Elimination of different treatment of Dutch Cooperatives and expansion of Dutch domestic dividend withholding tax exemption.
Are you investor in shares or membership interests in Dutch BVs, NVs or Cooperatives? Read this, as important changes are due and you have limited time to anticipate these.
The Dutch State Secretary already announced, on September 20, 2016, that in the near future legislative proposals would be published in order to eliminate the different dividend withholding tax treatment for the Dutch BV and Dutch NV on the one hand and the Dutch NV on the other hand (Announcement). At the same time the Announcement included the idea to expand the domestic Dutch dividend withholding tax exemption1.
Now, on May 16, 2017 the Dutch Government published its proposed legislative amendments and launched a public consultation in order to provide interested parties the opportunity to react to the proposed legislation. In short the now published draft law proposal has two key objectives, namely:
- Dutch Cooperatives (Dutch Coops) that function as holding company should be treated the same as Dutch entities with a capital divided into shares (e.g. the BV and NV) for Dutch dividend withholding tax (DWHT) purposes, i.e. eliminating the specific DWHT exemption for Dutch Coops.
- Expansion of the Dutch domestic DWHT-exemption to qualifying shareholders resident in a jurisdiction that has concluded a tax treaty with the Netherlands.
Besides, the proposal also contains amendments to the anti-abuse rules for non-resident corporate investors. These rules also apply to existing structures.
Interested parties should provide their input ultimately on June 13, 2017. It is currently the aim to have the new laws enter into effect as of January 1, 2018.
Basically, all structures in which foreign investors invest in Dutch entities will need to be reviewed to determine what the impact of the proposals will be. Please see below for more background information in relation to the proposals.
DWHT treatment of Dutch Coops
Currently dividend distributions made by a Dutch Coop are in principle, if structured properly and certain requirements are met, not subject to DWHT. On the other hand, dividend distributions made by Dutch BVs and NVs are in principle subject to 15% DWHT, whereas such DWHT can be reduced or even eliminated as a result of domestic laws (including the implementation of EU Directives into domestic laws) and tax treaties.
It is now proposed that dividends distributed by Dutch Coops that (usually) function as a holding company in principle also become subject to 15% DWHT to the extent such distributions relate to so-called "qualifying membership rights" 2. A Dutch Coop is considered to have a holding function in case its actual activities usually and predominantly (70% or more) consist of holding participations and/or group financing activities (Dutch Holding Coop). This test is determined on a stand-alone basis, and not per fiscal unity, if any. Whereas for instance it is specifically stated that within a private equity structure a Dutch Coop which balance for 70% or more consists of participations could still not be qualified as a Dutch Holding Coop based on other facts and circumstances such as employees, office space and active involvement in relation to the participations.
Distributions made by a Dutch Coop that does not qualify as Dutch Holding Coop or by a Dutch Holding Coop to a minor investor (less than 5% profit entitlement) should still be exempt from DWHT, whereas of course DWHT in relation to dividends distributed by Dutch Holding Coops could still be reduced or exempt by means of treaties or domestic laws.
Expansion of domestic DWHT-exemption
Apart from aligning the treatment of Dutch Coops with BVs and NVs, the proposal also introduces an extension of the DWHT exemption included in domestic laws. In short it is proposed that BVs, NVs and Dutch Coops could be exempt from withholding DHWT if the shareholder or member (a) holds at least 5% of the shares/membership rights and (ii) is resident in the EU/EEA or in a country that has concluded a tax treaty with the Netherlands covering dividends and treated as non-transparent in such jurisdiction.
Basically this would result in a dividend withholding tax exemption for investors in tax treaty jurisdictions regardless of the tax treaty rate. Similar broadening of the exemption for DWHT had already been introduced by Luxembourg and Belgium. The biggest difference in this proposal is that the threshold is generally lower (5% instead of 10%).
In relation to the DWHT-exemption anti-abuse measures are introduced having both an objective and subjective test, i.e.:
- Subjective test: the shareholder/member should not hold the shares/membership rights with the main purpose or one of the main purposes to avoid DWHT. This test can be met if direct or indirect shareholder/member (being an EU or EEA or treaty country resident) of the respective distributing entity has an active business enterprise
- Objective test: the arrangement (or series of arrangements) cannot be considered wholly artificial, whereas an arrangement (or series of arrangements) is considered artificial to the extent that they are not put into place for valid commercial reasons that reflect economic reality. This test is, again for EU or EEA or treaty country resident shareholders/members deemed to be met if:
- The shareholder/member has an active business enterprise in its country of residence and the shares/interests are attributable thereto;
- In case the direct shareholder/member is an intermediate holding company and its shareholder would have a business enterprise, valid business reasons will be deemed to be present if the foreign intermediate holding company has 'relevant substance'. In addition to the existing substance requirements (e.g. in relation to board members, bank account and administration), this now also includes a requirement that the holding company has (i) its own office space to carry out the activities as a holding and (ii) incurs salary costs of at least EUR 100,000 in relation to the holding functions (could be costs in relation to employees of related companies).
Dutch corporate income tax
The anti-abuse rules for DWHT purposes are now also aligned with the non-resident investor rules and therefore also apply to foreign residents that make a capital gain on Dutch entities.
There are still some open ends in the proposal and it is not yet clear whether the proposal will make it in the current form. In our view it is debatable whether the current proposal is fully in line with mandatory EU laws. In any event, the position of the non-resident investor will change this year.
As mentioned above, we urge non-resident investors that have investments in Dutch entities to review their structure and assess the impact of these changes. We are most happy to assist with such review and offer our clients an initial quick scan free of charge.
1. Reference is also made to our publication in relation to 2017 Dutch Budget Day dated September 22, 2016.
2. Whereas "qualifying membership rights" relates to the membership interest held by members that are considered to (directly or indirectly) on a stand-alone basis or as part of a collaborative group hold a membership interest in the Dutch Holding Coop of at least 5% (profit entitlement or entitlement to liquidation proceeds).