On Oct. 17, 2017 our article for the Cayman Financial Review on the use of the Netherlands as a tax haven was published. Among the topics covered were the benefits of the tax treaties of the Netherlands on the dividend withholding tax and the absence of a withholding tax on royalties and interests. In the same month, however, the new coalition government announced substantial changes in the Dutch tax code, most importantly the planned “abolition” of the dividend withholding tax and the introduction of a withholding tax on royalties and interest.

Because the new coalition government has a majority, albeit of just one seat, in both houses of parliament, the plan to do away with the tax is almost certain to become law, unless lawmakers from the ruling parties reconsider it. The first changes are not to be implemented before 2019 (likely 2020) and many details remain unknown. Since the “abolition” of the dividend withholding tax has led to a storm of reactions, we decided to discuss arguments for and against the proposed changes.

Current situation

Under current law there is no withholding tax on royalties and interest at all. There is a dividend withholding tax of 15 percent.

Dutch tax payers receive a full tax credit for the dividend withholding tax levied and this results in a repayment if there is no income tax to credit it against. As such the dividend withholding tax is effectively zero for resident tax payers.

Dividends distributed to foreigners are also subject to dividend withholding tax. If an exemption like the EU parent subsidiary directive applies, this may lead to the administrative costs of filing a zero tax return. In case of a reduction, like under a tax treaty, the tax is levied but partially repaid. If there is no Dutch income the dividend withholding tax is in effect an actual tax. So, in practice the dividend withholding tax is borne almost exclusively by non-resident retail shareholders and non-resident institutional shareholders like pension funds.

These non-resident shareholders may not be able to claim a full refund or exemption of the Dutch dividend withholding tax or a full home country tax credit may not always be available.

The proposal is not to abolish the tax, but to no longer levy dividend withholding tax in most cases. The tax remains for distributions to low tax jurisdictions and in case of “abuse.” A total ending of the tax is expected to result in a tax savings of 1.4 billion euros ($1.6 billion) for foreign investors according to the new coalition government analysis of the budgetary impact of the measures.

The dividend withholding tax

The plan to abolish the dividend withholding tax has been circulating for decades around Dutch academia and tax professionals. However, since the tax burden is primarily borne by foreign shareholders, the idea has never been popular amongst politicians. During the latest national election, no party campaigned on it or even mentioned it in its platform. Only during the formation of the new coalition government it was suggested by Shell and the employers’ organization VNO/NCW. Therefore, it was completely unexpected that it ended up in the new coalition agreement. This October surprise led to a parliamentary debate where various arguments were discussed.

The new coalition government argues that the ending of the tax is necessary. The exit of the United Kingdom from the EU affects the competitive position of the Netherlands. The United Kingdom has no dividend withholding tax. Even though the U.K. is the only direct neighbor that offers this significant advantage, there are many more countries in Europe and even the EU that do not tax outgoing dividends either. The Prime Minister stated that the abolition is of crucial importance for the international position of the Netherlands and maintaining the investments in its economy.

Senior executives from two of the largest Dutch corporations – Shell and Unilever – agree, there is insufficient home-grown capital to fuel large companies, making them dependent on foreign shareholders who can fund their growth and investments. The corporate executives point to the lack of domestic capital as a key reason why the country’s 15 percent tax on dividend distributions is a major burden on resident multinational corporations.

Opponents say the government is giving in to pressure from corporations and the business lobby – an accusation denied by both the government and corporations. Furthermore, they claim there is no positive effect on the Dutch economy, based on statements of the Central Planning Bureau.

But what are the facts? A recent study of SOMO (Centre for Research on Multinational Enterprises, part of the Oxfam strategic alliance) of the ten largest companies listed at the Amsterdam Stock Exchange claims that most shareholders will gain no tax advantage from the abolition, as most of them receive either a refund or are exempted. Additionally, insofar the Netherlands do not tax outgoing dividends, this advantage is often taxed away in the recipient’s country. So there is a case to be made that in many instances there is no tax benefit for the investor. But this does not take into account that the process of withholding and claiming reductions, exemptions and credits gives rise to significant administrative burdens. It is estimated 80 percent of the tax is returned. Therefore, it is clear that there will be significant savings in administrative costs.

