Cabinet advises against proposed dividend exit tax

This item was last updated on 19 July 2022.

Parliamentary history so far

In 2020, the Dutch leftwing political party ‘GroenLinks’ published a bill to counter the loss of the Dutch dividend withholding tax claim, which may occur when companies/head offices are relocated from the Netherlands to certain other jurisdictions. On 15 July 2022, the cabinet expressed its appreciation of the bill in a letter: the cabinet advised the House of Representatives not to adopt the bill. 

On 18 September 2020, the bill was amended by means of a Letter of Amendment (“Nota van Wijziging”). These amendments and some announced amendments are incorporated in the summary below. In addition, another set of amendments and additions that have been announced by the initiator of this legislation, have been incorporated, among other things, amendments and additions in response to the recommendations of the Council of State (“Raad van State”), published on 9 October 2020.

On 29 October 2021, a Second Memorandum of Amendment was submitted by which the initiator removed the retroactive effect to 18 September 2020, 12:00 a.m. from the bill. The bill no longer has retroactive effect and will enter into force in the usual manner, namely on the day following the day of publication in the Bulletin of Acts, Orders and Decrees (“Staatsblad”). The reason for this is that the bill was submitted more than a year ago and there is no view yet on its further consideration and the possible date of entry into force. The initiator does not find it appropriate to leave companies in uncertainty for a longer period of time with regard to the retroactive effect of the bill.

However, on 15 November 2021, GroenLinks submitted a Third Memorandum of Amendment, with which the bill was given retroactive effect to Monday, 15 November 2021, 3:00 p.m. With the submission of the Fourth Memorandum of Amendment, the Third Memorandum of Amendment has lapsed.

On 8 December 2021, the successor of the initiator submitted a Fourth Memorandum of Amendment. This Memorandum contains substantive amendments on four points compared to the original bill and the Memorandum of Amendment of September 18, 2020. These amendments have been incorporated in our article. In addition, it adjusts the retroactive effect of the bill to Wednesday, 8 December 2021, 9:00 a.m. 

In a letter to the House of Representatives dated 15 July 2022, the government gave its response to the bill. At the end of December 2020, the House of Representatives had asked for this cabinet appreciation.

Purpose of the Bill

By proposing this bill, GroenLinks aims to discourage companies that are considering relocating their headquarters. The relocation to e.g. the United Kingdom, where no dividend withholding tax is levied, is specifically mentioned.

Taxable base

According to the proposed bill, if one of these situations occurs, the company must declare dividend withholding tax. The basis on which the withholding tax is levied, is the so-called "pure profit" of a company. The “pure profit” includes not only the profit reserves of a company but also the latent profit reserves. The amount of the (recognized) paid-up capital may be deducted.

In principle, dividend withholding tax is calculated on the amount of a company's “net profit”. However, the withholding tax exemptions which apply in relation to the participation exemption, may be taken into account. The obligation to a final settlement therefore relates in particular to the dividend withholding tax claim that rests on the profit reserves to which the portfolio shareholders of a listed company are entitled. 

Exception: the proposed exit tax is "conditional"

A condition for the tax proposed, is that the dividend withholding tax claim is due as a result of one of the four cases described above. 

If the Dutch dividend withholding tax claim is replaced with a comparable foreign tax claim, the proposed Dutch tax will not be levied. The proposed bill therefore stipulates that in all four cases described above, a “qualifying foreign jurisdiction” must be involved. 

Originally, the bill only defined the concept of “qualifying foreign jurisdiction” as a country that does not levy a withholding tax on dividends comparable to the Dutch dividend withholding tax, or a country that designates the (deferred) profit reserves as paid-up capital (i.e. provides for a “step-up” upon entry).

The Fourth Memorandum of Amendment also sets the following two conditions:

1. The conditional final settlement in the dividend tax is only invoked when a company leaves the Netherlands for a country that is not an EU Member State or an EEA country that does not levy a dividend tax itself, or does not provide a step-up upon entry;
   
2. The conditional final settlement in the dividend tax is only levied on portfolio investors who are residents of a country that is not an EU Member State or an EEA country, and with which the Netherlands has not concluded atax treaty. 
   

Step-up in basis upon immigration 

The bill not only introduces a final settlement for relocation from the Netherlands, but conversely also arranges a step-up in basis when a foreign company is relocated into the Netherlands. This is an extension of the already existing step-up scheme for cases of cross-border divisions, mergers or share mergers. In this respect, the bill considers immigrations into the Netherlands and emigrations from the Netherlands in a broadly neutral manner. 

Deemed corporate residence

In addition, a deemed corporate residence clause is introduced for legal entities incorporated under foreign law, but which have been resident in the Netherlands for at least two years. These legal entities are considered to be resident in the Netherlands for ten years after their relocation from the Netherlands. This clause applies to both dividend withholding tax and corporate income tax. 

Retroactive effect

The Fourth Memorandum of Amendment proposes to grant the bill retroactive effect to Wednesday, 8 December 2021, 9:00 a.m. The Fourth Memorandum of Amendment has been submitted to the Council of State for advice, who advised against it.

Government response 15 July 2022

In its letter of 15 July 2022, the cabinet advises the House of Representatives not to adopt the bill. In doing so, the government is following the negative recommendations of the Advisory Division of the Council of State in response to the bill, the First Amendment Memorandum and the Fourth Amendment Memorandum. The government's objections to the bill consist of the following nine points:

1. The effectiveness and efficiency of the bill are questionable;
2. The amendments proposed in the bill represent a major systemic change to the Dividend Withholding Tax Act of 1965 Act, while the levy is limited to a very small group of shareholders;
3. The exercise of the company's right of recourse against the shareholders is too complicated;
4. There is a real chance that a judge will consider the bill to be contrary to Dutch Double Tax Treaties and the good faith that the Netherlands must observe in its interpretation and application;
5. The proposed tax is contrary to the free movement of capital;
6. The proposed franchise of €50 million, since it does not appear to be objectively justified, may lead to a selective advantage and therefore to a risk of state aid to companies falling below that threshold;
7. The bill is very difficult to implement;
8. The retroactive effect of the measures included in the bill does not seem justified and the many changes in the moment the law enters into force result into (legal) uncertainty for entities and their (potential) shareholders;
9. The levy has a negative impact on investments in the Netherlands.

Finally

Please note that the bill will become law provided that both the House of Parliament and the Senate agree to it. During the parliamentary process, adjustments to the bill may be made.