Anti-abuse provisions may affect international companies in the Netherlands
Tax directors of international operating companies and their advisors should check the Dutch dividend withholding position because the exemption is no longer certain due to anti abuse provisions. We would recommend checking in advance whether anti-abuse provisions will apply on dividend distributions. Due to the possible retroactive effect of the anti-abuse provisions, high financial risks are at stake.
As a result of international developments, Dutch tax law has been altered with respect to dividend withholding tax and corporate income tax. During 2018, a general anti-abuse provision was added to the Dutch Dividend Tax Act (Wet op de dividendbelasting) and the Dutch Corporate Income Tax Act (Wet op de vennootschapsbelasting). In case obtaining a tax benefit is one of the principal purposes of any arrangement or transaction that results in the benefit and in case granting that benefit in such circumstances will not be in accordance with the object and purpose of the relevant provisions of the law, the benefit will be denied. One must apply an anti-abuse test. This test consists of two elements. It is sufficient to satisfy one of the two elements to obtain the Dutch dividend withholding exemption. The first element obliges one to check whether Dutch dividend withholding tax is avoided because a recipient of dividends is put between a company which is not eligible for the withholding exemption and a Dutch company. The second element obliges one to check whether the receiver of the dividends has certain specified substance or activities. If a company meets those substance requirements, there is no abuse of law. The substance requirements therefore function as a safe harbour.
In his recent judgements of 26 February 2019 (the Danish cases) the European Court of Justice (CJEU) has specified further guidance on when an arrangement constitutes abuse of law. There is an indication of abuse of law when distributed interests, royalty’s or dividends are passed on wholly or partially shortly after they are received. Such an entity might be a flow through or conduit company. Another indication for abuse may be if the recipient has been interposed in a structure that otherwise wouldn’t be covered by the Interest and Royalty’s Directive or the Parent Subsidiary Directive. The CJEU emphasizes that all facts and circumstances of a specific case are important for the determination of abuse. From that perspective, it is questionable whether the Dutch substance requirements prevent the levy of Dutch dividend withholding tax in all cases.
As a result, the Dutch Secretary of Finance announced that the burden of proof on the substance requirements will change as of 1 January 2020. The substance requirements will therefore no longer function as a safe harbour.
There are also anti-abuse provisions in case of hybrid mismatches. In the past, hybrid entities, especially US Limited Partnerships and Dutch CV’s (Commanditaire Vennootschappen), have been used to avoid the levy of the dividend withholding tax and corporate income tax. Because of the altered Dutch Dividend Tax Act, such a structure might not be as favourable as it has been in the past. It could lead to potential dividend withholding claims, in some cases even retroactively.
As of 1 January 2020, with the implementation of ATAD 2, the Dutch Government announced that the Decree “Hybrid Entities under the tax treaty between the Netherlands and the US” of 2005 will be withdrawn. As a result, the participants or shareholders of a hybrid entity can no longer apply for the reduced dividend withholding tax rate to 5% or even 0% of that tax treaty and may be required to withhold 15% dividend withholding tax.