of vesting of equity incentive schemes and on that basis recognition of benefits from those schemes for Dutch wage tax purposes.
The current rules provide for specific exclusion of benefits from employee stock options and similar rights awarded in or before T-2. The background is that benefits from options are not taxed upon vesting, according to the general rules on recognition of benefits for wage tax purposes, but rather the actual benefits derived from these options are taxed upon exercise or disposal. Without this base exclusion, any benefits from options through the exercise or disposal in T-1 or later would be part of the tax base for the levy. Recently, the Supreme Court ruled that this exclusion does not only apply to options that vested in T-2 or before but also to options that were awarded in T-2 or before but that did not vest in T-2 or before. In the view of the Dutch government, the treatment confirmed by the Supreme Court creates an undesired loophole and therefore it proposes a change the exclusion to the effect that employee options and similar rights that have not yet vested in T-2 or before no longer reduce the tax base.
What will change for non-executives in one-tier boards?
Since 1 January 2013, statutory managing and supervisory directors of listed public companies are no longer considered employees for Dutch employment and corporate law purposes. However, as per the same date, a fiction was introduced in the Dutch Wage Tax Act pursuant to which managing directors of these companies and, in respect of companies with a one-tier board, also non-executive directors are deemed employed for Dutch wage tax purposes. This created an odd difference in treatment between supervisory directors of companies with a two-tier board and non-executive directors of companies with a one-tier board.
The bill proposes to exclude non-executive directors from the fiction as well. Hence, these directors will in principle no longer be considered employees for Dutch wage tax purposes. However, directors and the company can through a joint filing elect to treat the director as an employee for Dutch wage tax purposes. The main reasons for doing so are as follows. First, in many cases, regardless whether the relevant non-executive director is resident in or outside the Netherlands, Dutch personal income tax and, if applicable, social security contribution will continue to be due by the director. Further, the well-known and attractive 30%-regime is only available to employees and hence requires the filing of an election. A possible downside to the company is that through the election the director is brought within the scope of the excessive severance payment rules as described above. If it is expected that the non-executive or supervisory directors meet the € 540,000 threshold and they receive a significant equity participations, this may a downside that require careful consideration.
Annex: substance requirements
- The company has to incur at least € 100,000 in salary expenses annually in relation to its intermediary holding activities.
- The company must have and use its own office space, which is appropriate for its activities, for at least 24 months.
- At least one-half of the statutory and competent board members of the company are resident in the Netherlands.
- The board members residing in the Netherlands have the required professional qualifications to adequately fulfil their tasks, which at least include taking decisions – on the basis of the company’s own responsibility and within the scope of normal group management – on the transactions (to be) entered into by the company, and executing those transactions
- The company has qualified personnel for the adequate execution and registration of the transactions (to be) entered into by it
- The management decisions are taken in the Netherlands
- The company’s main bank accounts are kept in the Netherlands
- The company’s bookkeeping is done in the Netherlands
- The entity has – in any case until the moment it applies for an ATR or APA – duly and timely filed its CIT, value added tax and/or wage tax returns
- The company’s office address is in the Netherlands; the entity is – to its best knowledge – not (also) considered a resident in any other state
- In case of a request for an ATR with regard to a transaction with a subsidiary of the Dutch holding company, the Dutch holding company that files the request should have financed or will finance the cost price of its subsidiary, with at least 15% equity.