The Dutch Supreme Court recently issued a long-awaited ruling regarding the dividend tax withholding exemption. The Supreme Court ruled that denying the exemption based on the anti-abuse provision is possible even if only certain elements of a structure are artificial. This means the exemption can be denied if a holding company owns shares in a Dutch BV, without economic or commercial justification. This has broader implications for holding companies based outside the Netherlands.
Our experts discuss this important case and the key points of attention.
Belgian holding company: is the dividend withholding tax exemption applicable?
If a Dutch entity distributes dividends, it must withhold dividend tax. Sometimes this withholding is not required. This may, for example, be due to the application of the dividend withholding tax exemption. This follows from Dutch law that is based on European rules.
This exemption does not apply in cases of tax abuse, for example in cases involving certain artificial arrangements or constructions. If the foreign parent company operates an active business and holds the Dutch company shares in that context, there is no abuse. This so-called "relevant substance" is one of the factors in determining abuse. In the case at hand, this (economic) substance was a key issue. In short, it revolved round the following.
District Court: sufficient substance, exemption correct
In 2020, the District Court ruled that a Belgian holding company which, among other activities, held shares in a Dutch BV, conducted an active business. The shareholders of the Belgian holding charged substantial management fees related to their work for the holding and its subsidiaries. Additionally, there was office space in the shareholders’ home. Based on these factual considerations, the court concluded the Belgian holding operated a substantive business. Therefore, the arrangement was not deemed purely formal or artificial, nor did it lack economic or commercial justification. The requirements for denying the exemption were therefore not met.
Court of Appeal: exemption denied despite active business
However, the Court of Appeal reached a different conclusion. Although the Belgian holding operated an active business, the shareholding in the Dutch BV was not attributable to the substantive enterprise of the Belgian holding.
And there was tax abuse present: one of the holding’s primary goals for owning the Dutch BV shares was to avoid dividend taxation at the level of the ultimate shareholders: three Belgian individuals.
Finally, the Court also found that the arrangement was wholly artificial and not set up based on considerations that reflect economic reality.
As a result, the Court concluded that all conditions were met to deny the exemption, despite business activities at the level of the Belgian holding company. The Dutch BV was not attributable to the holding’s active business. The key consideration was that the management fees paid were not related to services for the Dutch participation: there was no involvement with the participation, and the shares were held passively.
Supreme Court: Court of Appeal was right, exemption justly denied
In line with the Court of Appeal and the Advocate General, the Supreme Court found tax abuse, even though the parent company appeared to have sufficient economic substance. The Supreme Court clarified the anti-abuse doctrine, stating that it is also possible that only certain steps or parts of a structure are artificial and therefore fall under the anti-abuse provision. If a step or part of an arrangement, such as passively holding shares in a Dutch BV, cannot be justified by related economic or commercial benefits, this step or part may be deemed artificial.
The Supreme Court also (re)confirmed that one must look beyond the historical elements of the establishment of the structure: all subsequent circumstances may be relevant in assessing artificiality.
Be alert whether (re)evaluation is necessary
Now that the Supreme Court has upheld the Court of Appeal’s ruling, it is clear that Dutch companies distributing dividends to foreign holding companies must be cautious. In some cases, a new, individual assessment of the withholding exemption is necessary: the exemption can be denied if a Dutch company is held as an investment by a parent company, even if that parent operates a substantive business.
The conclusion may differ for individual Dutch subsidiaries, even if they share the same foreign parent company (with sufficient substance).
Are you planning to distribute dividends to a foreign parent company? Or would you like to know more about dividend distributions to a (personal) holding or foreign parent? Make sure you understand the tax implications and whether a withholding exemption applies. Our tax advisors would be happy to help assess your situation and explain the available arrangements and their impact on your tax position.
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.
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