Overhaul proposal for Dutch dividend withholding exit tax for certain cross-border reorganizations
On 8 December 2021, an amendment was published to overhaul the pending bill of law for an exit tax for Dutch dividend withholding tax (DWT) purposes. Although the key features of the bill of law remain intact, the amendment contains substantial adjustments to its scope and mechanics. The revised bill of law will have retroactive effect to 8 December 2021.
Exit tax for DWT purposes in case of certain cross-border transactions
The revised bill, submitted by an opposition member of parliament, introduces an ‘exit tax’ for Dutch DWT purposes in the form of a deemed dividend distribution in case of certain cross-border reorganizations by an entity located in the Netherlands to a qualifying state, if the profit reserves of that entity exceed a threshold of EUR 50 million at the time the cross-border reorganization is executed.
The exit tax applies in case of the following situations:
(i) The assets of or shares in the entity are transferred to another entity in a qualifying state by way of a legal merger, legal demerger or a share for share exchange; or
(ii) The entity is, or becomes, a resident of a qualifying state, and ceases to be resident in the Netherlands on the basis of Dutch domestic legislation or as the result of a tax treaty. This includes a transfer of the place of effective management (POEM) outside the Netherlands and a cross-border conversion.
The exit tax under (ii) does not apply as long as the Netherlands can still levy DWT based on the residency fictions discussed hereafter.
Revision of the qualifying states
A qualifying state is a state that:
(i) is not a member of the European Union (EU) or the European Economic Area (EEA); and
(ii) does not levy a comparable withholding tax on dividends or allows for a step-up of its contributed capital to fair market value for purposes of its withholding tax on dividends.
The DWT rate does not have to be similar to the Dutch DWT rate of 15% to be comparable. However, (i) a NIL or almost NIL rate or (ii) a foreign withholding tax applicable only to tax havens is not comparable.
Introduction of an exemption for certain shareholders
For exit tax purposes, an exemption applies to shareholders (natural persons as well as corporates) that reside in or are situated in:
(i) a member state of the EEA / EU; or
(ii) a state with which the Netherlands has concluded a tax treaty containing provisions on the taxation of dividends (i.e., almost all tax treaties concluded by the Netherlands).
Different from the initial legislative proposal, reorganizations within the EU/EEA are in principle no longer in scope.
An anti-abuse provision applies in relation to the exemption if the foreign corporate shareholder holds the shares in the entity:
(i) with the main purpose, or one of the main purposes, to avoid the exit tax; and
(ii) the holding of the shares is part of an artificial arrangement or transaction or a series of artificial arrangements or transactions.
Payment of the exit tax and new compliance obligations
If the exit tax applies, the entity is deemed to have distributed its profit reserves (to the extent they exceed the EUR 50 million threshold) to its shareholders. As a result of this deemed distribution, the entity is obliged to file a tax return and pay the DWT due to the Dutch tax authorities (DTA) within one month after the date of the cross-border reorganization. Contrary to the initial legislative proposal, the DWT due must be paid at once. There is no option for payment extension.
In addition to the tax filing, the entity is obliged to submit a declaration to the DTA indicating which shareholder fulfils the conditions for application of the exemption.
Introduction of residency fiction for foreign entities
The Netherlands applies a so-called ‘incorporation fiction’ for Dutch corporate income tax and DWT purposes, meaning that entities incorporated under Dutch civil law are in principle deemed to be a tax resident of the Netherlands, even if their POEM is located outside of the Netherlands.
This fiction currently does not apply to entities incorporated under foreign law that have their POEM in the Netherlands. Under the revised bill of law, an entity incorporated under foreign law that has had its POEM in the Netherlands for more than five years, will remain a Dutch tax resident for Dutch corporate income tax and DWT purposes for ten years after it moves its POEM outside the Netherlands.
The purpose of introduction of this fiction is to keep full taxation rights on dividends distributed by such an entity during (part of) the 10-year period. Obviously, tax treaty protection needs to be taken into account in this respect. After the end of this at maximum 10-year period, the exit tax discussed above applies.
The broadened scope of the residency fiction only applies to entities that have moved their POEM outside the Netherlands on or after 8 December 2021.
We note that the bill of amendment narrows the scope of the exit tax as included in the initial proposal, but (re)introduces the residency fiction for foreign entities.
As the bill of amendment and the initial legislative proposal have been submitted by a member of the opposition, it is currently unclear if there will be a majority in favor of this (revised) proposal. In addition to this, the initiator of this bill of amendment advised that the proposal should be forwarded to the Council of State for advice. It therefore remains to be seen whether and when it will be enacted into law.
We will keep you informed on further developments. For further information, please contact your trusted advisor.