When does relief of dividend withholding tax apply?
Dividend withholding tax is levied on the person who is entitled to the proceeds from shares in, profit-sharing certificates from, and certain capital contributions and loans to companies established in the Netherlands.
Dividend withholding tax is withheld by companies established in the Netherlands that distribute profits. The Dutch dividend withholding tax, and personal and corporate income tax provide various options for the recipient of the dividends to credit, recover or reduce the dividend withholding tax withheld, or to obtain a dividend withholding tax exemption. For the application of this relief it is required that the recipient of the dividends is the ultimate beneficiary.
Mainly foreign shareholders benefit
Practice has shown that mainly foreign shareholders are able to reduce Dutch dividend withholding tax through a set of transactions, while they would otherwise not be entitled to such relief. These cases may constitute dividend stripping.
What is dividend stripping?
Dividend stripping involves splitting the legal and economic ownership of dividends to achieve tax benefits. This works as follows:
- A (foreign) shareholder, who is not entitled to an exemption, credit, reduction or refund of dividend withholding tax, retains the economic entitlement to the proceeds of the shares, while transferring the legal ownership of the shares to another party who can claim relief.
- After the dividend has been distributed, ownership of the shares will be transferred back to the original shareholder. The received dividend will then also be transferred to the original shareholder. This construction allows shareholders who do not meet the requirements for dividend withholding tax relief to still benefit this. In this way, the dividend withholding tax can be reduced or even avoided all together.
One of the measures in this proposal is the introduction of a record date. The record date of a share is the date on which a company determines at the end of the business day which shareholders are entitled to the proceeds from those shares.
The ‘Collective Decree Dividend withholding Tax’ stipulates that the record date is used to determine the ultimate beneficiary of the dividend and is therefore entitled to a settlement, reduction or refund of the dividend withholding tax. This proposal proposes to codify this provision into Dutch law. Codifying this measure into law will improve legal certainty.
This provision will only apply to listed shares. In the case of registered shares, such as in a ‘besloten vennootschap (BV)’, the ultimate beneficiary of the dividends on a specific date can be found in the company’s administration.
Set of transactions
To determine the ultimate beneficiary, the concept of a set of transactions is of importance. In any case, a person who has provided a favor in connection with received income as part of a set of transactions shall not be regarded as the ultimate beneficiary of that income.
To prevent the splitting of interests within a group and international concealment, the concept of 'set of transactions' has been further explained. Transactions entered into by an affiliated entity or person will be allocated to the taxpayer or recipient. Whether there is a set of transactions will therefore be assessed at a group level.
Burden of proof
Under current legislation, the burden of proof to demonstrate that the recipient of the dividend is not the ultimate beneficiary lies with the inspector. This proposal shifts the burden of proof to the recipient of the dividends with the aim of improving the position of the inspector. The proposed changes mean that the person or company claiming compensation must demonstrate that he or she is the ultimate beneficiary.
The proposed new burden of proof does not apply to all situations. In order not to unnecessarily burden investors with a small investment portfolio in particular, an efficiency margin has been included in the proposal. Taxpayers or dividend recipients should only demonstrate that they are the ultimate beneficiary when an amount of more than € 1,000 in dividend withholding tax is levied per financial year or calendar year.
These proposed changes will shift the burden of proof for the ultimate beneficiary from the inspector to the recipient in the event of a claim for compensation. It is therefore important that the ultimate beneficiary can be substantiated when claiming a settlement, refund or reduction of dividend withholding tax.
Would you like to know more?
Do you have any questions about this proposal and what it means for your specific situation?