On 19 September 2017 (Dutch Budget Day) a formal legislative proposal containing amendments to the Dutch dividend withholding tax was published as part of the 2018 Tax Plan package. In short, the legislative proposal introduced a broadened unilateral dividend withholding tax exemption to uphold the attractive fiscal climate of the Netherlands.
On 19 December 2017, the Senate agreed to all elements of the 2018 Tax Plan package. As a consequence, a broadened unilateral dividend withholding tax exemption came into force on 1 January 2018.
Dutch dividend withholding tax exemption prior to 1 January 2018
For many years, the Netherlands has exempted dividend distributions to parent companies residing in the EU or European Economic Area (hereinafter: EEA) from Dutch dividend withholding tax on the basis of the so-called EU Parent-Subsidiary Directive. In accordance with the EU Parent-Subsidiary Directive, profits distributed by a subsidiary in one member state to its parent company in another member state are exempt from dividend withholding tax if the following cumulative conditions are met:
The company must be in one of the legal forms listed in the annex to the EU Parent-Subsidiary Directive.
The company must be deemed to be a resident of an EU member state under its domestic law and be subject to corporate income tax without any possibility of being exempt.
The parent company must hold at least 10% of the capital (or voting rights) of the subsidiary. The 2003 amendments to the EU Parent-Subsidiary Directive reduced the holding requirement; the requirement went down from the original 25% to 20% for 2005 and 2006, 15% for 2007 and 2008 and 10% as from 2009.
The minimum holding period requirement, if any, must be met.
Extension of the Dutch dividend withholding tax exemption as of 1 January 2018
As of 1 January 2018 the exemption from the Dutch dividend withholding tax is broadened. The dividend withholding tax exemption is applicable to dividend distributions when:
The parent company would have been entitled to the Dutch participation exemption which basically means that the parent company holds an interest of at least 5% in the subsidiary/distributing entity.
The parent company is resident in the EU, EEA, or a jurisdiction with which the Netherlands has concluded a tax treaty that contains an article on dividends.
The parent company is not denied a reduction of dividend withholding tax under the tax treaty between the Netherlands and its country of residence based on an anti-abuse provision in that tax treaty.
The parent company does not hold an interest in the subsidiary/distributing entity, with the main purpose or one of the main purposes being avoidance of Dutch dividend withholding tax. This is the so-called ‘subjective test’. To determine whether the parent company holds the interest in the subsidiary/distributing entity with the main purpose or one of the main purposes to avoid Dutch dividend withholding tax, an assessment should be made as to whether the parent company has been interposed to obtain a more favourable Dutch dividend withholding tax position. If this is the case the so-called ‘objective test’ should take place. The objective test basically entails determining whether the structure can be considered as artificial to the extent that it was not put in place for valid business reasons that reflect economic reality. A structure will in principle not be considered an artificial arrangement if:
- The parent company carries on an active business itself; or
- The parent company is an intermediate holding company that is considered to generate a more favourable Dutch dividend withholding tax position compared to the indirect shareholder (the grandparent company) that carries on an active business, but has sufficient relevant substance. Sufficient substance is considered to be present if the parent company (being the intermediate holding company) meets the following two substance requirements in addition to the existing Dutch substance requirements:
- The parent company is required to have at least EUR 100,000 in employee costs.
- The parent company needs to have its own office space available in which it carries out its activities.
These additional substance requirements will come into effect as of 1 April 2018.
Those who benefit from the extension of the Dutch dividend withholding tax exemption are non-EU parent companies that run an active business enterprise and are residing in a jurisdiction in which the Netherlands has concluded a tax treaty with. The treaty should contain an article on dividends that merely provides a partial reduction of dividend withholding tax.
Are you running an active business enterprise in a non-EU country and thinking about expanding to a new market beyond country borders? The extension of the Dutch dividend withholding tax exemption makes the Netherlands a tax friendly jurisdiction for non-EU businesses looking to expand to the Netherlands or to other countries via the Netherlands.
Vistra Netherlands is perfectly suited to help you during every step of the expansion process. Our Amsterdam office has over 300 multi-lingual professionals, with sound experience in servicing clients from various industries. We function as your partner during the expansion process to make sure that your ambitions can be realised.
Could you benefit from working with an experienced partner to assist with your expansion plans? Contact one of our professionals to discuss your plans and see how Vistra Netherlands can help.
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