Private Member’s Bill proposes introduction of Dutch dividend withholding ‘exit tax’

July 24, 2020 | Blog

On 10 July 2020, a member of parliament submitted a private bill (proposed legislation), which would introduce a conditional ‘exit tax’ for Dutch dividend withholding tax in the event of cross-border mergers, demergers, migrations, and share-for-share exchanges. The bill aims to alter emigration plans of multinationals headquartered in the Netherlands, by levying an exit tax on any (deferred) profit reserves for groups with consolidated revenues of at least € 750 million. If the bill is adopted, it will have retroactive effect to Friday 10 July 2020, 12.00 noon.

The proposed conditional exit tax is constructed as a deemed dividend distribution, if any one of the following situations occurs:

  1. A Dutch taxpayer ceases to be a tax resident of the Netherlands and becomes a resident of a qualifying state. This can be the case when the place of effective management is transferred outside the Netherlands.
  2. The assets of a Dutch taxpayer are transferred to another entity that is a tax resident of a qualifying state, by way of a legal merger, a legal demerger, or a share-for-share exchange.
Qualifying state

A qualifying state is a state that:

  • does not levy a withholding tax that is similar to the Dutch dividend withholding tax; or
  • allows for a step-up to fair market value when a Dutch taxpayer migrates to the qualifying state in order to avoid creating a dividend withholding tax claim on existing profit reserves.

For the foreign dividend withholding tax to be comparable, the rate of the foreign dividend withholding tax does not have to be at least equal to the Dutch dividend withholding tax rate of 15%. Generally speaking, a foreign withholding tax is not deemed similar to the Dutch dividend withholding tax if it has a limited scope (for example: if it is only levied on dividend distributions to certain ‘blacklisted’ countries), or if the withholding tax rate is (close to) zero.

Threshold and payment

The exit tax will only apply if the Dutch taxpayer is part of a group whose consolidated net turnover is at least € 750 million in the year preceding the event triggering the deemed dividend distribution.

The exit tax is proposed as a deemed dividend distribution of all (deferred) profit reserves (including unrealized/hidden reserves), immediately prior to the event triggering the tax. If the exit tax applies, it is possible to request for a payment extension until a dividend is declared by the Dutch taxpayer.

Miscellaneous

The private member’s bill also introduces provisions under which the Netherlands will provide for a step-up of the paid-in capital to fair market value for Dutch dividend withholding tax purposes for foreign companies transferring their place of effective management to the Netherlands. Such step-up is already available in the event of cross-border mergers, demergers and share-for-share exchanges.

Finally, a foreign legal entity that has been a Dutch tax resident for at least two years will be deemed to remain a Dutch resident for corporate tax and dividend withholding tax purposes for a period of 10 years after transferring its place of effective management outside the Netherlands.

Legislative process

The bill proposes to cause companies such as Unilever or Shell to refrain from moving their headquarters to the UK without having paid Dutch dividend withholding tax on undistributed profit reserves. The private bill having been presented by a member of the opposition, it is unclear whether it will find majority support in the lower house of Dutch parliament. The bill is due to be discussed on 9 September, when parliament returns from summer recess. We will keep you informed of developments.

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