On 14 September 1999, a new regime was announced with regard to the treatment of passive income and capital gains for personal income tax purposes. As of 1 January 2001, individuals were going to be taxed on a deemed return of 4 percent (regardless whether the real return was higher, lower or negative) on their investments. The deemed return would be subject to a personal income tax rate of 30 percent, which effectively lead to a (4% x 30% =) 1.2 percent tax on investments, including dividends*.
Until 1 January 2001, dividends from investments were generally taxed at the progressive tax rates which could go as high as 60% (after an exemption for the first NLG 1.000 received); substantial interest holders in a company (generally shareholders holding at least 5 percent of the issued shares of any class) were taxed at a fixed rate of 25 percent on their dividend income.
The government feared that companies would see the new regime as far more beneficial and would not distribute dividends between the moment the law got announced (14-09-1999) and the date it entered into force (1-1-2001). It is important to note that the only persons qualifying from this change would have been the individual investors who were not substantial interest holders (income was and remained taxed at 25 percent), or were taxed as receiving profit from an enterprise or other activities taxed at the general marginal rates**. In order to counter such behaviour, the surtax regime was introduced.
Faced with the fact that it is easier to recapture any advantage from the distributing company directly, rather than going after all the individual shareholders, that it is better to have any onus of proof with the taxpayer, e.g. claiming exemptions from taxation, rather than with the tax inspector, e.g. that an excessive dividend income was received and that the EC Parent/Subsidiary Directive prohibits any other form of dividend tax than that allowed under the Directive, the Surtax regime was designed as an additional corporate income tax on deemed excessive dividends.
In short, if an entity is deemed to make an excessive distribution between 1 January 2001 and 31 December 2005, then the excess is subject to an additional corporate income tax of 20 percent. However, an exemption exists at the level of the distributing entity to the extent that distributions are made on shares which have been held by substantial shareholders for an uninterrupted period of at least three years. It has subsequently been determined that the shares held by such shareholders since the incorporation of the company within the last three years are also deemed to satisfy this condition.
In case of other entities than fiscal investment funds, an excess distribution is made if all of the following three tests are failed:
The excess profit is equal to the difference between total distribution made during the year and the highest of the above amounts. If it can be shown that all the profit distributions made since 1 January 2001 exceed the distributable profit reserves available on 31 December 2000, no surtax will be charged on excess distributions.
If the distribution is made to a person resident in the Netherlands or a treaty country, no dividend withholding tax is due on that part of the distribution subject to surtax.
On 4 October 2001 the EU Court of Justice decided in the so-called Athinaïki Zythopoiia case (C-294/99) that an additional Greek taxation, very similar to the Dutch surtax contravene the EC Parent/Subsidiary Directive and had to be disallowed. The Dutch State Secretary of Finance announced on 7 November 2001 that the consequences of this case with regard to the Dutch surtax regime would be studied. To date no public statement has been made by the tax authorities regarding the outcome of that study.
* It can be argued that the 0.8% Dutch net wealth tax which is said to have been eliminated as of 1 January 2001 has effectively been increased by 50% to 1.2% and reintroduced as an income tax on deemed investment income.
** Considering the fact that the amount of households which invest in Dutch companies directly can not be that high and assuming that the influence Dutch investment funds have on the profit distribution policy of Dutch listed companies are limited, one can only regret that the legislation was designed in such a way that many shareholders have to suffer to prevent the possible deemed abuse in favour of a few, especially when there were many other ways to achieve the same goal.