In addition, the Proposal introduces a fiction in case of a relocation of the (corporate) tax seat abroad and a step-up for foreign companies relocating their (corporate) tax seat to the Netherlands. The measures included in the Proposal would apply to Dutch taxpayers that are part of a group with a consolidated net turnover of EUR 750 million or more and are envisaged to have retroactive effect to 10 July 2020 12:00 noon CET.
Conditional final DWT levy
Background and purpose
The Dutch Dividend Withholding Tax Act 1965 ('DWTA') currently does not provide for a (final) DWT levy in case the DWT withholding liability of a Dutch taxpayer ends as a result of the taxpayer ceasing to qualify as tax resident in the Netherlands. This means that if a Dutch taxpayer enters into a cross-border reorganization, which typically results in the effective ending of the DWT withholding liability through the operation of double tax treaties, the Netherlands may generally no longer (fully) levy DWT on the taxpayers' (latent) profit reserves and the DWT claim of the Netherlands on such (latent) profit reserves would in principle be lost.
The purpose of the conditional final DWT levy is to preserve the DWT claim on (latent) profit reserves of Dutch taxpayers that enter into certain cross-border reorganizations. In addition, the conditional final DWT levy aims to combat cross-border reorganizations that would lead to the avoidance of such DWT claim.
The proposed conditional final DWT levy may apply to cross-border relocations of (corporate) tax seats, cross-border mergers, cross-border demergers and cross-border stock mergers that are entered into by Dutch taxpayers in relation to two types of 'qualifying' States:
- States that do not have a withholding tax on dividends comparable to DWT; and
- States that do have a withholding tax on dividends comparable to DWT but that, on arrival, designate the profit reserves of the (formerly Dutch) taxpayer entering the State as paid-in capital recognized for tax purposes (i.e. provide a step-up).
A withholding tax comparable to DWT is a withholding tax on dividends paid by the final link (i.e. the head office) in the group structure. A withholding tax on dividends that only applies to intra-group dividends paid to entities in blacklisted jurisdictions is, for instance, not sufficient in this respect. The applicable rate of the withholding tax is in principle irrelevant, albeit that a zero or near-zero rate is not a considered a withholding tax comparable to DWT.
Deemed dividend distribution
The conditional final DWT levy would be implemented by way of creating a deemed dividend distribution by the Dutch taxpayer immediately prior to the cross-border reorganization.
The taxable base in respect of which DWT may be due is in principle determined on the basis of the 'profit reserve' at the level of the Dutch taxpayer (including both its realized and unrealized profits), insofar this profit reserve exceeds the amount of paid-in capital recognized for DWT purposes. In case the Dutch taxpayer is a listed company, the taxable base is determined on the basis of the difference between the share price on the stock exchange immediately prior to the cross-border reorganization and the amount of paid-in capital per share that is considered recognized for DWT purposes.
The proposed conditional final DWT levy would in principle only apply in case of qualifying cross-border reorganizations by Dutch taxpayers that are part of a 'group' within the meaning of Section 24b of Book 2 of the Dutch Civil Code (or a similar foreign arrangement) with a consolidated net turnover of EUR 750 million or more.
The Proposal indicates that in order to avoid any adverse consequences as a result of the announcement of the Proposal, the conditional final DWT levy should have retroactive effect to 10 July 2020 12:00 noon CET (i.e. to the moment the Proposal has been submitted to Dutch parliament).
Payment of DWT due
A Dutch taxpayer that would be subject to the conditional final DWT levy is in principle able to either opt to pay the DWT due at once or to file a request for a payment extension, subject to certain conditions. In principle no interest would be due on such payment extension. If a payment extension is requested, the DWT due needs to be (partially) paid each time the (then former) Dutch taxpayer distributes dividends, until the entire amount of DWT has been paid.
Fiction in case of relocation of (corporate) tax seat abroad
The Proposal also includes an additional measure which has the aim to safeguard the DWT claim in the event of a relocation of the (corporate) tax seat abroad. The additional measure provides that a company incorporated under foreign (i.e. non-Dutch) law that has been resident in the Netherlands for at least two years and that relocates its (corporate) tax seat to a foreign country (based on place of effective management), will for purposes of the DWTA be deemed to remain tax resident in the Netherlands for a period of ten years.
The additional measure essentially provides for an extension of the incorporation fiction in the DWTA as currently already applies to companies incorporated under Dutch law, such as Dutch public liability companies (NVs) and Dutch public limited liability companies (BVs). The proposed extension of the incorporation fiction is a generic measure and – unlike the proposed final DWT levy in case of relocations of (corporate) tax seats – is not limited to transfers to 'qualifying' States.
Step-up for foreign companies relocating their (corporate) tax seat to the Netherlands
The Proposal furthermore introduces a 'step-up' for DWT purposes in case a foreign (i.e. non-Dutch) company relocates its (corporate) tax seat to the Netherlands. As a result of this step-up, the existing profit reserves of such company would in principle not be subject to DWT on subsequent distributions, subject to certain conditions.
The Proposal has been introduced as an initiative legislative proposal by (a member of) the opposition party Groenlinks and will now be subject to discussion in Dutch parliament and the Dutch senate. As the Proposal would need to be adopted by (a majority of the members of) Dutch parliament and the Dutch senate, it is unclear whether the conditional final DWT levy and/or (one of) the other measures proposed therein will actually be enacted in Dutch tax law. Finally, it is noted that the scope of the proposed measures may be subject to change due to e.g. discussions in Dutch parliament regarding the Proposal.