New group concept for the Withholding Tax Act 2021

The withholding tax is only levied on payments between affiliated entities. Dutch tax law has different definitions of affiliation. In this case, it concerns the situation in which there is a controlling interest between the recipient of the payment (the beneficiary) and the paying entity (the withholding agent). This is the case if one entity directly or indirectly influences the decision-making of the other entity in such a way that it can determine the activities of the other entity. This is typically the case when holding 50 percent or more of the statutory voting rights. Companies can also be affiliated through a joint shareholder, or through a so-called cooperating group. In order to qualify as a cooperating group, there must be a coordinated investment.

The cooperating group provision is also included in the corporate income tax law and is particularly important in the context of the interest deduction limitation of Section 10a CITA 1969. The definition of the term cooperating group is currently the same for corporate income tax purposes and the Withholding Tax Act 2001.  

In practice, it has become apparent that the application of the cooperative group provision in the Withholding Tax Act 2021 can result into unintended consequences. The explanatory memorandum to the bill mentions as an example the participation of three pension funds in a hybrid entity (non-transparent under Dutch law and transparent under foreign law), where none of the parties is established in a low-tax jurisdiction. In the example, the pension funds form a cooperating group. A Dutch participation of the hybrid entity pays interest, royalties or dividends to this hybrid entity on which withholding tax is in principle due in connection with the hybrid nature of the recipient. This is different if the rebuttal rule can be successfully invoked. Because there is a cooperating group, all pension funds involved must jointly and separately comply with the rebuttal rule, which requires, among other things, that the three pension funds are seen as entitled to the benefits according to their own tax regulations. If one of the pension funds is established in the Netherlands, the rebuttal rule is by definition not met because the hybrid entity is non-transparent according to Dutch standards and the benefits are therefore not attributed to the pension fund established in the Netherlands. In that case, withholding tax is still due, even if there is no avoidance motive.