Dutch anti-tax avoidance measures applicable to payments of dividends

Cross-border payment of dividend: taxed or exempt?

When a Dutch entity pays out a dividend to a foreign mother company, this would, in principle, be taxed with 15% dividend tax. If the mother company is situated in a state with which the Netherlands has concluded a double tax treaty and the company holds at least 5% of the share capital, an exemption can be applied. 

The exemption cannot be applied in three cases. In this article, one of these will be discussed more deeply. The other circumstances are: (i) a situation where the mother company is an investment institution, and (ii) a situation where the mother company is established in a state with which the Netherlands does not have a treaty that includes a dividend article.

The third case is where there is an “abusive situation”. A situation is abusive if the shares are being held with the main purpose of avoiding taxes. When two criteria are fulfilled, an abusive situation is assumed and the exemption cannot be applied. 

Firstly, the following situation needs to be assessed. If the mother company did not exist, would the underlying shareholder hold the shares in the Dutch entity? If, in this case, taxes would be due, the first criterion is fulfilled. For example, Dutch personal income tax would be due if the underlying shareholder is a private individual.

Secondly, the activities of the mother company come into play. If the mother company does not run a material business and, thus, does not have any relevant substance, the second criterium is fulfilled. An example of this is a holding company. It is important that the shares are not being held passively and that the holding of the shares can be considered a part of the commercial activity of the mother company.

If both criteria are fulfilled, the exemption cannot, in principle, be applied. The taxpayer still has the right to prove that the structure has been designed this way for economic reasons.

Double tax treaty

In some cases, a double tax treaty prohibits the Netherlands from levying taxes on these cross-border dividends or it lowers the tax percentage, even if national tax legislation defines the situation as abusive. However, if a multilateral instrument (MLI) is in place, the Netherlands may withhold treaty benefits in cases of abuse. The dividend is then subject to Dutch dividend tax after all.

Other anti-abuse measurements: tax obligations mother company

Dutch tax legislation includes another complimentary, anti-avoidance measure. If the same two criteria are fulfilled, the foreign mother company becomes liable to corporate income tax in the Netherlands. With that in mind, the mother company is required to register for tax purposes and annually file a corporate income tax return, even if no dividend is distributed. This way, capital gains on the shares in the Dutch company, as well as dividends, are taxable in the Netherlands.

The current tax rates for corporate income tax are 19% for income up to EUR 200,000. Any amount above EUR 200,000 is taxed at a rate of 25.8%. The 15% dividend tax that is withheld, is deductible from the amount of tax payable.

Structuring an international business with a Dutch entity

Keeping in mind the measures and consequences mentioned above, structuring an international group with a Dutch entity deserves attention. To ensure the foreign mother company has enough substance, it is recommended not to place the Dutch entity under a holding company. Rather, one should consider placing the Dutch entity under an entity conducting an active business that is in line with the activities of the Dutch entity.

Conclusion

When a Dutch entity distributes dividends to a mother company situated abroad, a factual analysis is needed to determine if the withholding exemption can be applied or if taxes are due. If the exemption can be applied, the Dutch tax authorities must be formally notified within one month after the decision for dividend distribution is made. If an abusive situation is assumed, a dividend tax return must be filed within one month. Separately, the mother company must file a corporate income tax return, regardless of whether a dividend distribution takes place.

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Leonie de Vos works as an international tax specialist at Schipper Accountants. She completed a master’s degree in international and European tax law and is thus specialised in international tax matters as well as social security. She has experience advising companies, as well as individuals.