The Dutch government intends to introduce measures to (better) curb dividend stripping with respect to portfolio shares. Recently, the Dutch government started an online consultation round, to provide an opportunity for interested parties to give their opinion on the possible measures to reach this goal. Nine reactions were published, among them letters from leading industry and consultancy associations as well as leading pension investors.
In the consultation, the government presented six alternatives, on which it wanted to hear the opinion of the public:
- Alternative A : Legal ownership and economic ownership of shares mandatory for reduction, crediting or refund of dividend tax.
- Alternative B : Introducing a holding period for the full legal and economic ownership of shares before and after record date15 to determine who is the ‘owner’ of the dividend.
- Alternative C : Introducing a net return / base approach for settlement or refund of dividend tax: The effect would be that dividend tax can only be credited insofar as there is corporate income tax to be paid on the dividend, after deduction of expenses. Pension funds would be exempt from this requirement.
- Alternative D: Documentation obligations: To support a system where it can be proven that only one dividend note / voucher is issued for a particular dividend payment, dividend notes must be registered with the Dutch tax authorities and shareholders are required to show a dividend note when claiming a credit, refund or reduction of tax.
- Alternative E : Codification record date: Make it a legal requirement – instead of a policy – that only the person who has the right to receive the dividend on record date is the person with a right to credit, refund or reduction of tax.
- Alternative F : Include affiliated entities: Only full economic ownership, possibly together with affiliated persons / entities, will be legally sufficient to show that a person has economic ownership.
The measures should meet the following (pre) conditions:
- good feasibility (for the tax authorities and the market);
- attention to impact on regular stock exchange trading and consequences for citizens and companies; and
- international and European legal sustainability.
Comments of the interested parties
The interested parties differ in their comments, which is of course in part due to their different backgrounds, but some similarities in opinion can be discerned from the comment letters. Clearly, alternatives A and B are not favoured, as they are seen as unworkable and / or ineffective. The same is more or less the case with respect to alternative C, which is seen as very complex, too broad, disruptive in the market, unworkable.
The commenting parties mainly found that the alternatives D, E and F will not be effective as stand-alone measures. Only in combination with other measures they might be effective, but it will depend on the combination.
Overall, not one of the six alternatives seems fit to reach the goal set by the government. Maybe there are more workable alternatives. The Dutch Association of Tax Advisors made some practical suggestions in that respect:
- await the outcome of a securities lending case that is currently pending at the Supreme Court, and which may yield a firmer grip on how dividend stripping can be challenged under current law;
- to leave the current status of the law as to what constitutes dividend stripping as it is, but only strengthen the formal position of the tax authorities to give them a better position to challenge possible dividend stripping cases;
- possibly introduce a reporting obligation, similar to DAC 6, based on ‘hallmarks’ that are deemed to be typical for dividend stripping transactions. This should be implemented on an EU wide basis as dividend stripping is an international problem.
It is understandable that tax authorities want to eradicate ‘real’ dividend stripping activities, where transactions are implemented with the sole goal of achieving a tax advantage. However, there are many instances where a transaction - that could be seen as a potential dividend stripping - is in fact based on a substantive business transaction and the tax effect is just a consequence and not the goal of the business transaction.
The current financial system and financial transactions are complex and diverse. But this has the effect that many measures to challenge dividend stripping can be disruptive and interfering with real business transactions and may damage the financial system. In our view, this means that it would be preferable that measures against dividend stripping are taken on an EU or on a global (OECD) level. The net result of anti-dividend stripping rules may be negative if they cause more damage than the loss of tax-revenue through dividend stripping is worth. Hopefully, the Dutch government will strive for an international solution that is both effective and causes minimal harm to bona-fide transactions involving portfolio shares. We will, of course, be closely monitoring the developments with respect to this issue.
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