On September 19, 2017 (Budget Day in the Netherlands) an official legislative proposal for amendment of the Dutch withholding tax on dividends was published in connection to the Tax Plan for 2018. In summary, the proposal referred to a broadened exemption from withholding tax on dividends applied unilaterally with the aim to maintain the favourable fiscal climate in Holland.
On the same day, the Senate approved all proposals included in the Tax Plan for 2018. Therefore, the broadened exemption from withholding tax on dividends is in force since January 1, 2018.
Dutch exemption from withholding tax on dividends before January 1, 2018
For a number of years, Holland has exempted the distributions of dividends to EU or EEA (European Economic Area) parent companies from withholding tax based on Council Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States. According to this document any income distributed by subsidiaries to parent companies in different member states is not subject to withholding tax on dividends in case the following collective requirements are fulfilled:
- The legal form of the parent company has to be listed in Annex I of Directive 2011/96/EU;
- The parent company has to reside in a Member State of the EU under its national law and pay corporate tax on its income without possibilities of exemption;
- The company needs to hold a minimum of 10 percent of the subsidiary’s voting rights (or capital). The Directive was amended to reduce this holding requirement. It decreased from 25% for 2005 to 20% for 2006; for the next two years it was 15% and in 2009 it became 10%.
- The requirement for minimum period of holding (if any) should be fulfilled.
Extended Exemption from Dutch Withholding Tax on Dividends since January 1, 2018
From the beginning of 2018, the Dutch exemption from withholding tax related to dividends has a broader scope. It applies to the distributions of dividends in the following cases:
- The parent corporation would have qualified for the participation exemption in the Netherlands, i.e. its interest in the distributing entity/subsidiary is 5% or more;
- The parent corporation resides in the EEA, EU or a country that has signed a tax-related treaty with the Netherlands including provisions for dividends.
- The corporation has not been denied a withholding tax reduction with regard to dividends under the treaty between Holland and the country where it resides by virtue of a counter-abuse provision.
- The parent corporation does not own a part of the distributing entity’s/subsidiary’s capital with the chief purpose to avoid the Dutch withholding tax on dividends. This condition is verified through a “subjective test”. An assessment is made to check if the company owns a part of the capital of the distributing entity/subsidiary with the intention to circumvent Dutch withholding tax on dividends and if the company was interposed to achieve a better position with respect to Dutch withholding tax on dividends. If the assessment yields a positive result, it is followed by an “objective test”. Its purpose is to ascertain if the entity is artificial, i.e. it was not established for legitimate business reasons reflecting the economic reality. In general, entities are not considered artificial in case:
- the parent corporation has an operating business; or
- the corporation is a holding that has acquired a better position with regard to the Dutch withholding tax on dividends in comparison to indirect shareholders (grandparent company) having an operating business, but its relevant substance is sufficient. This means that the parent corporation (intermediate holding) meets two additional requirements for substance, on top of the existing ones stipulated in Dutch law: 1) The parent corporation has costs for employees amounting to no less than 100 000 Euros; 2) The parent corporation has office space where it performs its business activities.
The additional requirements for substance are in effect from April 1, 2018.
Who gets an advantage?
The exemption from Dutch withholding tax on dividends benefits parent corporations based outside the EU that operate active businesses and reside in jurisdictions with which Holland has signed tax treaties. The treaties must include provisions regarding dividends that provide for partial withholding tax reductions.
Intercompany Solutions B.V.
Are you developing a business outside of the EU and considering an expansion to new markets beyond your country’s borders? The broader scope of the exemption from withholding tax on dividends makes Holland a convenient jurisdiction for businesses outside the EU looking for options to expand their operations to the Netherlands and Europe.
Our team at Intercompany Solutions has the skills and knowledge to support you through each phase of your expansion process. Would it be beneficial for you to work with a competent partner to help you with your plans for expansion? Get in touch with our professionals, discuss your ideas and see what we can do for you.