Will there be an effect on the economy? To claim there is no positive effect on the economy, based on statements of the Central Planning Bureau, is insincere. The Central Planning Bureau stated that since it has no studies that show either a positive or negative effect, it simply does not know. What is known to politicians, economists and anyone else with common sense is that if you increase the cost of something you get less of it, be it a tax on smoking or investments. Moreover, tax professionals indicate that large companies, especially U.S.-based companies, consider the dividend withholding tax to be an important factor when deciding where to locate their (European) headquarters. This point is illustrated by the fact that FiatChrysler and chemical giant LyondellBasell both moved to the U.K. because of the abolition of the dividend withholding tax in that country in 1999. So even though no one has a crystal ball to predict the future effects, a logical and empirical statement can be made regarding the effects on the economy.

Opponents of abolishing the dividend withholding tax point out there will be a loss of tax revenues which could have been used for infrastructure or education, which is also of value for investing companies. That there will be some net reduction in tax revenues is likely, but how much remains to be seen. We note the tax will not be abolished entirely, but it will still be levied in “abuse” situations and on dividend distributions to low tax jurisdictions. It is currently unclear what the relevant tax rate(s) will be, or when a jurisdiction will qualify as ‘’low tax,” or what situations will be regarded as abusive. It is especially the case in these situations that no tax treaty applied in the first place, so that the dividend withholding tax was effectively paid.

As for the tax revenue loss that may occur, even if it would be the total amount of 1.4 billion euros, it is doubtful that this amount (less than half of one percent of the total budget) would be used for meaningful incentives for international investors or even economic growth in general. None of the opponents take into account the increased tax revenue from economic growth, because they do not believe the abolition will have any positive effects. In other words, they make their predictions based on the static model, rather than the dynamic model.

Obviously, many tax payers have already found ways to avoid the current dividend withholding tax, as explained in our previous article, and it is unlikely that these tax payers will decide to start paying this new “anti-abuse” dividend withholding tax. Tax payers that decided to avoid tax where it pays to do so, will most likely find ways to do so in this future regime as well. Therefore, it remains to be seen how much tax revenue will be raised from this remnant of the dividend tax.

The interest and royalty withholding tax

As much attention as the “abolition” of the dividend withholding tax has garnered, so little attention the announced introduction of the royalty and interest withholding tax has received.

One reason is that still little is known. These new withholding taxes apparently would be introduced as of 2023. Details are expected earliest the first half of 2018.

The announced withholding tax demonstrates the intention to reduce the attractiveness of the Netherlands as a passive flow-through jurisdiction, while seeking to improve the country’s attractiveness for active business operations and headquarters by abolishing the dividend withholding tax. The coalition agreement’s budget assumes that no revenues will be raised through the new withholding tax, apparently because the new Dutch government expects that the relevant companies will either restructure or relocate these activities.

To the extent that these new taxes are hard to avoid for companies that do not relocate, they may very well lead to a loss in other tax revenues, because currently the government of the Netherlands collects a huge amount of revenues from the significant number of international holding companies, finance companies and royalty (conduit) companies and their staff, tax advisors, accountants, lawyers, notaries, trust companies and other service providers. Research by SEO (Foundation for Economic Research), paid for by an organization of major trust companies, shows that economic gains for the Netherlands are estimated at 3 billion euros. Therefore, it seems the measure’s purpose is simply to send a message to the world that the Netherlands is serious about fighting tax avoidance. In short: virtue signaling.

In the context of countering tax avoidance through the use of tax havens, the coalition agreement also proposes the introduction of a blacklist of non-cooperative jurisdictions.

It is striking that the arguments for abolishing the dividend withholding tax also apply to not introducing an interest and royalty withholding tax. It also reduces the effectiveness of earlier legislation to make the Netherlands more attractive for innovative companies.


Although details are not yet known, the planned abolition of the withholding tax on dividends looks promising for the use of the Netherlands in tax planning and will be an administrative relief for foreign and domestic investors alike. On the other hand, if the announced withholding tax on royalties and interests is implemented, it will be a deterrent for investment and will result in an increase in administrative burdens, even if they can be avoided with proper tax planning. The effects of these tax changes on the image of the Netherlands as a tax haven remains to be seen. If it helps to keep the Netherlands off the radar of zealous foreign tax inspectors, it would actually help to the keep the country attractive to tax avoiders. Now wouldn’t that be the ultimate irony?