Abolition of dividend tax: windfall for multinationals or job guarantee?
The Lower House of the Dutch Parliament most of last Thursday and Friday, the first and second of November remained in the throes of discussing the cabinet’s planned abolition of dividend tax, as a move which the government parties are presenting as beneficent in terms of business climate whereas many opposition parties have referred to it as a windfall for multinational corporations.
So exactly what is the commotion all about?
Profit distribution to shareholders
It is customary for companies at annual intervals to distribute part of the profit they have realised to their shareholders. In the Netherlands such dividend payments are liable for 15 percent dividend tax, which Dutch-resident shareholders may subsequently recoup through their income or corporation tax return. This facility is not usually available to non-Dutch tax payers such as foreign-resident private investors, pension funds and investment funds. All in all foreign investors currently account for some 1.4 billion euros in dividend tax receipts per annum.
Put differently, they will enjoy a collective 1.4 billion annual windfall at the expense of the Dutch coffers if the abolition of dividend tax goes ahead. It should be noted that the current regime includes scenarios – such as that of the Netherlands entertaining a double taxation convention with the foreign country in question – enabling non-Dutch based investors (dutch site) to recover the dividend tax they have had to pay.
Would the abolition of dividend tax benefit have a positive impact on employment?
CPB, the Netherlands Bureau for Economic Policy Analysis, is responsible for “crunching the numbers” where all kinds of proposed policy measures are concerned. Even so the planned abolition of dividend tax has had it stymied. At best their calculation experts have commented that “the measure may add to the attraction of the Dutch economy in the perception of non-Dutch based (strategic) investors”, with the Bureau’s response continuing as follows: “As CPB has no empirical evidence at its disposal where it concerns the consequences arising out of these potential effects on the Dutch economy, the Bureau has for now based its calculations on the assumption that neither economic growth nor employment will be affected by the abolition of dividend tax”.
This is rather different from what Stef van Weeghel, who combines a professorship of international tax law at the University of Amsterdam with the position of head of international tax policy at PwC, expects the impact to be:
“Companies are operating on an increasingly international scale and are engaging in mergers. This necessitates their having to weigh up time and again where their headquarters should be located. A minimal dividend tax rate will be a relevant factor whenever this sort of decision is having to be made.”
The Dutch dividend tax rate currently weighs in at a relatively modest 15 percent compared with our immediate neighbours, Germany (25 percent) and Belgium (30 percent). A similar situation can be observed a little further afield, in France, Italy and Spain, where dividend tax rates of 30, 26 and 19 percent, respectively apply. Conversely there are countries that operate lower dividend tax rates, such as Greece (10 percent) and Bulgaria (5 percent), whereas selected countries including the United Kingdom, Hungary, Slovakia, Malta and Monaco have dropped the dividend tax rate all the way to zero. Comments Stef van Weeghel: “The UK’s zero dividend tax rate makes it a fierce contender from a Dutch perspective.”
Should the Netherlands go for dividend tax reduction because other countries are doing the same?
“It would follow the logic of a race to the bottom”, says Anna Gunn, who is working on her PhD in international tax law at Leyden University. “The implementation of tax cuts is in line with a European trend and underlines that it is imperative to join forces at European level, on pain of individual countries being left with no choice but to revise their tax rates.”
Stef van Weeghel by contrast is far from convinced that a race to the bottom is under way: “There is no question of a more broadly based dividend tax trend gathering pace in Europe. The sheer size of the domestic economy in large players such as Germany and France makes these countries somewhat less vulnerable, and for them dividend tax cuts are not currently an issue. Then again several small countries including Belgium are taking the matter under advisement.”
How does all of this relate to dividend tax already having come under fire in the courts?
It’s true that numerous foreign investors have brought legal proceedings in recent years claiming the unfairness of their being denied the dividend recovery facilities that have consistently been available to their Dutch-resident counterparts.
In 2015 the Supreme Court (dutch site) – as the Netherlands’ most senior court – ruled against a Luxembourg-based investment fund which had been seeking access to a dividend tax rebate. This was hardly the end of the matter, however, as a similar case (dutch site) was brought before the Supreme Court earlier this year and said Court, rather than preparing a ruling of its own, asked the Court of Justice of the European Union to speak out on the matter, the European Court having determined in the interim that the treatment of individual foreign-resident investors should be identical to that of Dutch-resident investors … which might just open the door to foreign-resident investment funds insisting on being given access to the same tax rebate facilities.
The Dutch government by abolishing dividend tax would do away altogether with the legal predicament. In the words of Stef van Weeghel: “It would definitely enable the legal confusion to be phased out over the next few years.”
If the Netherlands’ Third Rutte Cabinet has its way, the abolition of dividend tax will be a fact by 2020.