In this article we discuss position paper KG:024:2023:16 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 in the event of a repayment of share premium, without first converting the share premium reserve into nominal share capital, Dutch dividend withholding tax is due over the entire repayment, regardless of the amount of the pure profit reserve that is available in the entity.
Facts
A Dutch entity repays share premium to its shareholders without first converting the share premium reserve in nominal share capital. The repayment exceeds the amount of the pure profit reserve that is available in the entity.
Question
Is in the event of a repayment of share premium, without first converting the share premium reserve in nominal share capital, Dutch dividend withholding tax due over the total amount of the repayment regardless of the amount of pure profit available?
Answer
No, Dutch dividend withholding tax is only due over a share premium repayment if and insofar as pure profit is available. Pure profit is to be understood to include any profit anticipation.
Legal context
Article 3, Paragraph 1, opening words and under d, of the Dutch dividend withholding tax Act 1965 (hereinafter: DDWT Act) stipulate that:
“1. The proceeds include:
(…)
(d) partial repayment of what has been paid up on shares, if and insofar as there is pure profit available, unless the general meeting of shareholders has previously decided to this refund and the nominal value of the relevant issued shares has been reduced with an equal amount by an amendment to the articles of association;”
From the considerations of the Dutch tax authorities
From the text of the law it can be deduced that for Dutch dividend withholding tax purposes, a repayment of capital is only considered revenue to the extent that pure profit is available. If no pure profit is available, no Dutch dividend withholding tax is due. In cases where the distribution exceeds the pure profit that is available, there is only reason to levy Dutch dividend withholding tax up to the amount of the available pure profit. With a different reading of the quoted provision, the words “and insofar as” would be meaningless.
This explanation is conform the intentions of the lawmaker, being the deferral of dividend withholding tax by replacing distributions with repayments of capital and/or share premium. In this context, reference can be made to the conclusion of Advocate General Wattel (ECLI:NL:PHR:2014:84) in Dutch Supreme Court October 17, 2014 (ECLI:NL:HR:2014:2976) in which he discusses the legislative history of this provision. Advocate General Wattel notes that Article 3, Paragraph 1 under d DDWT Act derives from Article 5, Paragraph 1 of Dividend and Tantième Tax Act 1917. The provision at the time stated that:
“as distribution of profit is (...) considered (…) the repayment of capital, if and insofar as there is pure profit.”
At the time it was not possible to omit the levy of Dutch dividend withholding tax on a repayment of share premium through a shareholder resolution followed by an amendment to the articles of association. The accompanying Explanatory Memorandum states that the aim of the provision is to prevent taxation from being deferred indefinitely by giving profit distributions the guise of refunds. Taxable would therefore from now on be:
“the repayment of capital if and to the extent that there is profit, i.e. if and to the extent that the repayment does not exceed the amount of the profit, (…).”
Only after criticism from parliament compensation for possible overkill created. During the subsequent period, this developed into the requirement for the presence of a shareholder resolution and an amendment to the articles of association. However, this does not alter the fact that since the introduction of this provision, the legislator has intended to only tax refunds to the extent pure profit is available. There is no indication that since then the legislature has abandoned this principle.
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.
Copyright – internationaltaxplaza.info
Follow International Tax Plaza on Twitter (@IntTaxPlaza)
