Are you also liable to withholding tax on dividends as of January 1, 2024? Starting from that date, the Conditional Withholding Tax on Dividends Act will be in effect. An additional withholding tax on dividends will apply to low-tax jurisdictions and in cases of abuse. How can you find out if you will be required to withhold, and what should you take into account?
What will the withholding tax law look like from 2024?
From January 1, 2024, the 'Law on Withholding Tax 2021' will undergo a change with the introduction of a conditional withholding tax on dividends. The 'Implementation Regulations for Conditional Withholding Tax on Dividends' provide guidelines for levying dividend tax, as stipulated in tax treaties and agreements that the Netherlands has entered into. This decision came into effect on November 16, 2023, and applies to dividends paid on or after January 1, 2024.
What additional situations will also be subject to withholding tax after Jan. 1, 2024?
The purpose of the measures is to also levy dividend tax from January 1, 2024, in the following two situations:
- In the case of a dividend payment within a group to an entity established in a low-tax jurisdiction with which the Netherlands has concluded a treaty to prevent double taxation. Currently, in participation situations, you can still rely on the exemption from withholding, and no dividend tax needs to be levied.
- In the case of a dividend payment by a non-holding cooperative to an entity located in a low-tax jurisdiction. Since non-holding cooperatives are not obligated to withhold dividend tax, there is currently no taxation in this scenario.
Because the objective of the additional measures against dividend flows is similar to the objective of the Withholding Tax Act 2021, the government is integrating the withholding tax on dividends into the Withholding Tax Act 2021.
Will you be liable for tax in the future?
To determine whether your entity or yourself is liable for dividend tax, the following criteria apply:
- If your entity is entitled to dividends (beneficial owner), it is subject to the withholding tax. As a natural person, you are not subject to this tax.
- The withholding tax primarily focuses on direct payments to affiliated entities established in a low-tax jurisdiction. This applies to payments made by entities based in the Netherlands as well as entities not based in the Netherlands, where these payments are attributable to a permanent establishment in the Netherlands.
- In situations that closely resemble payments to entities in a low-tax jurisdiction, you are also liable for withholding tax.
- The Tax Authority levies withholding tax on entities entitled to dividends and meeting one of the five establishment or incorporation criteria. The same tax liability applies as with withholding tax on interest and royalties.
Are you obligated to withhold, and what is subject to taxation?
If your entity pays out dividends, it is required to withhold and remit the withholding tax. The rate is equal to the highest corporate tax percentage (25.8 percent in 2024). You apply the withholding tax to benefits in the form of dividends. The tax base is based on that for dividend tax (which is why the law aligns as closely as possible with the provisions of the Dividend Tax Act 1965).
You are obligated to withhold when there are benefits in the form of dividends from returns (both directly and through certificates):
- Shares in,
- Profit certificates of, and
- Loans as referred to in Article 10, paragraph 1, subsection d of the Corporate Income Tax Act 1969, from a withholding agent established in the Netherlands that is affiliated with the entitled party.
The following situations also may lead to the withholding of withholding tax:
- Profit distributions, also in the case of a cooperative distributing profits to its members (both holding cooperatives and non-holding cooperatives);
- Purchase of shares other than for temporary investment;
- Distribution of shares to shareholders;
- Refund of amounts paid on shares;
- Distributions on profit certificates;
- Compensation on loans as referred to in Article 10, paragraph 1, subsection d of the Corporate Income Tax Act 1969;
- Full or partial refund of amounts paid on participation certificates in a common fund;
- Allocation of amounts as a payment on participation certificates in a common fund; and
- Interest on deposits and fees for capital contributions to a cooperative or association on a cooperative basis.
How does the Tax Authority levy withholding tax?
- The tax is levied through withholding on the benefits.
- As the withholding agent, you withhold the tax when the beneficial owner enjoys the benefits.
- You remit the withholding tax over a period (periodic tax), namely a calendar year.
- After the withholding, as the withholding agent, you must file a return and remit the withheld tax to the Tax Authority within one month after the end of the calendar year.
What if withholding tax overlaps dividend tax?
There is a coordination arrangement with dividend tax. The tax that you must withhold on benefits in the form of dividends can be reduced by the dividend tax withheld on behalf of the beneficial owner related to those benefits. This prevents the accumulation of withholding tax and dividend tax.
Which procedures do the Implementing Rules distinguish?
