A legislative proposal that introduces Dutch dividend exit withholding tax submitted to House of Representatives.
On 10 July 2020, an opposition member of the Dutch Parliament submitted a legislative proposal to introduce a dividend exit withholding tax in case of certain cross border reorganisations. The proposed exit tax would only apply to Dutch taxpayers that are part of a consolidated group with a net-turnover of at least EUR 750 million. Since the proposal is submitted by an opposition member it is unclear whether there will be a majority in the Parliament to approve the proposed legislation.
Currently, from a Dutch perspective, a cross-border merger, cross-border division, exchange of shares and a corporate migration of tax residence are not considered taxable events for withholding tax purposes.
The proposed dividend exit withholding tax would be levied in the form of a deemed dividend distribution in the case of a cross-border merger, cross-border division, exchange of shares and a corporate migration of tax residence to a so-called qualifying state. A qualifying state is defined as a state that:
(i) does not levy a dividend withholding tax comparable with the Dutch dividend withholding tax; or
(ii) provides a step-up to fair market value for dividend withholding tax purposes.
The exit withholding tax would only be levied if the Dutch taxpayer is part of a consolidated group with a net-turnover of at least EUR 750 million in the previous fiscal year. Concerning the definition of “group”, the proposed legislation refers to the Dutch Civil Code which defines a group as an economic unity in which legal entities are organisational associated.
If the exit withholding tax would apply, it would be levied on the (latent) profit reserves at the level of the Dutch taxpayer. The amount of the (latent) profit reserves exceeding the paid-up capital for dividend withholding tax purposes, would then be subject to 15% exit withholding tax. The proposed legislation provides for a deferral of the exit tax payments until the (latent) profit reserves are actually distributed.
The proposed legislation will not apply in case the Dutch dividend withholding tax exemption applies or in case dividend payments are exempt/relieved from withholding tax under an applicable tax treaty [See our newsletter from October 2019].
Considering the above, the scope of the proposed legislation seems to be limited as it will only have an impact on reorganisations of multinationals (i.e. groups with a net-turnover of at least EUR 750 million) to a qualifying state. Moreover, the proposed legislation should be considered an emergency measure to impose a Dutch tax claim on the contemplated migration of Unilever and Shell from the Netherlands to the UK. Therefore, the proposed legislation has retroactive effect as of 10 July 2020.
Finally, the proposed legislation introduces a “fiction” for dividend withholding tax purposes. As a result of the fiction, an entity incorporated under foreign law that was a Dutch tax resident for at least two years remains a Dutch tax resident for 10 years after it migrated from the Netherlands (i.e. migrated its place of effective management out of the Netherlands).
We will share further updates as soon as the proposal has been discussed and assessed in the Parliament. Should you have any questions or require more information in the meantime, please do not hesitate to contact us.
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