All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Netherlands: Proposed Dutch conditional exit tax: EU-proof or not?

Sponsored by Sponsored_Firms_piper.png
Many issues have been raised about the current solution

Jian-Cheng Ku and Tim Mulder of DLA Piper consider the practical implications of introducing a conditional exit tax to the dividend tax act in the Netherlands.

On July 10 2020, a Dutch left-wing opposition party, submitted a legislative proposal to introduce a conditional exit tax in the Dutch Dividend Withholding Tax (DWT) Act. This conditional exit tax should apply in case of certain cross-border reorganisations.



One of the aims of this proposal is to prevent multinationals that have their corporate head office in the Netherlands, from migrating to foreign jurisdictions that have no DWT, without first paying Dutch DWT on their (latent) retained earnings. This proposal is mainly triggered by the potential migration of two of the Netherlands’ largest multinational enterprises to the UK.

Dutch dividend withholding tax as of certain cross-border reorganisations

The Netherlands has a domestic DWT rate of 15% that applies to dividend distributions from a Dutch entity to its shareholders. In the case that the shareholder is a corporate entity holding an interest of generally more than 5%, the DWT might be reduced or fully exempt under the domestic DWT exemption or one of the many tax treaties concluded by the Netherlands.



Currently, the Dutch DWT Act does not provide for an exit tax in case the entity’s Dutch tax residency ends by virtue of a cross-border reorganisation. This is for example in case the Dutch entity converts its legal form into the legal form of a foreign jurisdiction and migrates its place of effective management, or in case of a cross-border merger.



Therefore, if a Dutch entity has portfolio shareholders, for example because the entity is listed, then the Netherlands will not be able to levy DWT on the entity’s (latent) retained earnings to these shareholders, if the entity migrates to a foreign jurisdiction.

Legislative proposal

The legislative proposal introduces a conditional exit tax in the form of a deemed dividend distribution that is triggered in case of certain cross-border reorganisations. The reorganisations covered by this proposal include a cross-border legal merger or demerger, share for share exchange or transfer of the place of effective management. Only to the extent that the Dutch entity migrates through such cross-border reorganisation and the entity migrates to a jurisdiction that has a DWT rate of nil or almost nil, or gives a step up in basis for DWT purposes, a deemed dividend distribution is triggered. Initially, the proposal would only apply to Dutch entities that are part of a multinational group that has a net turnover of €750 million ($872.2 million). However, following the public debate and potential EU tax aspects, this threshold is eliminated.



For DWT purposes, the Dutch entity is deemed to distribute its (latent) retained earnings to its shareholder(s), prior the migration. This is to the extent that the shareholder(s) qualify for the domestic DWT or treaty exemption, the migration has effectively no DWT considerations. This is different in case a shareholder does not qualify for an exemption. In such situation, the Dutch entity may file a request for deferral of the payment of the DWT. If granted, the deferral will be terminated when the dividends are actually paid.

EU aspects

One of the key questions with respect to this legislative proposal is whether it is in line with the EU principles, including free movement of capital and freedom of establishment, and EU Directives. Insofar the Dutch entity migrates to another EU member state and triggers the conditional exit tax, there might be an infringement of EU principles.



An exit tax in itself is an infringement on the freedom of establishment, however the Court of the European Union (CJEU) has ruled in the National Grid Indus case, that such infringement can be justified. Such justification can be the allocation of taxation rights between EU member states. However, since the CJEU has only ruled about exit tax for corporate income tax purposes and not for DWT purposes, which has a different nature, it is unclear yet if the Dutch legislative proposal can also rely on this justification.



Furthermore, it is likely that the legislative proposal is not in line with the EU Merger Directive and EU Parent-Subsidiary Directive since a cross-border merger could result in taxation of EU shareholders.

Comments

Although the legislative proposal is big news in the Netherlands, when considered among the other political pressures to keep multinationals in the Netherlands, the proposal itself should have an impact on only a small number of companies. Multinationals having a Dutch entity which is held by a group company residing in a jurisdiction that has a tax treaty with the Netherlands, should generally qualify for the domestic DWT exemption. Therefore in such situation, the deemed dividend distribution has effectively no impact.



However, for situations that are covered by this legislative proposal, it is doubtful whether this matches with the EU principles and EU Directives. Therefore, it will be interesting to see if the legislative proposal in its current form will and can ultimately be adopted.


Jian-Cheng Ku

T: +31 20 541 9911 

E: jian-cheng.ku@dlapiper.com




Tim Mulder

T: +31 0 20 5419 276

E: tim.mulder@dlapiper.com




More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree