On 25 September 2020, the under minister of Finance released a draft legislative proposal open for public consultation until 23 October 2020. The draft legislative proposal includes a source taxation on profit distributions by Dutch companies to shareholders in low tax jurisdictions. It is proposed to enter into force as per 1 January 2024.
The under minister of Finance previously announced the additional withholding tax in his letters of 29 May 2020 (see our Short Read of 5 June 2020) and 15 September 2020 (see our Tax Alert of 17 September 2020), respectively. This latest draft legislative proposal follows from the Dutch government’s policy to address international tax avoidance, which policy also resulted in the introduction of a conditional withholding tax on interest and royalties paid to low tax jurisdictions (see our Tax Alert of 18 September 2019) that will take effect as of 1 January 2020. The current draft legislative proposal broadens the scope of this conditional withholding tax to also include profit distributions to low tax jurisdictions.
Under the draft legislative proposal, profit distributions to low tax jurisdictions are subject to a dividend source taxation at the highest Dutch corporate income tax rate (currently 25%). Currently the following states are included on the Dutch list of low tax jurisdictions: American Virgin Islands, American Samoa, Anguilla, Bahamas, Bahrain, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Fiji, Guam, Guernsey, Isle of Man, Jersey, Oman, Samoa, Trinidad and Tobago, Turkmenistan, Turks and Caicos Islands, United Arab Emirates and Vanuatu.
The new dividend source taxation is proposed to apply separately from and in addition to the existing Dutch dividend withholding taxation (current rate of 15%), but accumulation is mitigated as dividend withholding tax may be offset against the new dividend source taxation. The new dividend source taxation would only apply to payments between qualifying related entities and in situations deemed abusive (similar to the conditional withholding tax on interest and royalty payments to low tax jurisdictions). The proposed tax base is broadly the same as the tax base of the Dutch dividend withholding tax. Profit distributions by cooperatives are in scope of the proposed dividend source taxation whilst these are out of scope of Dutch dividend withholding taxation, unless the cooperative qualifies as a so-called holding cooperative.