We previously informed you about the proposed changes to remove the way in which profit distributions by cooperatives (in principle not subject to dividend withholding tax) and private limited liability companies (BVs)/public limited companies (NVs) (in principle, subject to tax) are currently treated differently for tax purposes. The background to this is addressed in our memoranda of September 20, 2016 and December 19, 2016. On May 16, 2017 the previously announced bill on the ‘Withholding obligation for holding cooperatives and expansion of the withholding exemption Act’ (hereinafter: the draft bill) was opened for public consultation.
The content of the draft bill is broadly in line with previous letters from the Deputy Minister. The draft bill is summarized below.
General and follow-up
In the draft explanatory notes, the Deputy Minister indicates that the cooperative is increasingly being used in international structures and that the Cabinet wants to remove the abovementioned difference in the treatment of BVs/NVs and holding cooperatives, partly in response to the State aid risk. The basis assumption here is that no dividend withholding tax should be levied in shareholding structures where there is a business structure. This is subject to the precondition that real cooperative businesses are not affected. According to the draft explanatory notes, these measures are in line with the strategy of the Netherlands to, on the one hand, take a proactive approach on international tax evasion and, on the other, retain an attractive tax and business climate.
The draft bill contains both amendments to the Dividend Withholding Tax Act 1965 and the Corporate Income Tax Act 1969. The consultation closes on June 13, 2017. The amendments are intended to take effect on January 1, 2018. It was announced that measures covering the business sector will be included, but that these will only appear in the final bill. We expect the final bill to be presented on or around Budget Day.
Main features of the draft bill
The draft bill contains three key elements: the expansion of the withholding obligation for qualifying interests in holding cooperatives, the extension of the withholding exemption to third countries and to bring the current national anti-abuse provisions in line with EU law and treaty anti-abuse provisions. Each of these elements is discussed below.
Expansion of withholding obligation
In principle, dividend withholding tax will also be levied on holding cooperatives, but only if they have qualifying membership rights, i.e. membership rights that grant an entitlement to at least 5% of the annual profit or to at least 5% of the liquidation dividends. In assessing whether there is a qualifying membership right, the membership rights of a member and the individuals and entities related to that member will be taken into account. If, for example, there are two members in a holding cooperative, one of which has a 1% interest and the other a 99% interest, then the withholding obligation does not, in principle, apply to the member with the 1% interest. This is however different if both members form a cooperating group. In that case, the withholding obligation will apply to both members.
A holding cooperative is defined as a cooperative whose actual activities in the preceding year generally consisted primarily (i.e. for 70% or more) of the holding of participations or the direct or indirect financing of related entities or individuals. According to the draft explanatory notes, this definition, together with the fact that, as stated above, there must be qualifying membership rights, should lead to real cooperative businesses remaining outside the scope of the withholding obligation.
The draft explanatory notes also point out that in certain circumstances it is conceivable that a cooperative used in a private equity structure where the total assets on the balance sheet consist for more than 70% of participations, is nevertheless not regarded as a holding cooperative due to other factors, such as number of employees, office space and the business’ active involvement in the participations.
Extension of withholding exemption
Dutch treaty policy aims at agreeing an exemption for participation dividends in the source country. However, the Netherlands does not always realize this aim. That is why the draft bill extends the withholding exemption to third countries. This extension only applies if a tax treaty with a dividend clause has been concluded with the Netherlands.
The bill also includes anti-abuse rules. These are in line with the general anti-abuse provision in the EU Parent-Subsidiary Directive and the principal purpose test (PPT) in Action 6 of the BEPS project. There is abuse if – in short – the shares in the company or holding company established in the Netherlands are held for the principal purpose of, or one of whose principal purposes is avoiding dividend withholding tax being levied on another party (subjective test) and there is an artificial structure or transaction (objective test).
The abuse test involves first establishing whether there is a business structure or portfolio investments. In investment structures dividend withholding tax is, in principle, withheld. The application of the subjective test to business structures looks at whether a withholding exemption would also apply in the first link above the Netherlands where a business with substance is carried on. If not, then the subjective test has been met.
The objective test looks at whether there are valid business reasons which reflect economic reality. Valid business reasons are present if these are reflected in the relevant substance of the company that directly holds the participation in the Dutch entity. There is relevant substance if the intermediate holding company in the country where it is established cumulatively meets a number of conditions. In addition to all the known substance requirements that took effect on January 1, 2016, the following two new conditions are proposed: firstly, a payroll expense criterion of at least EUR 100,000 (whereby this amount must be a fee for the holding activities) must also be met and, secondly, during a period of at least 24 months the company must have its own office equipped with the usual facilities for performing holding activities.
Amendment of anti-abuse provisions
The draft bill brings the current national anti-abuse provisions in line with EU law and treaty anti-abuse provisions. To avoid an overlap with the anti-abuse provisions in the Dividend Withholding Tax Act, the foreign substantial interest rules in the Corporate Income Tax Act will in future only apply to capital gains on the substantial interest.
The introduction of a dividend withholding tax obligation for holding cooperatives represents a significant tightening of the current rules. A positive aspect is that a withholding exemption for business structures will, in principle, be included in treaty situations, both for companies with share capital and holding cooperatives. This means that where there is a direct dividend distribution to a shareholder in a non-treaty country, dividend withholding tax will always be withheld, regardless of whether the distribution is made by a holding cooperative, an NV, a BV or another company with share capital.
The proposals are expected to have a significant impact on the use of cooperatives in international structures and on investment structures in which companies established in the EU/EEA invest in Dutch companies. At the same time, the proposals offer the opportunity to receive an exemption from dividend withholding tax in business structures in which interests in Dutch companies are held by a company in a tax treaty Contracting State, where that exemption does not currently apply because it is not provided for in the treaty. We will, of course, keep you updated on any developments in the consultation and subsequent legislative process. Feel free to contact your regular contact at Meijburg & Co if you have any questions or comments.