On Budget Day 2016, the State Secretary for Finance sent Parliament an extensive letter containing a proposal to end the difference in the treatment of co-operatives and share capital companies, such as NVs and BVs, in the Dividend Tax Act 1965 and to widen the scope of an important dividend tax exemption. Several members of Parliament have asked the State Secretary questions on his Budget Day letter. On 16 December the Secretary answered those questions. The answers shed a light on the bill with proposed changes to the Dividend Tax Act 1965 that the Government intends to submit next year.
Current situation
At present, share capital companies are obliged to withhold dividend tax, the rate is 15 per cent - when they distribute profits to shareholders. Co-operatives, however, are normally not obliged to withhold dividend tax when they distribute profits to their members. For that reason, foreign investors have increasingly used co-operatives instead of share capital companies as international holding companies in the Netherlands.
Distributions of profits by a Dutch company are exempt from dividend tax in the case that the shareholder is a company resident in the European Union (EU) or the European Economic Area (EEA), provided that the relevant shareholding would qualify for the so-called participation exemption if the shareholder were resident in the Netherlands. The participation exemption is an exemption in the Corporate Tax Act 1969 of dividends and gains deriving from a qualifying participation.
Proposal
Pursuant to the Budget Day letter, the Government is going to propose that co-operatives that act as a holding company - hereafter referred to as holding co-ops - are obliged to withhold dividend tax from distributions of profits. The Government is also going to propose to extend the aforementioned dividend tax exemption so that not only corporate shareholders resident in the EU or the EEA are entitled to it, but also corporate shareholders resident in countries that have concluded a treaty with the Netherlands for the avoidance of double taxation.
Clarifications in letter 16 December
The obligation on co-operatives to withhold dividend tax is going to be aimed at holding co-ops. The State Secretary intends to define a holding co-op as a co-op of which the actual activities mainly, i.e. for at least 70 per cent, consist of holding participations and or the financing of related entities and persons. In the Budget Day letter, the State Secretary included portfolio investment in the activities of holding co-ops. The 16 December letter does not offer guidance on how one can determine to which degree activities consist of holding and financing activities. Based on another circular issued by the State Secretary, however, we expect that the kinds of assets and liabilities in the balance sheet, the turnover, the activities giving rise to the profits and the time spent by employees of the co-operative are going to be the principal criteria.
The obligation on holding co-ops to withhold dividend tax will be limited to distributions of profits on designated memberships. A designated membership will be a membership which entitles the member to at least 5 per cent of the annual profit and or 5 per cent of the proceeds from the winding of the holding co-op. The memberships of a group of members will be treated as a single membership in the event that those members co-operate with each other in a certain way.
The State Secretary expects that the changes to the Dividend Tax Act 1965 are going to affect around 2000 holding co-ops. These holding co-ops may, however, qualify for the extended dividend tax exemption, so those changes will not have a negative impact on all holding co-ops.
At present, the Dividend Tax Act 1965 contains an anti-abuse rule which only applies to co-operatives. Co-operatives falling within the scope of this rule are currently obliged to withhold dividend tax when they distribute profits. The State Secretary thinks that most of the holding co-ops are not affected by the current anti-abuse rule. This is important, because while the anti-abuse rule regarding co-operatives is going to be abolished, the extended dividend tax exemption will become subject to a similar anti-abuse rule. If the State Secretary is right to think that most of the holding co-ops are not affected by the current anti-abuse rule, we can expect that most of the holding co-ops will qualify for the extended dividend tax exemption.
In his Budget Day letter the State Secretary has not stated how the anti-abuse rule to which the extended dividend tax exemption will be subject is going to look like. A clue, however, to how the rule is going to work is the Secretary's statement that the exemption is going to apply to dividends in business structures. In the 16th December letter the State Secretary clarifies that a business structure consists of a chain of companies which conduct business activities. In his Budget Day letter the State Secretary has merely suggested that the anti-abuse rule may be modelled on the general anti-abuse rule in the EC Parent Subsidiary Directive. The current anti-abuse rule in the Dividend Tax Act 1965, of which the scope is limited to co-operatives, has also been modelled on the general anti-abuse rule in the EC Parent Subsidiary Directive, so we expect that the anti-abuse rule linked with the extended withholding tax exemption will mirror the existing anti-abuse rule regarding co-operatives.
Conclusion
The impending changes to the Dividend Tax Act 1965 mean that holding co-ops will cease to be more attractive than holding companies with a capital divided into shares. After the submission of the bill with changes to the Dividend Tax Act 1969 to Parliament, existing holding co-ops will have to verify whether they can reasonably expect that they will qualify for the extended dividend tax exemption. If that is not the case, the structure of the group to which they belong may have to be reorganized. The State Secretary intends to publish a draft bill on the internet in the first half of 2017, on which interested parties can submit their comments. The changes to the Dividend Tax Act 1969 are supposed to enter into force on 1 January 2018.
This blog is written by Derk Prinsen. If you have any questions about this subject, please contact Eric Vermeulen.
