Flying the Dutch Coop – Dividend Withholding Rules Expanded in the Netherlands
If your organization currently has a Dutch Cooperative (or “Coop”) in its corporate structure and you haven’t considered the looming changes related to dividend withholding taxes in the Netherlands, now may be a critical time to evaluate how pending tax legislation may impact tax leakage on dividends payments.
A commonly utilized planning tool that has made its way into many global corporate structures, particularly intellectual property (IP) holding structures, is the interposition of a Dutch Coop owning a Dutch Besloten Vennootschap (BV). This technique has traditionally been useful to minimize withholding tax by “sandwiching” the two Dutch entities between a parent and subsidiary where withholding tax on upstream dividends would otherwise be higher. The withholding tax savings results from the following conditions:
1) A strong tax treaty network in the Netherlands (and withholding tax exemptions under the EU Directive) providing for reduced rates of foreign withholding on dividends received by a BV from many jurisdictions;
2) A favorable participation exemption regime limiting Dutch taxation of foreign subsidiary dividend income;
3) A domestic exemption from tax on dividends paid by the BV to the Coop;
4) A broad exemption from Dutch withholding tax for Coops allowing dividends to leave the Netherlands withholding tax free; and
5) Limited substance requirements associated with eligibility for the treatment above.
The Dutch Ministry of Finance released their 2018 Budget earlier this year and within the budget were some key changes to tax law that may dramatically reduce the effectiveness of tax planning with a Dutch Coop/BV structure. Of note, “holding cooperatives” with concentrated ownership (e.g., 5 percent or more of profits interest or liquidation preference rights) will no longer be exempt from dividend withholding tax. The domestic rate for dividend withholding tax is currently set at 15 percent.
It should also be noted that while the dividend withholding is now expected to apply to Coop dividends starting January 1, 2018, the 2018 Budget also broadens the existing exemption regime from dividend withholding that currently applies to BVs (and will ultimately apply to Coop). More specifically, it may generally be concluded that a taxpaying entity located in a jurisdiction with which the Netherlands has concluded a tax treaty may be exempt if the holding company meets certain limited substance requirements (payroll of €100,000 and office space). It’s important to note that a U.S. Limited Liability Company (LLC) is not expected to be eligible for this exemption in any case (unless electing to be taxable as a corporation).
With the help of our colleagues in the Netherlands, A&M Taxand, LLC is currently working with many clients that are facing potential consequences associated with these rule changes to mitigate future leakage by looking to alternative holding jurisdictions and/or to consider bolstering substance in the current holding jurisdiction. If you have a Dutch Coop in your structure and are uncertain whether you may be affected by the rules discusssed, please feel free to reach out to us!
Author: Kenneth Dettman
We’d love to get your thoughts: Does you company have a Dutch Coop as part of its legal organizational structure? Have you considered the tax changes in the Netherlands’ 2018 Budget? Please call or email us and let us know!
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