In this article we discuss position paper KG:024:2023:15 of the Knowledge Group dividend and other withholding taxes of the Dutch tax authorities. In this position paper the Knowledge Group answered the question whether the withholding exemption as laid down in Article 4, Paragraph 1 under b of the Dutch dividend withholding tax Act applies if a parent of a Dutch fiscal unity for Dutch corporate income tax purposes distributes dividends on shares that are owned by one of its subsidiaries that are part of the fiscal unity.
Facts
A listed company and its subsidiary form a fiscal unity for Dutch corporate income tax purposes. The subsidiary has granted stock options to its employees. To cover its obligations under the stock option plan, the subsidiary has purchased shares in its parent company on the stock exchange. Subsequently the parent company has distributed dividends on all its shares, including those that are being held by its subsidiary.
Question
Does the withholding exemption of Article 4, Paragraph 1 under b of the Dutch Dividend withholding Tax Act (Hereinafter: DDWT Act) apply if a parent company of a fiscal unity pays dividends on shares that are held by one of its subsidiaries with which the parent entity forms a fiscal unity for Dutch corporate income tax purposes?
Answer
Yes. The withholding exemption also applies if a parent entity of a fiscal unity for Dutch corporate income tax purposes distributes dividends on shares that are owned by a subsidiary that is included in the fiscal unity of the parent entity.
Legal context
Article 4, Paragraph 1 opening words and under b of the DDWT Act read as follows:
“1. The withholding of the tax may be omitted regarding the proceeds from shares, profit participation certificates, capital contributions as referred to in Article 10, Paragraph 1 under c of the Dutch corporate income tax Act and money loans as referred to in Article 10, Paragraph 1 under d of that Act if:
(...)
(b) the beneficiary and the withholding agent are part of the same fiscal unity as meant in Article 15 of the Dutch corporate income tax Act and the shares, the profit participation certificates, capital contributions and money loans are part of the equity of the Dutch based business of the beneficiary.”
From the considerations of the Dutch tax authorities
Taking the text of Article 4, Paragraph 1 under b of the DDWT Act into account, grammatically the conditions that the withholding agent (in the underlying case the parent company) and the beneficiary of the proceeds (n the underlying case the subsidiary) are undeniably part of the same fiscal unity are met.
Neither does a teleological interpretation of Article 4, Paragraph 1 under b of the DDWT Act prevent an appeal on the withholding exemption. The provision constitutes a codification of the now expired decree of April 29, 2004, no. CPP2004/335M:
“Also under the new fiscal unity regulations a withholding exemption for distributions within a fiscal unity is desirable. By that the withholding and payment of Dutch dividend withholding tax on the one hand and its settlement in the context of the levy of Dutch corporate income tax on the other is short-circuited. Both within participation relationships, but also within fiscal unity relationships, there is no objection against this.”
From this it can be concluded that the main purpose of the withholding exemption is to avoid unnecessary withholding of dividend tax within group relationships. This applies even more in the underlying case since the withholding agent (the parent company) and the one that offsets the Dutch dividend withholding tax with the Dutch corporate income tax (also the parent company) are one and the same entity.
The full Dutch text of the position paper (in the Dutch language) can be found here.
Other position papers of the Knowledge Group on dividend withholding tax and (other) withholding taxes of which we already made an English summary can be found here.
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