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On Budget Day 2016, the State Secretary for Finance sent Parliament an extensive letter containing a proposal to end the difference in the treatment of co-operatives and share capital companies, such as NVs and BVs, in the Dividend Tax Act 1965 and to widen the scope of an important dividend tax exemption. Several members of Parliament have asked the State Secretary questions on his Budget Day letter. On 16 December the Secretary answered those questions. The answers shed a light on the bill with proposed changes to the Dividend Tax Act 1965 that the Government intends to submit next year.
Current situation
At present, share capital companies are obliged to withhold dividend tax, the rate is 15 per cent - when they distribute profits to shareholders. Co-operatives, however, are normally not obliged to withhold dividend tax when they distribute profits to their members. For that reason, foreign investors have increasingly used co-operatives instead of share capital companies as international holding companies in the Netherlands.
Distributions of profits by a Dutch company are exempt from dividend tax in the case that the shareholder is a company resident in the European Union (EU) or the European Economic Area (EEA), provided that the relevant shareholding would qualify for the so-called participation exemption if the shareholder were resident in the Netherlands. The participation exemption is an exemption in the Corporate Tax Act 1969 of dividends and gains deriving from a qualifying participation.
Proposal
Pursuant to the Budget Day letter, the Government is going to propose that co-operatives that act as a holding company - hereafter referred to as holding co-ops - are obliged to withhold dividend tax from distributions of profits. The Government is also going to propose to extend the aforementioned dividend tax exemption so that not only corporate shareholders resident in the EU or the EEA are entitled to it, but also corporate shareholders resident in countries that have concluded a treaty with the Netherlands for the avoidance of double taxation.
Clarifications in letter 16 December
The obligation on co-operatives to withhold dividend tax is going to be aimed at holding co-ops. The State Secretary intends to define a holding co-op as a co-op of which the actual activities mainly, i.e. for at least 70 per cent, consist of holding participations and or the financing of related entities and persons. In the Budget Day letter, the State Secretary included portfolio investment in the activities of holding co-ops. The 16 December letter does not offer guidance on how one can determine to which degree activities consist of holding and financing activities. Based on another circular issued by the State Secretary, however, we expect that the kinds of assets and liabilities in the balance sheet, the turnover, the activities giving rise to the profits and the time spent by employees of the co-operative are going to be the principal criteria.
The obligation on holding co-ops to withhold dividend tax will be limited to distributions of profits on designated memberships. A designated membership will be a membership which entitles the member to at least 5 per cent of the annual profit and or 5 per cent of the proceeds from the winding of the holding co-op. The memberships of a group of members will be treated as a single membership in the event that those members co-operate with each other in a certain way.
The State Secretary expects that the changes to the Dividend Tax Act 1965 are going to affect around 2000 holding co-ops. These holding co-ops may, however, qualify for the extended dividend tax exemption, so those changes will not have a negative impact on all holding co-ops.
At present, the Dividend Tax Act 1965 contains an anti-abuse rule which only applies to co-operatives. Co-operatives falling within the scope of this rule are currently obliged to withhold dividend tax when they distribute profits. The State Secretary thinks that most of the holding co-ops are not affected by the current anti-abuse rule. This is important, because while the anti-abuse rule regarding co-operatives is going to be abolished, the extended dividend tax exemption will become subject to a similar anti-abuse rule. If the State Secretary is right to think that most of the holding co-ops are not affected by the current anti-abuse rule, we can expect that most of the holding co-ops will qualify for the extended dividend tax exemption.
In his Budget Day letter the State Secretary has not stated how the anti-abuse rule to which the extended dividend tax exemption will be subject is going to look like. A clue, however, to how the rule is going to work is the Secretary's statement that the exemption is going to apply to dividends in business structures. In the 16th December letter the State Secretary clarifies that a business structure consists of a chain of companies which conduct business activities. In his Budget Day letter the State Secretary has merely suggested that the anti-abuse rule may be modelled on the general anti-abuse rule in the EC Parent Subsidiary Directive. The current anti-abuse rule in the Dividend Tax Act 1965, of which the scope is limited to co-operatives, has also been modelled on the general anti-abuse rule in the EC Parent Subsidiary Directive, so we expect that the anti-abuse rule linked with the extended withholding tax exemption will mirror the existing anti-abuse rule regarding co-operatives.
Conclusion
The impending changes to the Dividend Tax Act 1965 mean that holding co-ops will cease to be more attractive than holding companies with a capital divided into shares. After the submission of the bill with changes to the Dividend Tax Act 1969 to Parliament, existing holding co-ops will have to verify whether they can reasonably expect that they will qualify for the extended dividend tax exemption. If that is not the case, the structure of the group to which they belong may have to be reorganized. The State Secretary intends to publish a draft bill on the internet in the first half of 2017, on which interested parties can submit their comments. The changes to the Dividend Tax Act 1969 are supposed to enter into force on 1 January 2018.
This blog is written by Derk Prinsen. If you have any questions about this subject, please contact Eric Vermeulen.
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