The current DDWT exemption for EU and EEA shareholders has per 1 January 2018 been extended to third countries where the non – resident shareholder is an entity that has an interest of at least 5 percent in the Dutch company or resides (for tax treaty purposes) in a jurisdiction that has concluded a tax treaty, including a dividend article, with the Netherlands. The dividend article does not necessary has to minimize the dividend withholding tax to 0%.  The extended DDWT exemption may also apply to distributions to a hybrid entity (an entity which is considered transparent in one country and non-transparent in the other).

Hybrid Entity

There are two possible situations:

A hybrid entity is non – transparent for Dutch tax purposes but is transparent under its local tax legislation;
A hybrid entity is transparent for Dutch tax purposes but is non – transparent under its local tax legislation.
We will discuss the application of the DDWT exemption in both situations below.

DDWT Exemption In Case Of A Hybrid Entity, Non – Transparent For Dutch Tax Purposes

In this situation the hybrid entity is considered to be non-transparent and the beneficiary of the dividend for Dutch tax purposes.  At the same time, the country of residence of the hybrid entity perceives the hybrid entity as transparent and does not consider the hybrid entity to be the beneficiary of the dividend, but its participants. (Residents of the same country as the Hybrid Entity).

In this situation the DDWT exemption can still be applicable if all the participants in the hybrid entity can qualify for the DDWT exemption independently. In other words, the hybrid entity can still qualify for the DDWT exemption if all the participants in the hybrid entity, independently:

Have an interest of at least 5 percent in the Dutch company;
Reside (for tax treaty purposes) in a jurisdiction that has concluded a tax treaty, including a dividend article, with the Netherlands. The dividend article does not necessarily have to minimize the dividend withholding tax to 0%.
Does not hold the shareholding with the main purpose (or one of the main purposes) to avoid taxation (subjective test) and the holding of the shares or membership rights is not part of an artificial structure)s) or transaction(s), which is the case if there are no valid business reasons reflecting economic reality (objective test).

DDWT Exemption In Case Of A hybrid Entity,  Transparent For Dutch Tax Purposes
The hybrid entity in this situation is considered to be transparent for Dutch tax purposes and does not qualify as the beneficiary of the dividend.  The country of the participants in the hybrid entity perceives the hybrid entity as non – transparent and does perceive the hybrid entity as the beneficiary of dividend  for tax purposes.

In this situation the application of the DDWT exemption depends on the tax treatment of the hybrid entity in its country of residence. If the country of the hybrid entity perceives the hybrid entity as non – transparent and as a beneficiary of the dividend (which means that the dividend is considered as part of income of the hybrid entity), the DDWT exemption will be applicable if the hybrid entity

Has an interest of at least 5 percent in the Dutch company;
Resides (for tax treaty purposes) in a jurisdiction that has concluded a tax treaty, including a dividend article, with the Netherlands. The dividend article does not necessary has to minimize the dividend withholding tax to 0%.
Does not hold the shareholding with the main purpose (or one of the main purposes) to avoid taxation (subjective test) and the holding of the shares or membership rights is not part of an artificial structure)s) or transaction(s), which is the case if there are no valid business reasons reflecting economic reality (objective test).
If the country of the hybrid entity perceives the hybrid entity as transparent and not as a beneficiary of the dividend, in that case, the DDWT will not be applicable. Nor for the hybrid entity, nor for the participants of the hybrid entity. The participants of the hybrid entity can fall back on the concluded double taxation agreement with the Netherlands.

Would you like to know more? Or would you like us to review your structure to ensure its effectiveness?

Have a question about your Dutch Structure? Contact Jimmy Cox.