General memorandum on dividendstripping

Background

The Dutch tax authorities lost a number of cases in court, which lead them to change the law instead. However, even the changing of the law itself did not go easy as there was a massive outcry against the first draft legislation, which the authorities - very much to their credit - (partially) withdrew to be replaced by the legislation to be discussed here below.

Description of dividendstripping regulations

Dividendstripping is deemed to happen if a combination of legal actions take place in which the proceeds enjoyed by the holder of a share or a dividend receipt are, by means of compensation, actually enjoyed by another individual or legal person which itself is entitled to a smaller credit, reduction or refund of dividend withholding tax. This measure is further limited to situations in which the persons who transferred their dividend rights retain the economic interest in the shares. In that case, the person actually receiving the dividend payment is not deemed to be the ultimate beneficiary, whereby it is not entitled to the credit for or reduction or refund of dividend withholding tax. The (unnecessary) overkill in the legislation is the fact that no credit, reduction or refund is subsequently provided, not even the credit, reduction or refund which the deemed economic owner would have been entitled to.

These changes have retro-active effect to the date that the legislation was announced, being 27 April 2001. The law entered into force on 26 July 2002.

Dividendstripping regulations

In order to effect the above measures, the following changes were implemented under Dutch law.

• Article 4, first paragraph of the Dividend Withholding Tax Act got an addition stating, "The first sentence is not applicable with regard to proceeds to which the person entitled to the proceeds is not the ultimate beneficiary." Hereby the exemption from dividend tax applicable under the participation exemption would no longer apply in cases of deemed dividendstripping.
• The crux of the regulation is subsequently put under the third and fourth paragraph of this article in which "ultimate beneficiary" and "combination of transactions" are defined. The third paragraph reads as follows:
  
  

  "For purposes of not withholding dividend tax under this article, a refund of dividend withholding tax under article 10 as well as a reduction or refund of dividend withholding tax under a treaty for the prevention of double taxation concluded by the Netherlands, the person who provided compensation in connection with the proceeds received as part of a combination of transactions is not treated as the ultimate beneficiary, where it is likely that:

  1. those proceeds have been enjoyed, in whole or in part, directly or indirectly, by
  1. an individual or legal person with regard to whom a dividend tax must be withheld, while it does not need to be withheld with regard to the person providing the compensation; or
  2. an individual or legal person which is entitled to a smaller refund or reduction of dividend withholding tax than the person providing the compensation; and
  2. this individual or legal person directly or indirectly holds or acquires a position with regard to the shares, profit sharing certificates or profit sharing bonds which resembles its position in similar shares, profit sharing certificates or profit sharing bonds before the combination of transactions has started."
  
  The fourth paragraph continues,
  
  "For purposes of the third paragraph:
  1. a combination of transactions include transactions made over a regulated stock exchange or market;
  2. a transaction regarding the simple acquisition of one or more dividend receipts or short term rights of enjoyment (kortlopende genotsrechten) on shares is also treated as a combination of transactions."


• Article 10, first paragraph of the Dividend Withholding Tax Act got an addition stating, "The first sentence is not applicable with regard to proceeds with regard to which the person entitled to the proceeds is not the ultimate beneficiary."
  A similar sentence was added to the second paragraph of that article. Hereby the refund of dividend tax to tax exempt entities and fiscal investment funds would no longer apply in case of deemed dividendstripping.
• Article 25 of the Corporate Income Tax Act now contains provisions similar to those in the Dividend Withholding Tax Act, whereby a taxpayer is not allowed to credit Dividend Tax paid against its Corporate Income Tax, if it is not deemed to have been the ultimate beneficiary of the dividends received.

For more details on dividendstripping, see our detailed memorandum.

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