Netherlands: The saga on the withholding tax exemption continues

Introduction

The Amsterdam Court of Appeal denied the dividend withholding tax exemption for a distribution to a Belgian family holding company due to lack of substance. This case is highly relevant to all foreign personal and family holdings that invest in the Nether­lands.

Background

The Netherlands does not levy dividend withholding tax on dividend distributions to corporate shareholders in the EU/EEA or jurisdictions with which the Netherlands has a double tax treaty (the "WHT Exemption"). The WHT Exemption is not applicable to holding companies that lack physical presence, when they are used to obtain access to the WHT Exemption and it concerns a wholly artificial arrangement. Many personal/ family holding companies lack physical presence and often do not have employees and the holding company’s owners would not be entitled to this exemption had they owned the shareholding in the distributing company directly. One can therefore debate whether the use of a personal holding or family company should be considered a wholly artificial arrangement.

The case

The case concerned a Belgian holding company ("holding") that was held by a Belgian family. The holding received a dividend from a Dutch BV ("BV"), serving as private equity pooling vehicle. The holding did not have its own office space or employees. However, the holding paid a management fee to an affiliated entity for management services and the use of its premises. The holding owned various other investments and was actively involved with the management of those other investments.

The decision of the Court of Appeal

According to the Court of Appeal, the holding had the main purpose to avoid Dutch dividend withholding tax. This is because the (ultimate) shareholders in holding are individuals who are not entitled to the WHT Exemption.

The Court of Appeal ruled that the holding was an artificial arrangement because:

• The holding had no (own) personnel and office facilities.
• The decision-making of the holding is fully in the hands of members of the family.

The Court of Appeal mentioned that the absence of active involvement could be an indication of the absence of economic activity and thus an indication of an artificial arrangement. The Court of Appeal also considered if there was an obligation to reinvest any income and that the family was free to request a distribution at any time.

Hence, the WHT Exemption was denied.

Atlas notes

It is recommended that the applicability of the WHT exemption is carefully reviewed prior to any dividend distribution. Alternatively, distributions can be postponed until the Supreme Court ruling. The WHT Exemption can be discussed in advance with the Dutch tax authorities.

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