On November 9, 2023 on the website of the Dutch tax authorities a position paper of their Knowledge Group dividend withholding tax and withholding taxes on the consequences for Dutch dividend withholding tax purposes of a repurchase of outstanding shares to hedge a potential conversion obligation that exists under a convertible bond was published (KG:024:2023:23).
In this position paper the Knowledge Group answered the question whether shares that were repurchased to hedge a potential conversion obligation that exists under a convertible bond qualify as a temporary investment for Dutch dividend withholding tax purposes.
Facts
A Dutch company has issued a convertible bond. At a certain moment the company repurchases outstanding (own) shares to hedge a potential conversion obligation that exists under the issued bonds. The question is whether that repurchase qualifies as a repurchase for temporary investment purposes as meant in Article 3, Paragraph 3 of the Dutch dividend withholding tax Act (hereinafter: DDWT Act).
Questions
Do shares that have been repurchased to hedge a potential conversion obligation that exists under a convertible bond qualify as a temporary investment?
Legal context
Article 3, Paragraph 3 of the Dutch dividend withholding tax Act reads as follows:
“The purchase of shares for the purpose of fulfilling an option obligation towards an employee of the own company, or of an affiliated company, as referred to in Article 10a, Paragraph 7 of the Dutch wage tax Act is a temporary investment. In the event that three months after the option obligation extinguished these shares are still part of the company's assets, they are deemed to have been repurchased at that time against the fair market value of said shares at that time. For the purposes of this paragraph, an option obligation is understood to mean an obligation that is the counterpart of a right to acquire one or more shares, or rights equivalent thereto.”
Answer
No, shares that have been repurchased to hedge a potential conversion obligation that exists under a convertible bond are not held as a temporary investment. In case of such a repurchase any amount that is being paid in excess of the average paid up capital of the relevant shares is therefore part of the proceeds referred to in Article 3 of the DDWT Act.
(Remark ITP: The above means that unless other exemptions apply in principle Dutch dividend withholding tax is due over the part with which the repurchase price exceeds the average paid up capital of the repurchased shares.)
From the considerations of the tax authorities
In ECLI:NL:HR:2001:AB0158, the Dutch Supreme Court ruled that shares that are repurchased to hedge an option obligation are to be considered cancelled and are therefore not held for temporary investment purposes. As a result of this ruling, Article 3, Paragraph 3 of the DDWT Act was introduced. Under that provision, the repurchase of shares to hedge an employee option obligation constitutes a repurchase for temporary investment purposes. During the debate in parliament on the introduction of the aforementioned article, the Secretary of State explicitly stated that based on ECLI:NL:HR:2001:AB0158 shares that have been repurchased to hedge a conversion obligation of a convertible bond are deemed to have been cancelled, and therefore they have not been repurchased for temporary investment purposes.
On the occasion of such a repurchase, what is paid in excess of the average paid up capital of the repurchased shares therefore belongs to the proceeds referred to in Article 3 of the DDWT. For the sake of completeness, it should be noted that, if the conditions set therein are met, the exemption of Article 4c of the DDWT Act may apply.
Other position papers of the Dutch Knowledge Group dividend withholding tax and withholding taxes that we have reported on earlier can be found here.
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