The Netherlands proposes to expand its dividend withholding tax exemption

18 mei 2017

On 16 May 2017, the Netherlands government published the announced legislative amendments and the parliamentary considerations for the envisaged amendments of the Dutch dividend withholding tax legislation regarding the withholding tax position of Dutch Cooperatives (“COOP/ COOPS”). In addition, the public is invited to response to the proposed amendments. This consultation is open for response until 13 June 2017. It is envisaged that the amendments become effective as per 1 January 2018.

Purpose of the proposed legislation

The proposed legislation envisages a wider application of the Dutch dividend withholding tax exemption, resulting in the same treatment of taxation at source of dividends from a Dutch NV, BV or COOP. This allows the Netherlands to exempt dividends from any Dutch withholding tax in respect of dividends to a corporate shareholder resident in a tax treaty country, regardless whether the distribution is made by a holding COOP, NV or BV.

At the same time, in order to prevent abuse in certain situations, it is proposed to expand the dividend withholding tax liability to Dutch holding COOPS, in cases of a direct profit distribution to a corporate shareholder in a non-EU/EEA or non-tax treaty country, resulting in the same treatment for dividend withholding tax purposes of a Dutch NV, BV or holding COOP.

COOP subject to DDWT

Under the new rules, dividend distributions made by holding COOPS to members with qualifying membership rights, will become subject to  dividend withholding tax.  

A holding COOP is defined as a COOP of which the factual activities predominantly consist of holding or intra-group financing activities. Predominantly in this context means 70% or more. This test is performed with regard to the financial year preceding the year in which a profit distribution takes place.

Whether the factual activities of a COOP predominantly consist of holding or financing activities, should be assessed on the basis of the total assets held by the COOP. However, other factors (e.g. revenue, profit making activities, time spent by employees and total of assets and liabilities) may also be taken into account. In this context, reference is made to COOPS in private equity structures. In these structures, even if the assets of such a COOP predominantly consist of interests in subsidiaries, such COOP may not be considered a holding COOP when other factors are taken into account (such as employees, office space and the active involvement in the business activities of the subsidiaries).

A qualifying membership right is defined as a membership right that entitles the holder (and certain affiliated parties) thereof to at least 5% of the annual profits or the liquidation proceeds of a "holding COOP".

Dividend WHT exemption

The current dividend withholding tax exemption for distributions by Dutch BV’s and NV’s to corporate shareholders holding an interest of 5% or more and being resident in an EU/EEA Member State will be widened.

As a consequence, the exemption also applies to corporate shareholders that are residents of a country with which the Netherlands has concluded a tax treaty that contains a dividend withholding tax clause, irrespective whether this treaty would reduce the dividend withholding rate to nil or not. This exemption will be also applicable to distributions by holding COOPS.

Anti-abuse rules

Anti-abuse rules remain applicable to distributions to corporate shareholders that fall under the scope of a Tax Treaty. Under these rules it should be assessed if the interest in the Dutch entity is held with the main purposes, or one of the main purposes, to avoid the levy of dividend withholding tax and if the structure may be considered part of (an) artificial arrangement(s) or transaction(s).

These anti-abuse rules should not be applicable to structures where the direct shareholder of the Dutch entity conducts an active business. There is also a safe haven available in case the direct shareholder is a passive entity, but the indirect shareholder conducts an active business, if the direct shareholder avails of sufficient substance. For this amongst others, the presence and actual use of office space is decisive and also a (minimum) level of wage costs of at least EUR 100,000 for relevant holding/management activities.

Our view

We recommend, for which we would be pleased to assist, to investigate legal structures in which a COOP is used timely and determine whether the proposed legislation may lead to tax liability for the COOP for dividend withholding tax purposes. If this is the case, we can advise on how to prevent or reduce a potential tax burden. As long as the COOP is part of an active business structure and there is a tax treaty involved with a dividend withholding tax clause the proposed legislation should not have any adverse tax consequences, provided the corporate member of Dutch COOP has the required level of substance.