by Wiebe Dijkstra and Klaas Versteeg
The Dutch Supreme Court rendered three decisions on 4 March that provide further guidance on how to calculate the refund of Netherlands dividend withholding tax due to foreign portfolio shareholders.
The Supreme Court decisions, Miljoen, X, and Société Général, follow the European Court of Justice’s (ECJ’s) September 2015 determination that the levying of Netherlands dividend withholding tax from foreign shareholders is incompatible with European law if the levy exceeds the effective Dutch taxation of comparable Dutch resident shareholders.
Netherlands companies are in general obliged to withhold 15 percent dividend withholding tax from distributions to both domestic and foreign shareholders. However, Dutch individuals and Dutch corporate shareholders benefit from a full credit or exemption whereas the dividend withholding tax is from a Dutch tax perspective a final levy for non-residents.
Dutch individuals effectively pay income tax at a rate of 1.2 percent times the fair market value of their portfolio investments minus related debt insofar as this net amount exceeds a tax-free threshold of close to € 25 k (double for partners). Dutch corporate portfolio shareholders are subject to Dutch corporate income tax on their net profits calculated for tax purposes at rates up to 25 percent. This could lead to a different effective tax rate for foreign and domestic individual portfolio shareholders.
In its rulings, the ECJ gave not exactly unambiguous instructions to the Dutch Supreme Court on how to compare tax paid by foreign and domestic shareholders. This week’s Dutch Supreme Court decisions provide some further guidance based on these instructions.
Individual shareholders
For foreign individual portfolio shareholders, the Supreme Court confirmed that the value of all portfolio shareholdings in Dutch companies forms the basis of the comparison to be reduced by the full amount of the tax-free threshold. Both elements are beneficial because they restrict the taxable base for calculating the tax due if the foreign shareholder were taxed under the rules applicable to domestic shareholders.
For instance, one could also argue a pro rata allocation of the tax-free threshold on the basis of the overall net value of portfolio investment held by the individual. This would result in a higher taxable base. If, by way of example, a French individual shareholder holds portfolio investments with an aggregate value of € 100,000 of which € 50,000 is attributable to Dutch shares, the taxable base is just over € 25,000 and the tax due is € 300 under the rules for domestic taxpayers. Hence, if the shareholder received a gross dividend of € 5,000 reduced by € 750 dividend withholding tax, the shareholder would be entitled to a refund of € 450.
Unfortunately, the Supreme Court rulings are silent on a number of important other aspects regarding the comparison in respect of individual portfolio shareholders, including (i) how to deal with the allocation of debt incurred for portfolio investments to the Dutch part of that portfolio, and (ii) whether or not for Dutch real estate investments held by the foreign individual the rules are applicable as to domestic shareholders.
Corporate shareholders
For foreign corporate shareholders, the Supreme Court followed the ECJ’s instruction that only costs and expenses directly related to collecting dividends should be taken into account for calculating the taxable (net) profits that serve as a basis for determining the corporate income tax that would be due under the rules applicable to Dutch corporate shareholders. This rather restricted approach towards taking into account related costs is to the disadvantage of foreign shareholders.
Finally, the Supreme Court did not clarify the comments of the ECJ that tax credits provided by the country of residence of the shareholder based on double taxation treaties could justify the incompatibility and remove the need to refund Dutch dividend withholding tax.
We expect that making assessments in all individual cases will be complex and extremely burdensome. It would be very welcome if, as announced, the Dutch State Secretary of Finance provides general and practical administrative guidance. Even more welcome would be the abolishment of Dutch dividend withholding tax.
Wiebe Dijkstra
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Klaas Versteeg
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