Explanation of dividend tax in the Netherlands
Nov 1, 2020
If you start a BV in the Netherlands, sooner or later you will be confronted with dividend tax. Already have? Great! That means business is going well! Not yet encountered? Read on: sooner or later you will. In this blog we will explain.
What is dividend tax?
Dividend tax is the tax that is paid on profits that you pay from your BV to its shareholders. As soon as the financial year of the BV has ended, the accountant will start preparing the financial statements. This shows how much profit is left at the bottom of the line. This profit can then either be held in reserve, or be distributed to the shareholders. If you choose to distribute the dividend, the BV that distributes the profit to the shareholders is referred to as the "withholding agent" in tax terms. This BV is responsible for withholding and paying the dividend tax to the tax authorities. Let’s put it into a simple example.
BV A has made a profit of EUR 100,000 and distributes this to its shareholder Sharon. The dividend tax rate is 15%. BV A should withhold this and deduct it from its profits before it pays the remaining 85% to Sharon. Sharon receives net EUR 85,000 from the BV on her private bank account. BV A withholds EUR 15,000 and pays this to the Tax Authorities.The BV has done its job now. But Sharon isn’t done yet with the Tax Authorities.
Sharon received EUR 85,000 in her account. This amount will be taxed as income. Since Sharon has all shares (100%) in BV A, the shares fall in "Box 2" of the Dutch Tax bracket system. If Sharon had held less than 5% of the shares in BV A, all her dividends would have been taxed in Box 3, instead of Box 2. The difference between the two is significant: 26,25% for Box 2 and 0,54% - 1,60% for Box 3.
But Sharon doesn’t need to pay the full amount under Box 2, because her dues are settled with the dividend tax already paid for her by BV A. In total Sharon has to pay € 100,000 x 26,25% = € 26,250 in tax. € 15,000 of this was already withheld by the BV. This means she needs to pay an additional € 11,250 in taxes, rendering her a net profit of € 73,750 on her dividend. This system is called a withholding taxation.
Is there a difference if shareholder Y is a natural person, or a holding BV?
Yes, very good question! If Sharon would have been a holding company called Sharon Holding B.V., and not a natural person, things would have looked very different. This is due to the so-called “participation exemption”. Under this rule, in a holding structure any dividends or capital gains from shares in the subsidiary company are exempt from dividend taxes. Be mindful that the participation exemption regime requires that the holding company holds an interest of at least 5% and meets at least one of the rules below:(i) The consolidated assets of the subsidiary consist of less than 50% of low-taxed free passive investments.(ii) The objective for investing in the subsidiary is to obtain a return that is higher than what may be expected from regular asset management.
But then the dividends are in Sharon’s holding. What good does that do her?
This is true. Having cash in her holding is not the same as having it in her private bank account. If Sharon wants to be able to buy a nice car from her dividends, she would still have to perform a payout from her holding to her private bank account, which is taxed as described in the first example. But there are many more options open to Sharon. She can use the dividends to reinvest in other business projects, she can give herself a loan or mortgage from her BV.
I’m a foreign shareholder. How does this work for me?
During 2019-2020, there was a lot of fuss in the Dutch media about dividend tax for foreign shareholders. What was going on here? The Dutch taxation system on dividends, as explained in our previous example, works as a withholding tax on the shareholder's income tax. Most other countries (though not all!) use this system as well. So when a foreign shareholder in a Dutch company wants to receive dividends, that shareholders’ Tax Authorities also want to levy tax on the distributed profit. This would lead to the unfortunate result of double taxation. For that reason, countries conclude tax treaties with each other so that shareholders do not receive a fiscal double wedgie. These treaties often stipulate that the country where the shareholder lives does not tax the dividend for the second time.
So for example, if the Netherlands levies 15% dividend tax and the country of residence levies 28% income tax, the shareholder has to pay 15% in dividend tax in the Netherlands and 28% - 15% = 13% in income tax in its home country. The home country settles these taxes, just like the Dutch Tax Authorities would in the first example.
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