The Netherlands: Proposed conditional 25% dividend source tax

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Introduction

On March 25, 2021, the Dutch government submitted a draft bill (Wet invoering conditionele bronbelasting op dividenden, the Bill) to the parliament to introduce a 25% conditional dividend source tax as from January 1, 2024. The purpose of the proposal is to prevent the Netherlands being used as a flow-through jurisdiction to group companies resident in low-tax jurisdictions. A low-tax jurisdiction means a jurisdiction with a statutory profit tax rate of less than 9% and/or a jurisdiction that is included in the EU list of non-cooperative jurisdictions.

Main characteristics

The source tax only applies if the profit-distributing entity and the recipient belong to the same group. A group is considered present if one entity directly or indirectly owns a qualifying interest in another entity. Qualifying means that the entity must have decision making influence with respect to the activities of the other entity. Such interest is in any case considered present if the interest represents more than 50% of the statutory voting rights in the other entity.

In addition, the source tax will also be levied in cases of abuse, which is determined on a case-by-case basis. A situation is considered abusive if the recipient of the dividends is interposed with the main purpose or one of the main purposes being to avoid the source tax, and in addition the structure or transaction is considered artificial. Therefore, the source tax may also impact profits distributed to group companies in jurisdictions that are not considered low tax. This provision is similar to the current anti-abuse provision with respect to the Dutch dividend withholding tax exemption.

The tax base for the source tax will be similar to the current Dutch dividend withholding tax base. However, the rate will be equal to the highest Dutch corporate income tax rate (2021: 25%) and must be withheld upon the distribution of dividends. Other than the dividend tax, which must be remitted shortly after the distribution, the source tax will be levied annually, and the 15% already levied and remitted will be creditable against the source tax.

The (1) low-tax and (2) non-cooperative jurisdictions currently are:

American Samoa Fiji2 Seychelles2
Anguilla1 2 Guam2 Trinidad and Tobago2
Bahamas1 Guernsey1 Turkmenistan1
Bahrain1 Isle of Man1 Turks and Caicos Islands1
Barbados1 2 Jersey1 United Arab Emirates (UAE)1
Bermuda1 Palau US Virgin Islands2
British Virgin Islands1 Panama2 Vanuatu1 2
Cayman Islands1 Samoa2  

The provisions of the source tax will be included in the Dutch Source Tax Act 2021 (Wet Bronbelasting 2021). Please also see our news alert on the implementation of this tax act: here.

Impact on low-tax treaty jurisdictions

Profits distributed by a Dutch resident company are subject to 15% dividend withholding tax, unless an exemption or a lower tax treaty rate applies. An exemption may apply to a corporate shareholder resident in a jurisdiction (including low-tax jurisdictions) with which the Netherlands concluded a bilateral tax treaty and that contains a dividend article, or a corporate shareholder resident in an EU/EEA member state, if such shareholder owns 5% or more of the shares in the Dutch company.

Because all EU/EEA member states have a profit tax of 9% or more, these situations will not be hit. The Netherlands concluded tax treaties with four low-tax jurisdictions: Bahrain, Barbados, Panama and the United Arab Emirates (UAE). These tax treaties provide for a reduction or exemption of source taxes on dividends if certain criteria are met. Therefore, the Netherlands is not able to (fully) effectuate the source tax if these treaties are not renegotiated prior to January 1, 2024. The Dutch government announced that it intends to renegotiate these tax treaties.

Impact on operational cooperatives

Profits distributed by Dutch cooperatives whose activities consist of less than 70% out of holding qualifying participations and/or direct or indirect financing of group companies (operational cooperatives) are not subject to dividend withholding tax.

As from January 1, 2024, profit distributions made by an operational cooperative to group companies in low-tax jurisdictions will be subject to the source tax of 25%.

Our observations

Groups that will be effected by this Bill have up till the end of 2023 to amend their structure, which offers a reasonable period of time to mitigate the adverse Dutch tax consequences.

The tax treaty negotiations with Bahrein, Barbados, Panama and the United Arab Emirates (UAE) should be closely monitored by those groups that have parent companies in these jurisdictions.

The source tax will apply the same principles as the dividend withholding tax and the interpretation of most provisions should therefore not result in interpretation issues. This means for example that a repayment of the contributed capital by a cooperative and the reduction of the nominal share capital by a share capital company should remain possible without levying the source tax, even if the entity has profits and retained earnings.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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