The changes proposed are the following:
- Dividend distributions by cooperatives will become subject to dividend withholding tax to the extent it concerns distribution to a qualifying member (5% threshold requirement) by a holding cooperative (activity test).
- Exemption of dividend withholding tax for dividend distributions by Dutch entities (including holding cooperative) to companies resident in tax treaty countries.
- Introduction of anti-abuse test for new and existing dividend withholding tax exemption. Moreover, additional substance requirements will be included in the anti-abuse test.
- Amendment of the scope of the foreign corporate income tax payer rules.
i. Dividend withholding tax for qualifying members in holding cooperatives
Profit distributions made by a cooperative will in principle become subject to dividend withholding tax if:
- the cooperative qualifies as holding cooperative; and
- the holding cooperative distributes a dividend to a qualifying member.
A ‘holding cooperative’ is defined as a cooperative which activities usually consist for more than 70% of holding participations or group financing activities. Whether a cooperative is considered a holding cooperative has to be tested during the year prior to the dividend distribution. Various factors are relevant to determine whether the cooperative should be qualified as a holding cooperative (e.g. balance sheet, turnover, activities of the employees, etc.)
According to the proposal a ‘top holding’ which assets consists for 70% or more of participations should not be considered a holding cooperative in case it actively manages its participations, has employees, an office and carries out headquarter functions (relevant for private equity) .
The dividend withholding tax obligation only applies to qualifying membership rights. This concerns an entitlement to at least 5% of the annual profit (or liquidation proceeds) of the cooperative. This implies that dividend distributions by a holding cooperative to members owning (alone or together with related persons or a collaborating group) less than 5% in the holding cooperative are not subject to withholding tax.
ii. Extension scope withholding tax exemption
Currently a dividend withholding tax exemption applies in EU situations. It is now proposed to exempt from dividend withholding tax all dividend distributions by Dutch entities (including the holding cooperative) to corporate shareholders owning at least 5% and tax resident in countries with which the Netherlands has concluded a double tax treaty that includes a provision on dividends.
This is a very important change for foreign shareholders currently not benefiting from an exemption of dividend withholding tax. An anti-abuse rule will be introduced to avoid improper use of this exemption (see below).
iii. Introduction anti-abuse rule for dividend withholding tax exemption
In accordance with the EU general anti-avoidance rule (‘GAAR’) and the principle purpose test (‘PPT’) from the OECD (BEPS action plan 6), an anti-abuse rule is introduced to avoid the application of the exemption in abusive structures.
A structure is considered abusive if:
- the shares in the Dutch BV, or qualifying membership rights in a holding cooperative, are held with the main purpose, or one of the main purposes, to avoid dividend withholding tax due by another entity or individual (subjective test); and
- if the structure is part of an artificial arrangement or transaction, which will be the case if there are no valid business reasons reflecting economic reality (objective test).
iv. Amendment of the scope of the non-resident corporate income rules
Currently, the non-resident corporate income tax rules for substantial shareholding apply to dividends and capital gains. Based on the proposal, these rules will be limited to capital gains realized on such shareholdings to avoid an overlap with the proposed dividend withholding tax anti-abuse rule.
The proposed amendments may have an important impact on certain international structures involving Dutch entities. All structures in which foreign shareholders and members holding interest in Dutch entities need to be reviewed to assess the impact of the proposed changes. We will follow this development closely.