Exit tax on dividends

Monique Pisters
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In July 2020, an opposition member of the Dutch parliament submitted a bill proposing a conditional exit tax as part of the Dutch dividend withholding tax regime in the case of certain cross-border reorganizations. A revised proposal has been submitted to parliament on October 9, 2020. In this tax alert we will provide you with an overview of this proposal and the (negative) advice published by the Council of State on October 9, 2020. We would like to emphasize there is a significant chance that no majority on the proposal will be reached taking into account the negative advice and the fact that the proposal is from a member of the opposition.

The proposed exit taxation

Following the announcement of Unilever to move its head office from the Netherlands to the United Kingdom an ‘exit tax’ was proposed on July 10, 2020 as a way to secure the Dutch deferred dividend tax claim. This legislative proposal namely aims to impose an exit tax for dividend withholding tax in case Dutch resident companies leave the Netherlands to a so called “qualifying state”. A “qualifying State” in this respect is regarded:

  • a state that does not levy a withholding tax on dividends that is similar to the Dutch dividend withholding tax; or
  • a state that provides for a step up of the deferred profit reserves (regarded as paid-in capital upon arrival).

The proposal targets companies that exit the Netherlands to qualifying states in case they perform one of the following transactions:

  • Cross border legal merger or share transfer to a qualifying State.
  • Cross border demerger to a qualifying State.
  • Transfer of the tax residency to a qualifying state.

The exit taxation is based on the assumption that the company, by fiction, distributed its undistributed reserves to its shareholder prior to the cross border reorganization. A deferral of payment might be granted upon request.

Amended proposal

In the initial proposal, the exit tax would only apply to Dutch resident companies that are part of a group whose consolidated net revenues are at least EUR 750 million. In order to comply with EU law the EUR 750 million condition is abolished in the amended legislative proposal of September 18, 2020. As such the exit tax would apply to all companies irrespectively of their (group) turnover. 

Finally, the amended legislative proposal includes a retro-active effect to September 18, 2020 (instead of the original retro-active effect to July 10, 2020).

Advice of the Council of State

On September 2, 2020 the Dutch Council of State issued its advice on the initial and revised legislative proposal. This advice has been made public on October 9, 2020.
According to the Council of State the legislative proposal would result in a drastic change in the structure of the Dutch dividend withholding tax act. As such the so called principles of prudence and legal certainty are not met. Furthermore, the Council of State raised their concerns whether the dividend claim of the Netherlands on undistributed profits would be in compliance with international tax treaties and EU law.

Finally, the retro-active effect to September 18, 2020 is, according to the Council of State, also not justified. Due to the retro-active effect ongoing cross-border restructuring with possible sound business reasons will also be hit by this exit tax.

Revised proposal

In response to the advice of the Council of State the opposition party published a revised proposal on October 9, 2020. The main amendments of this revised proposal are as follows:

  • An automatic extension of payment would be granted at the moment of the cross border restructuring. The exit tax would ultimately be due at the moment the undistributed profits are actually distributed to the shareholder.
  • The exit tax would not apply to (deemed) distributions of undistributed reserves of EUR 50 million or less.
  • An anti-abuse provision would be included in the legislation which implies that the exit tax would still be due in case the main purpose or one of the main purposes is to avoid the exit tax.

Next steps

For now however it should be seen if the proposed legislation will receive a majority of the votes from The House of Representatives. We will update you accordingly when more information is available on the proceedings of this legislative proposal.