Dividend tax buyback facility to be maintained

17/09/24

When repurchasing their own shares (for amortization), publicly listed companies are generally required to withhold dividend tax. Under certain conditions, Dutch law provides an exemption, known as the dividend tax buyback facility. The facility received significant attention last year. The Dutch House of Representatives abolished it via an amendment to the 2024 Tax Plan, effective in 2025. This decision faced criticism from the previous cabinet, the business community, and initially from the Dutch Senate. The current cabinet has brought the issue back to the table and proposes in the 2025 Tax Plan to maintain the facility.

What does this mean for your enterprise?

If the facility remains in place, as currently proposed in the 2025 Tax Plan, the legislation will effectively not have changed. However, we still expect discussions on this topic in the Dutch House of Representatives and/or the Senate, so there is sufficient reason to keep following updates on our website.

Background

For a long time, it was unclear whether the repurchase of own shares by a company qualified as a taxable transaction for dividend tax for shareholders. The Dutch legislator then opted for a system in which "repurchases for temporary investment" are not subject to dividend tax, while "repurchases for amortization" are.

Repurchase for Temporary Investment

The key aspect of repurchasing for investment purposes is the temporary nature of the transaction. A repurchase is considered temporary if the company intends to resell the repurchased shares within a reasonable period. Examples include repurchasing shares to meet a delivery obligation of shares for employee options or repurchasing shares to support the stock price.

Repurchase for Amortization

In the case of repurchase for amortization, a company aims to reduce the issued and paid-up capital for an extended period or even permanently. The repurchase is an alternative to canceling or reducing shares. The difference between the purchase price and the average paid-up capital per share constitutes a return subject to dividend tax.

The Buyback Facility

For publicly listed companies that are engaged in business activities (and not primarily investing), a facility allows the repurchase of their own shares (for amortization) to remain untaxed under certain conditions. Companies primarily engaged in investment activities are excluded from this facility.

Why this facility?

Dividend tax is not intended to burden the company, but rather the shareholder. The company calculates the gross dividend, pays out the net dividend to the shareholder, and provides the withheld dividend tax to the tax authorities. Depending on how a shareholder qualifies, they can offset the withheld dividend tax against any personal income tax, corporate tax, or foreign income or profit tax (in the case of a foreign shareholder).

Practical Issue

The legislator does not treat the repurchase of own shares differently, but publicly listed companies face a practical problem. A publicly listed company is not aware from whom it is purchasing shares, and the selling shareholder does not know that the publicly listed company is the buyer. The legislator considered it practically impossible to correctly withhold dividend tax in this situation. This means that the repurchasing company would have to bear the dividend tax itself and gross it up. For a more detailed explanation of grossing up, including a calculation example, we refer to our previous article.

To avoid this undesirable situation, the buyback facility for dividend tax applies. It is also available in many other countries, including Germany, France, Spain, and the United Kingdom, that provide for an exemption or facility to apply to the repurchase of shares by publicly listed companies. The buyback facility is one of the factors that contributes to the business climate. abolishing the buyback facility could negatively impact the business climate and thereby the relative competitive position of the Netherlands.

2024 Tax Plan

During the discussions on the 2024 Tax Plan, the Dutch House of Representatives (via an amendment) largely abolished the buyback facility. The funds saved from this abolition were intended to support low- and middle-income households. The previous cabinet advised against the abolition, and the Dutch Senate also expressed serious concerns. The Senate eventually agreed to the abolition after the then Dutch Secretary of State for Finance, Van Rij, promised to present alternatives before the abolition would take effect on 1 January 2025. In a letter, the former Dutch Secretary of State reiterated that “the abolition of the facility is not a good idea”.

2025 Tax Plan

Shortly after, the new coalition parties indicated in the main agreement their desire to reverse the abolition of the buyback facility. This intention is now included in the 2025 Tax Plan.

As mentioned, the buyback facility is likely to remain a subject of debate in parliament. This will also involve discussions about the estimated budgetary revenue associated with the abolition of the facility, which varies significantly. A SOMO report estimated the revenue from the abolition at EUR 2 billion, the Dutch Ministry of Finance estimated it at just over EUR 800 million, while SEO predicted a range of EUR 421 million in revenue to even a loss of EUR 369 million. The wide range of estimates is understandable, as it depends on the reactions of publicly listed companies. Changes in dividend policies or even the relocation of a company abroad could mean that the expected funds from the abolition may not be realized.

Several studies highlight widespread concerns about the state of the Dutch business climate (such as the PwC CEO Survey, our Business Climate Heatmap, the 2024 National Business Climate Survey by VNO-NCW and MKB-Nederland, recent public statements from directors of Dutch publicly listed companies, and concerns expressed by the Dutch Minister of Economic Affairs and Climate after discussions with some of those companies). The cabinet has stated in its coalition program that it intends to strengthen the business climate. Providing clarity on the future of the buyback facility could contribute to this goal.