Ministry of Finance: further approach to dividend stripping

This article is based on the information as it was known on 15-07-2022.

In a letter to the House of Representatives dated 15 July 2022, the government announced which additional measures it will investigate and develop to combat dividend stripping more effectively. With this announcement, the government is responding to the recent public internet consultation in which it identified six new alternative measures to combat dividend stripping.. The consultation document concerns the approach to dividend stripping situations that relate to portfolio interests. These are cases in which a shareholder holds an interest of less than 5% in a Dutch company.

The internet consultation was closed on January 26, 2022.

Government assessment

Alternatives A and B

The internet consultation shows that there are serious objections to alternatives A and B in particular. The responses indicate that the requirement that legal ownership and economic interest should be in one hand (Alternative A) can lead to undesirable consequences in situations where for bona fide reasons it has been decided to split legal and economic ownership. For example, reference is made to the situation where shares are legally held by a custodian or a manager for the account and risk of another. This applies, for example, to mutual funds, foundations, certificates of shares or usufruct. The possible market-distorting effect of this measure argues against the introduction of a holding period (alternative B). Some of the objections can perhaps be overcome by combining a measure based on alternative A or B with a rebuttal scheme, the inclusion of exceptions or an efficiency threshold, but then the scheme is likely to become very complicated to implement.

Alternatives D and E (in combination)

The government would prefer a combination of alternatives D and E. According to the government, one of the reasons that the current measures against dividend stripping are not always adequate is the heavy burden of proof that lies with the Tax Administration under the national anti-abuse legislation. In addition, in practice the manifestations of dividend stripping are complex and diverse. A solution could be found in a combination of measures based on the alternatives D (“Stricter documentation obligations”) and E (“Statutory determination of the reference date on which it is determined who is entitled to receive the dividend”). We note that the Collective Dividend Withholding Tax Decree (section 6.2) already includes a regulation about the reference date ('record date'). The cabinet is further developing measures with a view to improving the information and evidence backlog of the Tax Administration. This mainly concerns a change in the current distribution of the burden of proof. For example, measures can be taken to ensure that both domestic and foreign beneficiaries (with their tax return or request for a refund) are required to provide a number of additional statements and/or information to substantiate their position as beneficial owners of the relevant dividend income.

Alternative C

The government also announces that it will further investigate alternative C.

Alternative C proposes to limit the possibility of crediting dividend withholding tax against income tax and corporation tax. This alternative means that dividend tax withheld, can only be credited insofar as corporate income tax is due on the dividend after deduction of the related costs. These costs also include dividend replacement payments, such as, for example, a payment for borrowing the shares. This measure is very similar to the net settlement of foreign withholding taxes when applying Double Tax Treaties or the Unilateral Decree for the Avoidance of Double Taxation (Bvdb 2001).

Alternative C could possibly be combined with an efficiency threshold, which could be a threshold in which there is only a limitation of the settlement if the costs exceed a certain percentage of the gross dividend. For small investors, little would have to change. Alternative C would not be applied to pension funds, which are generally subjectively exempt from corporate income tax. In the responses to the consultation document, it was noted that alternative C violates the character of the dividend tax as a withholding tax in domestic situations.

Alternative F

Alternative F reads “Introducing a legal provision to determine whether a person (together with related parties) holds the economic interest in the shares”). It appears from the technical explanation that this is a measure on the basis of which there is only an economic interest in the shares if a person is, independent or together with an affiliated entity within the meaning of, for example, Article 10a (4) CITA 1969 or an associated individual within the meaning of Article 10a (5) CITA 1969, owns the entire economic interest. This should prevent legal relationships from being disguised across national borders. In the responses to the consultation document, this alternative was judged negatively because it does not sufficiently consider the complex and dynamic way in which trading, and ownership of stocks takes place. In addition, it was pointed out that current doctrine attaches more value to entitlement to the proceeds than to the entire economic interest in the shares. 

Like the State Secretary, we note that currently a court case is pending with the Supreme Court regarding the question of entitlement to dividend income and the concept of beneficial ownership in the context of (alleged) dividend stripping. The Advocate-General has already concluded in this case. Despite the negative assessment during the recent internet consultation, the government has not yet written off this alternative. It announced that it is investigating whether it is also possible to come up with a robust and easily enforceable measure on the basis of this alternative, taking into account the decision of the Supreme Court.