The Netherlands may levy tax on dividend from substantial interest
16/01/20
The judgment of the Dutch Supreme Court of 10 January 2020 relates to the question whether a dividend payment by a company established in the Netherlands to a foreign corporate shareholder, should be regarded taxable income for Dutch corporate income tax purposes (the so-called “substantial interest”). The foreign shareholder, which was interposed, was ultimately held by an individual. This question was answered in the affirmative and therefore the dividend payment could indeed be subject to Dutch corporate income tax.
What does this mean for you?
The judgment is important for foreign shareholders who hold an interest in a Dutch company via an intermediate holding company. When the intermediate holding company receives a dividend or a result from the sale of shares, the question becomes relevant whether a so-called "substantial interest" exists.
Since the "substantial interest" scheme only applies as from 1 January 2018 if Dutch personal income tax is avoided, from that date the scheme currently applies if the ultimate shareholder is an individual. Before 2018, the scheme applied if personal income tax as well as dividend withholding tax was avoided, so the scheme was applicable to both individual and corporate shareholders.
The judgement
The judgment concerned the payment of a dividend of EUR 24 million by a company established in the Netherlands, originally a holding company of a Dutch insurance firm ("Holding"). The Holding paid this dividend to its parent company, a company incorporated under Dutch law but effectually managed in Luxembourg ("X BV", the party concerned in the proceedings). The ultimate shareholder of the Holding is Mr Y, an individual. Y held the shares in the Holding directly since 1978, but transferred these shares to X BV in 1985. Mr Y has been living in Switzerland since 2009. In that year, the place of effective management of X BV was transferred to Luxembourg. After the Holding sold the shares that it held in two subsidiaries to a German insurance company in 2011, the sales proceeds were paid by the Holding as a dividend to X BV in 2012.
In its judgment of 10 January 2020, the Dutch Supreme Court decided, in line with the Dutch Court of Appeal and the Advocate-General, that indeed a substantial interest is present in this case, and thus the dividend payment should be subject to Dutch corporate income tax. The reason is tax avoidance; this has been tested on the basis of “ignoring” the Holding in the structure: a comparison of the tax consequences of the situation in which the Holding is, and in which the Holding is not interposed between X BV and Holding’s subsidiaries. In addition, according to the Dutch Supreme Court, this is a wholly artificial arrangement. Since the Holding was a cash company at the time of the dividend payment, the interest in its shares could not be attributed to an enterprise of stakeholder X BV. Another important part of the judgmentis, that the Dutch Supreme Court confirms that the motive for tax avoidance must be tested when an advantage arises from a substantial interest. This must therefore be tested continuously; the initial purpose of the structure is therefore irrelevant.
Finally, the Dutch Supreme Court ruled that the application of the anti-abuse clause of the substantial interest regime is in line with the EU fundamental freedoms (in particular the freedom of establishment) and the EU-Parent-Subsidiary Directive. More specifically, the Dutch Supreme Court ruled that, although the rule results in a restriction on the freedom of establishment, it can be justified by the need to combat tax abuse.
Referring to case law of the ECJ on the division of the burden of proof in assessing tax abuse (such as the Eqiom, Deister Holding AG and Juhler Holding A/S cases), the Dutch Supreme Court ruled that the anti-abuse provision of the substantial interest scheme is in line with EU law. The reason for this is that the tax administration must first plausibly substantiate that the subjective condition of tax abuse has been met; such a starting point for the burden of proof distribution is in line with EU law. In addition, the Dutch Supreme Court ruled that there is an indication of a wholly artificial arrangement if an EU company without real economic substance is placed between shareholders residing in a third country and a Dutch company, with the aim of escaping Dutch personal income tax and dividend withholding tax on dividend payments by that Dutch company.
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