Update: Conditional Withholding Tax on Dividends

17/11/21

On 2 November 2021, the Dutch Upper House of Parliament (in Dutch: “Eerste Kamer”) adopted the legislative proposal on Conditional Withholding Tax on Dividends. Under IFRS, the status of the legislative proposal is considered to be “substantively enacted” as per 2 November 2021. Consequently, the tax implications of the legislative proposal should be considered for (interim) reporting periods (under IFRS) ending on or after 2 November 2021. Meanwhile, the legislative proposal has also been published in the Government Gazette on 11 November 2021, which means that the legislative proposal is also considered “enacted” per the aforementioned date under IFRS. The new Conditional Withholding Tax rule (CWHT rule) will enter into force on 1 January 2024.

Conditional Withholding Tax on Dividends

Pursuant to the new CWHT rule, a withholding tax will be levied on (i) dividend payments to low-tax jurisdictions (i.e. countries with a statutory profit tax rate lower than 9%), (ii) dividend payments to jurisdictions that are included on the EU list of non-cooperative jurisdictions and (iii) dividend payments to hybrid entities and artificial structures intended to avoid Dutch withholding tax on dividends (i.e. abuse situations).

The rate of the CWHT on dividends is linked to the highest rate of the Dutch corporate income tax (CIT) (currently being 25%). The proposed CWHT on dividend payments will be a new tax that will exist next to the regular Dividend Withholding Tax Act 1965 (rate: 15%). As a result, these taxes may apply simultaneously on the same dividend payment under certain circumstances. For these situations, the new CWHT rule provides for an anti-accumulation scheme that could be applied so that effectively a maximum rate of 25% is applied.

Unlike the regular dividend tax, a distributing entity must pay the tax withheld under the new CWHT rule no later than one month after the end of the calendar year, in accordance with the tax return. The final date for filing the return and payment of the CWHT will therefore always be January 31 of the following year (under the regular dividend tax, dividend tax must be withheld and paid within one month of the dividend being made payable).

For more detailed information on the new CWHT rule, please refer to our publication: Draft Bill introducing conditional source tax on dividend payments

Tax accounting considerations

IFRS prescribes that current and deferred taxes are measured against the tax rates and tax laws that have been “enacted” or “substantively enacted” by the end of the reporting period (IAS 12.46 and 12.47). As the status of the legislative proposal is considered to be “substantively enacted” as per 2 November 2021, the tax implications of the new CWHT rule should be considered for (interim) reporting periods ending on or after this date.

Pursuant to the new CWHT rule, dividend payments made by a Dutch entity to, inter alia, low-tax jurisdictions may be subject to withholding tax. Although the CWHT is levied at the level of the Dutch distributing entity, the actual burden of the CWHT lies at the level of the (foreign) recipient of the dividend. From a tax accounting perspective, the applicability of the CWHT could result in an increase of the effective tax rate of the (foreign) recipient.

Furthermore, an analysis should be made whether the (foreign) recipient should account for the potential CWHT claim (i.e. deferred tax liability (DTL)) on the undistributed profits of its Dutch subsidiary (i.e. outside basis difference) in its financial statements pursuant to IAS 12.39. If, for instance, the conclusion of the analysis performed is that no DTL should be recognized at the level of the recipient, then it is also relevant to note that IFRS has a disclosure requirement on the aggregate amount of unrecognized DTLs on outside basis differences (IAS 12.81 (f)).

At last, it is also relevant to monitor the recent proposed increase of the highest rate of the Dutch CIT from 25% to 25.8% as stated in the second Note of Amendment to the Tax Plan 2022 (see also our updated publication: 2022 Tax Plan: Tax accounting considerations. Upon (substantively) enactment of this proposal, the higher 25.8% rate will also be the rate of the CWHT on dividends. This will impact the potential CWHT claim and hence the DTL amount on outside basis differences.