Dividend tax repurchase facility own shares abolished
28/09/23
This article was last updated on 20 December 2023.
Under specific conditions, listed companies can repurchase shares without dividend tax. The Dutch Parliament's amendment in the Tax Plan 2024 almost entirely abolishes this, redirecting tax revenue to aid low and middle-income earners. On 19 December 2023, the Dutch Senate adopted the 2024 Tax Plan, including this change in legislation.
However, during the discussion of the bill in the Senate, the State Secretary for Finance promised prior to the votes on the motions that the caretaker government will present alternative measures in mid-May 2024 for four components of the 2024 Tax Package (stemming from amendments to the House of Representatives) which a number of factions in the Senate have difficulty with. One of these components concerns the abolition of the own share purchase facility for listed companies in dividend tax. Now that the abolition of the dividend tax repurchase facility will only come into effect in 2025 according to the now approved 2024 Tax Package, it remains to be seen whether the abolition will be adjusted or reversed in 2024. We will of course follow this closely and keep you informed.
In this article we will discuss the mechanics and background of the purchasing facility and the consequences if it is indeed abolished - as is currently planned.
What does this mean for your company?
The legislative measure concerns the repurchase facility for listed companies. This restriction will take effect on 1 January 2025. This does not mean that every repurchase of own shares will now be subject to dividend tax. Repurchase of own shares for temporary investment will still be possible without dividend withholding tax even after the implementation of this legislative amendment. The legislative amendment applies to the repurchase of own shares for amortisation by specifically entrepreneurial listed companies (see below for further explanation of the distinction between temporary investment and amortisation). The so-called repurchase facility will be abolished for these companies.
Background
The legal notion of share repurchase has a rich history in the Netherlands, encompassing its implications for dividend withholding tax as well as for the antecedent of the modern income tax system. For an extended period, there was ambiguity about whether a company's repurchase of shares would result in taxable income for the shareholder. Legally speaking, such a repurchase is essentially equivalent to a standard purchase and sale of shares between a shareholder and an unrelated third party; the only difference is that the buyer in these cases is the company itself. A distinction has been made between repurchases by the company for the purpose of temporary investment, and those intended for amortisation.
Repurchase for temporary investment
Under current law, a repurchase of shares for the purpose of temporary investment by a company does not yield taxable income for the shareholder. Such a scenario arises, for instance, when a company buys back its own shares to fulfil delivery obligations related to employee stock options, or to provide temporary support to its stock price. The crucial factor is that the company intends to resell the repurchased shares within a relatively short time frame.
Repurchase for amortisation
In the case of a repurchase for amortisation, the company's intent is to decrease the size of its issued and paid-up capital for an extended period or even permanently. Such a repurchase serves as an alternative to formally cancelling shares or reducing capital. According to case law from the Dutch Supreme Court, the difference between the repurchase price and the average paid-up capital on the shares was treated as taxable proceeds subject to dividend withholding tax (and until 2001, also applicable to personal income tax).
These two legal constructs are currently governed by Article 3, paragraph 1, subparagraph a of the Dividend Withholding Tax Act 1965. At present, repurchases for temporary investment do not result in taxable proceeds. For repurchases intended for amortisation, however, the difference between the purchase price and the average paid-up capital on the shares is recognized as taxable proceeds for the purposes of dividend withholding tax. However, there is currently still a special provision for entrepreneurial listed companies, allowing them, under certain conditions and within specified limits, to repurchase their own shares without incurring dividend withholding tax. This special provision (the repurchase facility) will be abolished as of 1 January 2025.
Why a facility for entrepreneurial listed companies?
As described above, the purchase of own shares for amortisation generally results in a taxable revenue subject to dividend withholding tax. This naturally raises the question of why a facility would be necessary if the intention is actually to levy dividend tax on such a purchase.
