Exit tax in case of certain cross-border transactions
The proposal introduces an “exit tax” in the form of a deemed dividend distribution in case of certain cross-border reorganizations in relation to a “qualifying state”.
The exit tax would apply in case of the following situations:
I. The assets of the Dutch tax payer are transferred to another entity in a qualifying state by way of a legal merger, a legal demerger or a share for share exchange.
II. The Dutch tax payer is, or becomes, a resident of a qualifying state, but 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.
A qualifying state is a state that:
(i) does not levy a comparable withholding tax on dividends, or
(ii) allows for a step-up to fair market value for purposes of its withholding tax on dividends.
The rate in the other state does not have to be similar to the Dutch rate (15%) to be comparable. However, a NIL or close-to-NIL rate is not comparable. Furthermore, if the foreign withholding tax on dividends only applies to certain “blacklisted” jurisdictions, it is not comparable.
The DWT would be calculated on the profit reserve at the level of the Dutch entity, which includes unrealized or hidden profits, insofar it exceeds the recognized capital for DWT purposes. For tax payers that are publicly traded, the profit reserve would be based on the share price just prior to the transaction.
The exit tax would only apply if the Dutch tax payer is part of a group whose consolidated net group turnover in the preceding year amounted to at least EUR 750 million.
Payment of exit tax
If the exit tax applies, the Dutch tax payer has the option to either pay the DWT due at once, or to request a payment extension. Such payment extension is in principle without interest.
If a payment extension is requested, the DWT due needs to be (partially) paid every time profit distributions are made by the entity, until the entire amount of DWT is paid. The extension can be terminated prematurely in certain circumstances.
Step-up in case of a cross-border migration to the Netherlands
The proposal also introduces a step-up for Dutch DWT purposes in case a tax payer becomes liable for DWT as a result of a transfer of its POEM to the Netherlands or in case of a cross-border conversion to the Netherlands. Such a step-up was already included for cross-border mergers and demergers since 2016.
Incorporation fiction in case of transfer of POEM
The Netherlands applies an “incorporation fiction” for DWT and corporate income tax purposes, meaning that entities incorporated under Dutch law are in principle considered a tax resident of the Netherlands (even if they have their POEM outside the Netherlands).
This fiction currently does not apply to entities incorporated under foreign law that have their POEM in the Netherlands. Under the proposal an entity incorporated under foreign law that has had its POEM in the Netherlands for more than 2 years, will remain a Dutch tax resident for 10 years after it has moved its POEM outside the Netherlands.
We note that the proposal only covers situations where there is currently no relief under the Dutch domestic DWT exemption or a tax treaty. The proposal has been sent to parliament, which has the opportunity to propose amendments or reject the proposal. As this is a proposal by a member of the opposition, it is currently unclear if there will be a majority in favor of this proposal. It therefore remains to be seen whether it will be enacted into law.
We will keep you informed on further developments. For further information, please contact your trusted advisor.