Currently, Dutch BVs/NVs are as a general rule subject to Dutch withholding tax (“DWT”), whereas Dutch cooperatives (“Coops”) are not.
On May 16, 2017, the Dutch Ministry of Finance published a legislative proposal which aims to abolish the different treatment of Coops and Dutch BVs/NVs for DWT purposes. This is achieved on the one hand by introducing a full DWT exemption for qualifying BVs and NVs, and on the other hand by introducing a DWT obligation for certain ‘Holding Coops’.
In order to benefit from a full DWT exemption new anti-abuse rules will be introduced, thereby implementing the Principle Purpose Test (BEPS 6). It is envisaged that the proposed legislation will become effective as per 1 January 2018.
Impact of the proposed DWT legislation if you have a Holding Coop in your structure
The proposed legislation will have impact on Coops that in the year preceding the profit distribution qualify as ‘Holding Coops’. A Coop will qualify as a ‘Holding Coop’ if its activities usually for at least 70% consist of holding participations or of financing related entities and individuals.
The impact of the proposed legislation relating to Holding Coops will in broad terms be as follows:
- it will – only – affect ‘qualifying members’ holding a ‘substantial interest’, i.e. a right giving an entitlement (alone or together with related persons or a collaborating group) to at least 5% of the annual profits or liquidation proceeds of the Coop;
- distributions to a ‘qualifying member’ will remain fully exempt from DWT, provided that for tax (treaty) purposes, such member is located in the EU or in a country with which the Netherlands has concluded a tax treaty including a dividend article (a ‘Dividend DTT’) and (i) the membership rights are not held with the main purpose, or one of the main purposes, to avoid taxation due by another individual or entity (‘subjective test’), or (ii) the holding of the membership rights is not part of an (series of) artificial arrangement(s) or (composite) transaction(s), which will be the case if there are valid business reasons reflecting economic reality (‘objective test’).
- distributions to a ‘qualifying member’ that is not located in the EU nor in a Dividend DTT jurisdiction (e.g. the BVI, Cayman Islands, Bermuda, etc.) will be subject to 15% DWT, regardless whether the Coop is part of an active business structure that is (currently) not abusive.
Objective test ‘valid business reasons’
Valid business reasons are present if the shareholder/member:
- conducts a material business enterprise and the shareholding is part of the business enterprise’s assets;
- functions as an intermediary holding company in relation to the relevant Dutch Coop/BV/NV and has ‘relevant’ substance. Relevant substance will be present if in addition to the current minimum substance requirements, the holding company complies with the following additional requirements:
- it incurs salary costs of at least € 100,000 in relation to its intermediary holding functions, and
- it has (for at least 24 months) own office space at its disposal which is used to carry out its holding activities.
Impact of the proposed DWT legislation if you have a BV/NV in your structure
Dividend distributions to a shareholder of a BV/NV will become fully exempt from DWT, provided that the following conditions are met:
- the shareholder (alone or together with related persons or a collaborating group) holds a ‘substantial interest’ in a BV/NV;
- for tax (treaty) purposes, it is located in the EU or in a Dividend DTT jurisdiction; and
- the above subjective test or objective test is met.
Impact of the proposed non-resident corporate income tax rules
Currently, members and shareholders holding a substantial interest are under certain circumstances subject to non-resident corporate income tax on income and capitals gains derived from such interest. In order to avoid overlap with the new DWT rules, the non-resident taxation rules will be limited to capital gains. Also under the new non-resident corporate income tax rules, no such tax should become due if either one of the tests is met (which will be the case if there are valid business reasons). Qualifying shareholders located in a non-DTT jurisdiction (e.g. Cyprus, BVI, Panama) that cannot pass either one of the tests will be(come) subject to non-resident taxation on capital gains.
Currently, an internet consultation on the legislative proposal is open until 13 June 2017, therefore the proposed legislation is subject to changes.
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