Dividend stripping addressed with new rules

19/09/23

The recent news has brought dividend stripping into the spotlight. Sometimes, this involves fraud where dividend tax is claimed back or offset twice, which is already illegal. In other cases, it's about tax planning, where dividend tax is reclaimed or offset by a party that doesn't have an economic interest in the dividend itself. The latter is now considered undesirable and is being addressed more effectively with the proposed measures. It's worth noting that international research shows that this issue is prevalent in many countries. The current legislative proposal follows a consultation round that took place at the end of 2021 and the beginning of 2022.

This article was last updated on 25 October 2023.

What does this mean for your organisation?

If the bill is adopted by parliament, more stringent conditions will apply to the setoff, refund, or reduction of dividend tax if your organisation or business receives dividends.

Dividend stripping

Dividend stripping is a financial practice where, in specific scenarios, the legal ownership and economic interest in shares are separated. This means that a shareholder temporarily transfers the legal ownership of the shares to one or more other parties, often foreign entities, while retaining the economic interest in those shares. The primary aim of dividend stripping is to take advantage of tax benefits by leveraging the more favourable tax treatment that these other parties may receive for dividend taxes, as opposed to the original shareholder who still maintains the economic interest in the shares. This favourable treatment can encompass a range of advantages, such as higher allowances for offsetting, refunding, or reducing Dutch dividend taxes, while the original shareholder may have limited or no access to such benefits.

It's worth noting that dividend stripping can manifest in various forms, some of which are considered legitimate under tax regulations, while others are not. Legitimate situations may exist where a taxpayer can rightfully offset, refund, or reduce Dutch dividend tax without engaging in dividend stripping. Conversely, there are instances where a claim for offset, refund, or reduction of dividend tax may align with the letter of Dutch tax law or a tax treaty but goes against the underlying intention or spirit of these regulations, as perceived by the legislator. New rules are currently under consideration to address such situations more effectively.

Furthermore, real-world cases have emerged where international dividend payments were made, presenting different sets of facts to the tax authorities in different countries. This was done with the intent of claiming offset, refund, or reduction of dividend tax in both jurisdictions. While this form of dividend stripping is not permitted, proposed rules aim to empower tax inspectors to reject refund or offset requests more easily in such instances.

Current anti-abuse legislation

In 2001, Dutch legislation took a significant step in addressing dividend stripping by incorporating a general anti-abuse rule. This rule was designed to prevent situations where a reduction, setoff, or refund of dividend tax could be claimed when the recipient of the dividend (or the party seeking such benefits) was not the genuine ultimate beneficiary of that dividend. The application of the withholding exemption in dividend withholding tax act - by the person who pays out the dividend - can also be refused if the person who received the dividend is not the ultimate beneficiary of that dividend. The 2001 measure clarified the criteria for determining who could be considered the ultimate beneficiary of the dividend in such cases. The aim was to strike a balance between practicality and avoiding excessive administrative burdens.

Proposed anti-abuse legislation: The objective

However, practical experience has revealed that the existing legal framework, even with the anti-abuse legislation from 2001, does not always effectively combat dividend stripping. One challenge is that the tax inspector is burdened with the challenging task of proving that dividend stripping has occurred. Additionally, the complexity of identified cases has risen in recent years. The government deems it undesirable for individuals or entities to continue enjoying significant tax advantages through dividend stripping, which goes against the original intentions of the legislator.

To address these concerns, the draft bill titled "Other Fiscal Measures 2024" introduces a series of measures aimed at better countering dividend stripping practices.

Proposed anti-abuse legislation: The measures

Adjustment of the burden of proof

Under the proposed legislation, a significant change is being made regarding the burden of proof in cases related to dividend stripping. Currently, the responsibility to demonstrate that the recipient of the dividend is not the ultimate beneficiary falls upon the tax inspector. However, the new legislation will shift this burden. In the future, the burden of proof regarding the ultimate beneficiary status will rest with the person making a claim for a benefit, such as a reduction, setoff or refund of dividend tax, or the application of the withholding exemption in dividend withholding tax act. This individual must not only present the relevant facts but also make those facts plausible in case there is a dispute raised by the tax inspector. Moreover, they will be required to establish and make plausible that they are, indeed, the ultimate beneficiary of the dividend.

The explanatory notes accompanying the draft bill specify that the interpretation of the term 'ultimate beneficiary' will be guided by various sources, including the OECD Model Convention, the Commentary on the OECD Model Convention, and the case law of the CJEU (Court of Justice of the European Union).

It's important to note that the proposed change in the burden of proof allocation will not apply universally. An efficiency margin has been introduced to accommodate investors with small investment portfolios. Under this provision, a taxpayer or income beneficiary will only need to make it plausible that they are the ultimate beneficiary when the dividend tax collected exceeds EUR 1,000 per fiscal or calendar year. This adjustment aims to strike a balance between maintaining efficiency and ensuring fairness in the implementation of these rules.

Codification of the record date

Secondly, a measure is proposed for shares traded on a regulated market (such as a stock exchange). Currently, the Decree on Dividend Tax (in Dutch: “het Verzamelbesluit dividendbelasting”) determines that, for the question of who is entitled to the dividend, and therefore entitled to a reduction, setoff, or refund of dividend tax, the so-called "record date" is used. The record date is the date at the end of the working day when financial institutions determine the positions and establish, based on clients' shareholdings, who is entitled to the dividend. It is proposed to legally anchor this provision in the Dividend Tax Act of 1965.

The draft bill previously submitted to public consultation included more anti-abuse measures, but these measures have not been incorporated into this final draft of the bill.