Netherlands: Proposed options to address dividend stripping

The government on 15 December 2021 launched an internet consultation on options for strengthening measures to prevent dividend stripping.

Dividend stripping involves splitting the beneficial and legal entitlement in order to obtain a tax advantage—for example a dividend tax refund, reduction or credit for which the beneficial owner itself is not eligible. The tax benefit is usually split between both parties. For example, lending out shares, buying a put option or writing a call option are ways to have one party receive the dividend under civil law (a limited benefit amounting to a part of the tax benefit), while the beneficial interest in the share and the dividend goes to the other party.

There are currently measures in place to address dividend stripping, but because of the tax authorities’ heavy burden of proof, it is not possible to adequately address dividend stripping.

The government is investigating how to prevent the improper use of dividend stripping without unnecessarily affecting normal stock exchange trading. The consultation document contains six potential solutions and various general questions. The government is explicitly offering the scope to propose options that fit within the preconditions. 

The government has identified the following alternative measures:

A.     A dividend tax reduction, refund or credit is only possible for the party that is the shareholder (the document talks about “legal ownership”) and has the beneficial ownership of the shares. In this option, the holder of the right of usufruct is no longer entitled to a reduction, refund or credit. The consultation document says nothing about an equal status with share certificates.

B.     A dividend tax reduction, refund or credit is only possible for the party that during a certain period before the record date and for some time thereafter, has the entire legal ownership and the beneficial ownership of the shares. The holding period can be combined with a rebuttal provision (whereby the shareholder must prove that it is pursuing business-motivated objectives in splitting off the beneficial interest, or does indeed hold the beneficial interest), and with an efficiency threshold (per distribution or per period).

C.     The crediting of dividend tax against corporate income tax is limited to the net amount of corporate income tax payable on the dividend. This option may also be combined with an efficiency threshold. This option will not apply to pension funds.

D.     To determine that only one party is entitled to a credit, refund or reduction, additional documentation obligations can be introduced, for example (1) to verifiably only issue one dividend voucher per dividend distribution, (2) to register dividend vouchers with the Dutch tax authorities, and (3) to require a dividend voucher to be presented in order to obtain a credit, refund or reduction.

E.     In order to provide clarity on who is entitled to the dividend and thus is entitled to a dividend tax credit, reduction or refund, the legislation can state that this depends on who the shareholder is on the record date. This option could have an effect in combination with option A, B or D.

F.      In combination with other options, a legal provision can be included under which any assessment of the beneficial interest in the shares must also take account of the interests that are held by associated natural persons and associated entities. 

In assessing the solutions, the following preconditions apply:

• It must be feasible (for the Dutch tax authorities and market parties).
• Attention is paid to the impact on normal stock exchange trading and the consequences for citizens and companies.
• It is sustainable under international and EU law.

The government will consider the options further based on the reactions received and then inform the Lower House of Parliament, probably in the spring of 2022.

• Option A has profound implications for a broad range of situations unrelated to dividend stripping and contains a high degree of what some believe is “overkill.”
• At first sight, Option B appears the most realistic, certainly if the efficiency threshold is set at a somewhat higher level.
• Option C has the risk that it will lead to excessive tax on dividends received by service providers in the financial sector (for example, insurers and market makers).
• Options D, E and F are only supplementary in nature.

Read a December 2021 report prepared by the KPMG member firm in the Netherlands