Netherlands announces plans for new dividend withholding tax

Jian Cheng Ku

Rhys Bane

DLA Piper

By Jian-Cheng Ku & Rhys Bane, DLA Piper Nederland N.V., Amsterdam

In a May 29 press release, the Netherlands government announced its intention to propose an additional withholding tax on dividends to step up its fight against tax avoidance.

The withholding tax, if adopted by the Netherlands parliament, would take effect in 2024.

Background

The Netherlands government has taken several measures to curb tax treaty shopping structures.

Treaty shopping structures are structures where an entity is interposed between the country of source and the country of destination to minimize withholding taxes on outbound flows of dividends, interest, and royalties (or other mobile capital). Generally, the intermediate country has a tax treaty in place with (more) favorable withholding tax rates.

The measures already taken by the Netherlands government to curb treaty shopping structures include the beefing up of substance requirements for companies that perform intercompany financing or licensing functions and the introduction of a conditional withholding tax on interest and royalties. Both are set to take effect in 2021.

Previous legislative proposal

The conditional withholding tax on dividends, referred to in the Netherlands government’s press release, is an entirely new proposal.

 In 2018, the Netherlands government intended to abolish the dividend withholding tax in its present form, while simultaneously introducing a so-called “conditional withholding tax” on dividends distributed to low tax jurisdictions and in certain abusive situations.

This proposal was withdrawn following criticism from opposition parties. A more detailed description of the 2018 proposal can be found here.

Similar to the conditional withholding tax on interest and royalties that was adopted by the Netherlands parliament in December 2019 (effective as of 2021), the new withholding tax on dividends will likely only apply to dividends distributed to low tax jurisdictions.

The Netherlands government publishes a list of jurisdictions that it considers low tax jurisdictions annually. The list is comprised of jurisdictions that have a statutory corporate income tax rate of less than 9% (or no corporate income tax at all) at the reference date (October 1) and jurisdictions that are included on the EU list of non-cooperative jurisdictions for tax purposes immediately before the publication of the list.

More details on the conditional withholding tax on interest and royalties can be found here.

Our observations

It is clear from the measures taken that the sitting government wants to be perceived as tough on tax avoidance.

In being tough on tax avoidance, however, legislation has been adopted that contains overkill, which must be carefully navigated.

The key message of the Netherlands government is still that the Netherlands is open for business, albeit with the requirement that businesses should also invest in activities physically located in the Netherlands.

The 2024 effective date of the conditional withholding tax on dividends was likely chosen because of Dutch tax authorities’ difficulties, including outdated tax systems and scandals that have resulted in the Netherlands Ministry of Finance pressing criminal charges against them.