The background to this is practical in nature. In the case of regular dividends, the distributing company withholds dividend withholding tax. First, the gross dividend is determined. Then, the amount of dividend tax to be withheld is calculated. The shareholder then receives the net dividend, and the Tax Authority receives the withheld dividend tax. It is therefore explicitly intended that the dividend tax is not borne by the company, but by the shareholder receiving the dividend. The dividend note, which is issued to the shareholder in connection with the dividend payment (often through a bank), states the gross dividend and the amount of dividend tax withheld. Depending on the shareholder's situation, they can take the dividend tax into account as a prepayment if they file an income tax return (or corporate income tax return), or offset it against income or profit tax payable elsewhere (if they are a foreign shareholder).
The same principle applies when the distribution occurs through a repurchase of own shares. However, a practical issue arises with listed companies that engage in such repurchases. When a listed company buys back its own shares on the stock market, it doesn't know who the selling shareholders are. Likewise, a shareholder selling shares on the stock exchange is not aware that the buyer is the listed company itself. Due to this lack of information, it becomes practically impossible to accurately administer the withholding of dividend tax for the respective shareholders.
In the absence of a special provision, the company would be required to calculate and remit dividend tax to the Tax Authorities, as stipulated in Article 3, paragraph 1, section a of the Dividend Tax Act 1965. Since this tax cannot be passed on to, or invoiced, the shareholder from whom the shares are repurchased, it is considered an additional distribution benefiting the shareholders. Consequently, the uncollectible dividend tax becomes taxable income anew. This means that any dividend tax levied on a listed company's repurchase of its own shares needs to be grossed up within the legal framework.
The repurchase facility
Without going into all the technical details, there is (at least until 1 January 2025) a repurchase facility specifically for entrepreneurial listed companies. Companies that are primarily engaged in investing are excluded from the facility. This enables entrepreneurial listed companies to repurchase shares within certain limits without being confronted with non-recoverable and grossed-up dividend tax.
The amount for which these listed companies can repurchase their own shares is related to the average cash dividend of the previous 5 years. Furthermore, there are a number of conditions that must be met to prevent regular cash dividends from being replaced by the repurchase of own shares in order to avoid dividend withholding tax:
In the year in which the repurchase takes place, a 'normal' cash dividend must also be paid (at least equal to the average cash dividend paid in the previous five years);
And, save some exceptions, there may have been no increase in the nominal paid-up share capital in the four previous years. Companies are therefore not allowed to increase capital with the aim of creating capital (new shares) to be used in the future for this facility, that is the idea
Consequences
With the 2024 Tax Plan passed in the Senate on 19 deceber 2023, it has been affirmed - at least for now - that starting from 1 January 2025, the previously outlined repurchase facility will be eliminated. The impact on the Dutch treasury remains uncertain, a fact explicitly recognised in the explanatory section accompanying the amendment proposal.
Additionally, the presence of this facility may incentivise listed companies to maintain a stable dividend policy, giving them the flexibility to use the repurchase option as needed or desired, at least as long as the purchasing facility still exists. After the abolition of this facility, listed companies might alter their dividend policies, potentially leading to reduced regular dividend withholding tax revenues for the Dutch treasury due to behavioural changes. This could result in the measure generating less income than initially anticipated.
Lastly, there is a risk that companies might relocate to jurisdictions outside the Netherlands that offer more investor-friendly regulations.
Consequences for you as a listed company
When you decide to proceed with a repurchase of own shares with the intention of permanently reducing the size of the issued and paid-up capital (amortisation), you will have to calculate and pay dividend tax on the difference between the value of the shares and the average paid-up capital on those shares. However, until 1 January 2025, the repurchase facility is still available.
Grossing up
As outlined in the background explanation of the repurchase facility, a notable challenge emerges concerning the calculated dividend withholding tax, which cannot be transferred to the shareholders. Consequently, the burden of this dividend tax falls upon the company. Interestingly, this dividend tax, although the specific shareholders are unknown, effectively circulates back to benefit the shareholders, qualifying as a distribution. Consequently, a cycle ensues where the dividend withholding tax must be recalculated on the tax already borne by the company, leading to a continuous process of grossing up. Notably, there is no provision in the law permitting the omission of this grossing up procedure.
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