Netherlands: Consultation on proposal for conditional withholding tax on dividends
Netherlands: Conditional withholding tax on dividends
The Dutch government on 25 September 2020 launched an internet consultation to allow interested parties an opportunity to respond to a draft bill to introduce a conditional withholding tax on dividends, as of 2024.
The consultation closes 23 October 2020.
Context of the draft bill
In the 2017 coalition agreement, it was agreed that the current dividend tax would be repealed and that a conditional withholding tax on dividends, interest, and royalties would be introduced. The government ultimately decided not to repeal the dividend tax and to withdraw the bill for the introduction of a conditional withholding tax on dividends that had, in the meantime, been presented to the Lower House.
The government subsequently indicated that it would examine whether elements of the proposed withholding tax could be integrated into the current dividend tax. The Withholding Tax Act 2021 (now effective) provides for a conditional withholding tax, effective as of 2021, on interest and royalties that are paid to group companies in “low tax” jurisdictions. The intention is now to expand this withholding tax as of 2024 to cover dividends, as had been announced by the Deputy Minister of Finance in a May 2020 letter to the Lower House of Parliament.
The draft bill proposes that the tax base for the withholding tax would be expanded to cover dividends. With regard to the withholding obligation and the tax base, this is largely in line with the Dividend Withholding Tax Act 1965.
The proposal means that a withholding tax at the high corporate income tax rate (currently 25%) would be levied on dividends that are distributed within a group, if the shareholder is established in a jurisdiction appearing on the Dutch list of low tax jurisdictions or on the EU list of non-cooperative jurisdictions, and in certain instances when the interest is held by a hybrid entity and in abuse situations.
Aside from the tax rate, there are a number of differences compared to the current dividend tax. Differences with the current dividend tax include:
- Cooperatives that do not qualify as a holding cooperative also would, in principle, be obliged to withhold the conditional withholding tax.
- There would no exemption for the redemption of shares if this entails a redemption for the purposes of temporary investment. [This difference is less relevant in practice because the conditional withholding tax would only be levied on group structures and, in practice, the exception for the redemption for temporary investment especially plays a role in the case of listed companies.]
If the dividend tax and the conditional withholding tax would both apply, the withholding tax would be reduced by the amount of dividend tax levied. On balance, the withholding tax rate would be payable.
A difference with the previously proposed, but later withdrawn, proposal for a conditional withholding tax on dividends is that no withholding tax would be levied on the sale of shares (unlike in the case of redemption) and that the possibility of the untaxed repayment of capital would remain intact (even if there is distributable profit) under the same conditions that also apply to the current dividend tax.
An initial analysis of the draft bill leads to the expectation that the proposal, if it ultimately becomes law, would particularly affect situations when the dividend tax exemption currently does not apply because the shareholder is established in a non-contracting country. If the non-contracting country is a designated low tax jurisdiction, the tax rate on the group dividend would increase from 15% to 25%. Distributions by non-holding cooperatives to members in designated low tax jurisdictions that currently do not fall under the dividend tax would also be taxed at 25%. Also in abuse situations when the direct shareholder is not established in a low tax jurisdiction but the underlying group shareholder(s) is/are, the tax rate could increase to 25%. This may, for example, also occur in certain circumstances if the direct shareholder is established in a contracting state.
Read a September 2020 report prepared by the KPMG member firm in the Netherlands
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