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.
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.
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.
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.
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