In December 2023, the Netherlands approved significant tax changes aiming to streamline investment structures and combat dividend stripping. If you’re a Dutch investment manager or a foreign investment manager with interests in the Netherlands, your fund’s withholding tax recovery may be affected by these changes.
Foreign investors could face added complexity when aiming to qualify for favourable tax treatment in the Netherlands, while Dutch limited partnerships and mutual funds may face new challenges when trying to recover foreign withholding tax.
This article equips you with the knowledge and resources needed to navigate these changes confidently. We’ll break down the key amendments and explore how WTax can assist in managing them.
Changes in the Netherlands
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Background to the New Laws
On 27 December 2023 the Netherlands gazetted the budget proposals and draft laws presented to parliament on 19 September 2023 as part of the Tax Plan 2024.
Besides the changes discussed in the article, other notable amendments to tax structures of Dutch entities include:
- Dutch Fiscal Investment Institutions (Fiscale Beleggingsinstellingen, or FBIs):
To maintain their 0% tax rate, FBIs will no longer be permitted to directly invest in Dutch real estate starting from 1 January 2025.
- Dutch Exempt Investment Enterprises (Vrijgestelde beleggingsinstelling, VBIs):
From 1 January 2025, the VBI regime will only be available to UCITS and investment institutions defined under the Financial Supervisory Authority Act, ending accessibility of the regime for funds owned by a limited group of family members.
The new law is available, in Dutch, here.
Two Key Changes For Holders of Dutch Investments
1. Introduction of Dividend Stripping Measures:
What is the Change?
When a foreign investor applies for a refund of excess withholding tax from the Netherlands, the Dutch Tax Authority may now require the applicant to prove that they are the beneficial owner of the dividend. This is to prevent fraudulent claims.
• Before Jan 1, 2024: Dutch Tax Authority bore the burden of proving illegitimate beneficial ownership.
• Effective Jan 1, 2024: For refunds exceeding EUR 1000 per year, taxpayers must demonstrate beneficial ownership. If a full tax exemption is claimed, taxpayers must always demonstrate beneficial ownership.
How You May be Affected
As the burden to prove beneficial ownership has shifted to the taxpayer, compliance with the new laws may require meticulous documentation. This is to prove entitlement to a tax exemption or to the refund of excess Dutch withholding tax. Doing so may be administratively burdensome for investment managers.
How Can WTax Help?
WTax can help guide investment managers through the complicated process of providing evidence of beneficial ownership. From preparing necessary documentation, to liaising with the Dutch Tax Authority, WTax is committed to simplifying the reclaim process, streamlining administrative procedures, and ensuring compliance with Dutch tax laws as they evolve.
2. Amendments to Tax Classification of Foreign Entities:
What is the Change?
The classification of foreign entities for Dutch tax purposes has been revised:
• Before Jan 1, 2025: For Dutch tax purposes, a foreign entity is classified as a Dutch entity with comparable legal form.
• Effective Jan 1, 2025: If the legal form of a foreign entity is comparable to the legal form of a Dutch entity, it will still be treated as similar for Dutch tax purposes. If there is no similar legal form, two new rules are introduced to determine the tax treatment: (i) the symmetry method (the entity’s tax treatment in its country of residence will be applied) and (ii) the fixed method (the entity will be considered as non-transparent. This applies when the foreign entity is based in the Netherlands).
How You May be Affected
As investors navigate these changes, understanding the nuances of these new qualification methods will be essential to ensure compliance and navigate potential complications in withholding tax reclaim applications.
How Can WTax Help?
These changes highlight the importance of thorough due diligence and strategic planning in navigating complex tax environments. By proactively addressing these changes and staying abreast of how the new determinations will apply, WTax can help foreign investors adapt effectively, seize opportunities, and maintain their competitive edge in the dynamic Dutch market.
Essential Changes For Dutch Investment Managers
What Are The Changes?
Based on changes to their classification, Dutch limited partnerships and mutual funds may be affected when reclaiming withholding tax from foreign jurisdictions:
· Dutch Limited Partnerships (Commanditaire Vennootschappen, or CVs)
• Before Jan 1, 2025: CVs were either tax transparent or opaque, depending on the consent requirements of the partnership.
• Effective Jan 1, 2025: All CVs will be tax transparent, aligning with international standards.
· Dutch Mutual Funds (Fonds voor Gemene Rekening, or FGRs)
• Before Jan 1, 2025: FGRs were tax transparent if they fulfilled either the consent requirement or the repurchase requirement. If not, they were classified as tax opaque.
• Effective Jan 1, 2025: Only FGRs that are a UCITS or an investment institution defined under the Financial Supervisory Authority Act, and have tradeable units, will be considered opaque for tax purposes. In all other cases, FGRs will be classified as tax transparent.
How You May be Affected
Transparent entities may face challenges in obtaining certificates of residence, impacting their ability to qualify for the benefits afforded by the Netherlands’ double taxation treaties in eliminating or reducing foreign withholding tax.
Reclaim processes may need to be adjusted for Dutch entities reclassified as being tax transparent, potentially requiring submissions for withholding tax reclaims at the level of underlying investors. This could pose additional administrative burdens for affected funds or it could eliminate the ability to reclaim foreign withholding tax via a double taxation treaty altogether.
How Can WTax Help?
For Dutch investment entities that no longer qualify for treaty benefits, WTax is poised to capitalise on all other reclaim mechanisms available from foreign investment jurisdictions, including domestic exemptions and reclaims based on European Court of Justice precedent.
By partnering with WTax, Dutch funds can remain confident that all recoverable withholding tax will be pursued.
Conclusion
As global funds investing into Dutch equities adapt to changes in Dutch withholding tax laws, it’s essential for investment managers to stay informed and proactive. The amendments emphasise the importance of compliance and documentation. By partnering with WTax, you ensure efficient and compliant withholding tax reclaims from the Netherlands.
Dutch investment managers should similarly stay informed about changes in tax laws that may impact their withholding tax reclaims from foreign jurisdictions. The amendments introduced in the Tax Plan 2024 signify a significant shift in how Dutch entities are classified for tax purposes. With WTax’s expertise, you can navigate these changes confidently, ensuring you maximise your reclaim opportunities.
With WTax by your side, navigating new complexities becomes simpler. Get in touch with us today.
