Netherlands budget day no Dutch dividend withholding tax for active business structures from 2018

Sep 22, 2016

The Netherlands budget day (last Tuesday 20 September 2016) surprisingly also contains some very good international tax news.

The government considers that it would be appropriate to extend the existing withholding exemption for participation dividends involving active business structures for parent companies within the EU/EEA to parent companies established in countries with which the Netherlands has concluded a tax treaty.

The Netherlands has concluded these tax treaties with virtually all relevant countries in the world.

Up to now, the 15% Dutch dividend withholding tax on dividends from subsidiaries to parent companies was usually decreased to 5% (or 10%) under tax treaties. In the cases involving active business structures, the Dutch dividend withholding tax will further be reduced to 0% unilaterally if such a treaty is in place.

Therefore, in principle a dividend withholding tax obligation will exist, but a full withholding exemption will apply to participation dividends if the Netherlands has concluded a tax treaty with the shareholder’s country of residence and there is no question of abuse. These rules will not only apply to Dutch B.V.s and N.V.’s; it will be extended to Dutch holding cooperative societies (holding coops).

With regard to the anti-abuse rules, these will be in line with, for example, the General Anti-Avoidance Rules (GAAR) in the EU Parent-Subsidiary Directive, which means that the exemption will not apply to artificial arrangements and will only apply to active business structures.

Will there be a Dutch safe harbour for this? Not officially, although the new tax treaties between the Netherlands and Curaçao and the Netherlands-Sint Maarten contain a safe harbour when a Dutch company distributes to an e.g. Curaçao resident corporate parent company, the 0% Dutch dividend withholding rate will apply if the Curaçao company has (next to adequate office space) at least three full time local qualified employees who can independently manage the affairs of the company and are authorized to do so.

We expect this safe harbor to apply to all structures. For example, if a Dutch BV would distribute dividend to China whereby the Chinese company has – next to adequate office space – at least three full time local qualified employees in China who can independently manage the affairs of the Chinese company and are authorized to do so, the Dutch company should likely be able distribute dividends free of Dutch dividend withholding tax as from 2018 under the proposal. We recommend that the Dutch company that will distribute these dividends to also have this minimum Netherlands 3 FTE ‘managerial ‘substance’.

After the UK Brexit from the EU has been finalised, the above example will also apply to active UK parent companies of Dutch companies (under the safe assumption that the UK will not become a Member of the European Economic Area/EEA).

The legislative proposal is intended to become effective as from January 1, 2018 at the latest, most likely preceded by a public internet consultation.