Dutch dividend withholding tax exemption for European shareholders

Last updated: 18-01-2006

October 27, 2005

A lower Dutch tax Court has recently given a very important judgement in relation to levying Dutch dividend withholding tax from a European corporate shareholders. 

The case which the Court had to decide upon, regarded a Luxembourg based company, which, over 2001 and 2003 had an 2.25% interest in a Dutch B.V.

The European Parent Subsidiary Directive was not applicable as it requires a minimum interest of 25% of the shares (in specific cases 10%).  According to the tax treaty between the Netherlands and Luxembourg, the Netherlands were permitted to levy 15% dividend tax.

The Luxembourg company objected against the withholding of Dutch dividend withholding tax based on the European Non-Discrimination Clause (free movement of capital).

The Court honoured the appeal of the Luxembourg company.

According to the Court, The Netherlands are not allowed to levy dividend withholding tax in case the recipient of the dividend is a European company which would qualify for the Dutch participation exemption if it would have been based in the Netherlands.

A Dutch based company is entitled for dividend withholding tax exemption in case the participation exemption is applicable for the shares on which it receives a dividend.  According to Dutch law, a similar exemption applies for foreign based companies, provided however, that the shares belong to the equity of a Dutch permanent establishment.

According to the Court this regulation for foreign based companies is a form of prohibited discrimination on the basis of the EU-treaty, more specifically the free movement of capital, because it discourages Dutch companies to attract foreign (EU) instead of internal (Dutch) capital and it discourages foreign (EU) investors to participate in the capital of Dutch companies.

The Luxembourg shareholder was therefor entitled to a 100% dividend withholding tax exemption.

This decision is quite remarkable as it can have enormous consequences in The Netherlands as well as in other EU member states.

Where it comes down to, is that the Dutch dividend withholding tax exemption, applicable in domestic parent-subsidiary relationships, must be extended to virtually all European Parent - Subsidiary relationships. Every European company keeping an interest in the shares of a Dutch company, has the possibility to claim an exemption from Dutch dividend withholding tax in case the share interest meets the conditions applicable for the Dutch participation exemption.

Many European countries have comparable regulations, so this interpretation of European Law may have a similar outcome in other EU countries which provide for a full dividend withholding tax exemption in domestic relations.

It is self-evident that budgetary consequences as a result of this judgement can be tremendous. Like in the Bosal case, it can be expected that the Dutch tax authorities will appeal against this decision. Considering the importance of this case a judgement by the European Court would in our eyes also be appreciated.

For now however, each qualifying European shareholder can appeal for the Dutch exemption from the Dutch withholding tax. Also each Dutch shareholder, paying dividend tax somewhere in the EU would do the right thing to inquire whether based on the foreign regulations for internal relations, it has the right to be exempted from foreign dividend withholding tax.

If you require more information on this subject please feel free to contact:

Ton Smit

Telephone (direct) : +31 (10) 2010470