This article is most likely to be relevant for investments by Dutch holding companies in foreign subsidiaries.
On January 1, 1995, a Bill became effective concerning the relief for withholding tax levied abroad on dividends received under the participation exemption.
Below we have given an overview of the most relevant aspects of the Bill.
Old Law
If the Dutch participation exemption applies, the foreign dividend withholding tax can not be set off against the Dutch corporate income tax. In the event of onward payment the Netherlands will also levy dividend withholding tax, without relief for the withholding tax levied abroad.
New Law
According to the new law, a withholding agent as defined under the 1965 Dividend Withholding Tax Act is allowed as of January 1, 1995, to reduce the amount of dividend withholding tax due. After the theoretical discussion an example is given for clarification.
Requirements
In order for the withholding tax relief to be available, several conditions should be met, including:
1.a withholding tax of at least 5 percent was withheld by a treaty partner from the dividends received by the Dutch company; and
2.the dividends thus received are covered by the participation exemption in the Netherlands.
The reduction is restricted to the lower of the following two amounts:
1.3 percent of the dividends paid by the Dutch withholding agent, with the exception of dividend payments to specific entities that are exempt from corporate income tax;
2.3 percent of the dividends received in the calendar year up to the moment of withholding, as well as in the two preceding calendar years, from qualifying foreign subsidiaries after January 1, 1995. For 1995 and 1996 the percentage of 3 is replaced by 2.5.
Special Provisions
Special provisions have been included for the following: of branch profit tax, onward payment to entities exempt from corporate income tax which may fully recover the dividend withholding tax levied, transitional provisions, fiscal unities, and situations where dividends qualifying for the participation exemption relief are normally paid free of dividend withholding tax to a Dutch parent company. The practical application of the latter two provisions is not yet clear.
Example
Foreign subsidiary (FS) pays a dividend of 10,000, and 10% withholding tax is withheld (in accordance with the relevant treaty provision). Based on the participation exemption, no corporate income tax is levied in the Netherlands from the parent company (NL P). If NL P pays the dividend to a foreign grandparent company (FP), the Netherlands applies a 10% withholding tax (again in accordance with the relevant treaty).
Previous Present (1-1-1995) Dividend paid by FS 10,000 10,000 Foreign withholding tax -/- 1,000 -/- 1,000 Received by NL P 9,000 9,000 Dutch corporate income tax 0 0 Dividend made payable by NL P 9,000 9,000 Dutch withholding tax -/-900 -/-900 Dividend received by FP 8,100 8,100 *
* The overall advantage of the new law for FP equals the increased value of its subsidiary; this increase equals the difference between tax withheld upon dividend distribution and the dividend withholding tax actually payable to the Dutch tax authorities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Further information can be obtained from Mr Alfred GM Groenen, MCL, KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247
© Mondaq Ltd 1995 Tel +44 171 820 7733.