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By Jian-Cheng Ku and Rhys Bane
The Dutch government presented a number of tax proposals in connection with the 2019 Budget. Among these proposals was a proposal focused on improving the Dutch investment climate by abolishing the Dutch dividend withholding tax.
The Dutch government announced on October 5, 2018, that it was reconsidering the proposal to abolish the Dutch dividend withholding tax. The Dutch government published a letter on October 15, 2018, stating the intent to keep the current Dutch dividend withholding tax and to take 10 alternative measures to further improve the Dutch investment climate for multinational companies (“MNC”s).
On the 2018 Budget Day, the Dutch government presented its tax proposals for 2019 and onward.
Part of these proposals was the abolishment of the Dutch dividend withholding tax in its current form in 2020. Simultaneous to the abolishment of the Dutch dividend withholding tax, a conditional withholding tax on dividends (as of 2020), interest and royalties (as of 2021) would be introduced, which would only apply to payments made directly to so-called low tax jurisdictions and in abusive situations.
For the purpose of the conditional withholding tax, low tax jurisdictions are, in general, states with a statutory corporate income tax (“CIT”) rate of less than 7 percent. States without a CIT are also qualified as low tax jurisdictions. Jurisdictions that are listed on the EU list of non-cooperative jurisdictions also qualify as low tax jurisdictions within the meaning of the conditional withholding tax.
On September 25, 2018, a list containing the jurisdictions the Netherlands considers low tax was published for public consultation.
The proposed list contains Anguilla, the Bahamas, Bahrain, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Kuwait, Palau, Qatar, Saudi Arabia, the Turks and Caicos Islands, the United Arab Emirates and Vanuatu.
As this list is still open for public consultation, it is possible that a number of jurisdictions may still be removed and/or added.
The current EU list of non-cooperative jurisdictions contains American Samoa, Guam, Namibia, Samoa, Trinidad and Tobago and the U.S. Virgin Islands.
The letter from the Dutch State Secretary of Finance dated October 15, 2018, states the intent to further improve the Dutch investment climate. The Dutch government proposes to keep the current dividend withholding tax in place and to introduce a number of alternative measures to further improve the investment climate.
One of the alternative measures is the further lowering of the Dutch CIT rates in comparison with the original tax proposals published September 18, 2018. The proposed CIT rates 2018–21 are shown here.
The CIT rate applicable to the first tax bracket (up to 200,000 euros in taxable profits) will be lowered to 15 percent (2021 rate). The CIT rate applicable to the second tax bracket (taxable profits in excess of 200,000 euros) will be lowered to 20.5 percent (2021 rate).
In an October 25, 2017 judgment, the European Court of Justice (“CJEU”) considered the Dutch fiscal unity regime to be partially in violation of EU law. As a result of this judgment, the Dutch government presented emergency reparatory legislation to bring an end to the violation of EU law. The proposed legislation would have retroactive effect up to and including the date of the judgment.
Under the alternative measure presented, there will be a limitation of the retroactive effect of the emergency reparatory legislation to January 1, 2018. This limitation in the retroactive effect helps from a compliance perspective, as otherwise the CIT returns for 2017 would (partially) have to be based on legislation that has not yet been approved by parliament.
Under the original 2018 Budget Day proposals, the term of the so-called 30 percent facility, which allows employers to pay their expatriate employees 30 percent of their salary free of wage tax, would be reduced from eight years to five years as of 2019 without any transitional measures.
The Dutch government has decided to modify this proposal to include a transitional measure for expatriate employees who would no longer be entitled to the 30 percent facility in 2019 or 2020 due to the change in legislation.
Due to the originally proposed abolishment of the Dutch dividend withholding tax, it would no longer be possible to invest in (Dutch) real estate directly with a so-called “fiscal investment institution”, a Dutch corporate vehicle that can be used as a real estate investment trust (“REIT”).
Fiscal investment institutions are subject to Dutch corporate income tax at a rate of 0 percent; as such, the abolishment of the Dutch dividend withholding tax would mean that these REITs would not be subject to any tax.
As the Dutch dividend withholding tax will remain in place, fiscal investment institutions will still be able to invest in real estate directly after 2019.
As the abolishment of the Dutch dividend withholding tax would be accompanied by the introduction of a conditional withholding tax on dividends (as of 2020), interest and royalties (as of 2021), the fact that the dividend withholding tax will no longer be abolished is reason for the Dutch government to reconsider the conditional withholding tax proposals.
The State Secretary of Finance has stated his intent to reconsider the conditional withholding tax as it would apply to dividends, but to keep the proposal in place for the conditional withholding tax as it would apply to interest and royalties paid to low tax jurisdictions or in abusive situations as of 2021.
The Dutch investment climate will be further improved than originally proposed on Budget Day 2018.
The Dutch CIT rates will be lowered even further, to a level below the EU average, the retroactive effect of the emergency reparatory legislation for the Dutch fiscal unity regime will be reduced, transitional measures for the reduction in the term of the 30 percent facility will be introduced and direct investments in real estate with Dutch REITs will remain possible from 2020.
The fact that the dividend withholding tax remains as is generally does not adversely impact MNCs. A Dutch domestic withholding exemption often applies to dividends paid to parent companies established in EU member states, a European Economic Area member state or in a jurisdiction with which the Netherlands has a tax treaty.
The further lowering of the corporate income tax rates in the Netherlands to 15 percent for the first bracket and 20.5 percent for the second bracket make it more attractive to do business in the Netherlands.
Parts of the proposed conditional withholding tax, which may have adversely impacted taxpayers, are being reconsidered.
Jian-Cheng Ku is a Tax Adviser and Attorney at Law and Rhys Bane is a Tax Adviser with DLA Piper, the Netherlands
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