The Hague decision on Netherlands non-resident tax

On 12 December 2017, an appeal decision by Court The Hague was published regarding non-resident taxation of a dividend distribution from a Dutch company to a company migrated to Luxembourg. The company migrated to Luxembourg was held by an individual. Where the lower court decided in favor of the taxpayer, the Court The Hague decided the other way around. The Dutch Tax Authorities actively use this case in relevant discussions.

Under art. 17(3)b Corporation Income Tax Act, a foreign company, which owns a substantial shareholding (i.e. a shareholding of a t least 5%) in a Dutch company is taxed as a non-resident taxpayer, with respect to income from such shareholding, if the taxpayer owns the substantial shareholding with the main purpose the avoidance of income tax or dividend withholding tax. Court The Hague decided that this provision was applicable in the case at hand, because (i) dividend withholding tax would have been due if a Dutch company had distributed a dividend directly to the individual (i.e. without Luxembourg in between) and (ii) the structure was considered as “wholly artificial”. Furthermore, Court The Hague decided that the substantial shareholding was not part of the individual’s active business. On that basis, a dividend withholding tax of 2.5% was found to be applicable.

The case, one of the first dealing with art. 17(3)b Corporation Income Tax Act, illustrates the mechanisms around this area of the Dutch non-residential taxation provisions, which were introduced two/three years ago. It is our understanding that the Dutch Tax Authorities actively use this case to enquiry into similar situations.