Netherlands: Proposed Dutch conditional exit tax: EU-proof or not?
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

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 across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article