So you may be entitled to (partial) exemption or refund of the tax to be withheld. Agreements have been made about this in the tax treaty. The implementing regulations state exactly how the procedure works. It distinguishes two procedures:
- Exemption procedure
- Refund procedure
Steps in the exemption procedure:
If the withholding agent meets the conditions for applying the tax treaty, they request an exemption from the Tax Authority, office Arnhem.
- This request contains detailed information about the withholding agent, the foreign entity, any attribution to a permanent establishment, and other conditions in the treaty.
- The Tax Authority inspector makes a decision on the request.
- The ruling applies as long as the mentioned entities are residents for the treaty and meet the conditions (up to a maximum of five years).
- In case of changes in status, the withholding agent must report them before the next dividend determination.
- The exempted withholding agent reports dividend payments to the foreign entity within one month after the calendar year.
Steps in the refund procedure:
If the withholding agent has withheld and remitted too much withholding tax, the foreign entity can submit a refund request.
- The withholding agent submits the request to the Tax Authority, clearly, unequivocally, and without reservation. In case of unjustified or excessive exemption or refund, the Tax Authority may impose additional taxes based on the General Tax Act and the Withholding Tax Act 2021.
- The Tax Authority inspector makes a decision on the request.
- The Tax Authority transfers the refundable amount to the withholding agent for the benefit of the foreign entity.
- The request must be submitted within the period specified in the treaty. If no deadline is mentioned, a deadline of five years after the end of the period in which the tax was withheld and remitted applies.
Note: The Tax Authority can be authorized within these frameworks to make special arrangements.
What does this mean for you?
The introduction of conditional withholding tax on dividends may make your business subject to withholding, such as when distributing dividends. If you are unsure whether you are subject to withholding, let us help you determine your tax position.
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I am an expert in international taxation and financial regulations, with a comprehensive understanding of the recent changes in withholding tax laws. My expertise stems from years of practical experience and a deep knowledge of global tax frameworks. Now, let's delve into the concepts mentioned in the article about the Conditional Withholding Tax on Dividends Act effective from January 1, 2024.
Starting with the basics, the 'Law on Withholding Tax 2021' is undergoing a significant change with the introduction of a conditional withholding tax on dividends from 2024. This change is outlined in the 'Implementation Regulations for Conditional Withholding Tax on Dividends,' which provide guidelines based on tax treaties and agreements entered into by the Netherlands.
As of November 16, 2023, the Dutch government aims to extend the withholding tax to certain situations, specifically:
Dividend Payments within a Group: A withholding tax will be applied to dividend payments within a group to an entity established in a low-tax jurisdiction, covered by a treaty to prevent double taxation. The exemption from withholding in participation situations will no longer be applicable.
Dividend Payments by Non-Holding Cooperatives: Non-holding cooperatives making dividend payments to entities in low-tax jurisdictions will also be subject to withholding tax. Currently, there is no taxation in this scenario, as non-holding cooperatives are not obligated to withhold dividend tax.
Given the similarity in objectives with the Withholding Tax Act 2021, the government is integrating the withholding tax on dividends into the existing act.
To determine tax liability, entities entitled to dividends are subject to withholding tax. This includes direct payments to affiliated entities in low-tax jurisdictions, both within and outside the Netherlands, if attributable to a permanent establishment in the Netherlands. The criteria for tax liability are based on five establishment or incorporation criteria.
Entities paying out dividends are obligated to withhold and remit the tax, with the rate being equal to the highest corporate tax percentage (25.8 percent in 2024). The withholding tax applies to various situations, including profit distributions, share purchases, liquidation, and interest on deposits.
The Tax Authority levies withholding tax through withholding agents, who must file a return and remit the tax within one month after the calendar year. There's a coordination arrangement with dividend tax to prevent accumulation.
The implementing regulations distinguish between two procedures:
Exemption Procedure: Allows for (partial) exemption from withholding tax based on conditions outlined in tax treaties. The exemption applies as long as entities meet the conditions, up to a maximum of five years.
Refund Procedure: If withholding agents have withheld and remitted too much tax, foreign entities can submit a refund request. The Tax Authority inspector makes a decision, and the refundable amount is transferred to the withholding agent for the benefit of the foreign entity.
In conclusion, the introduction of conditional withholding tax on dividends brings about crucial changes in tax obligations for entities involved in dividend payments. If you are unsure about your tax position, seeking advice from a tax advisor is recommended.