In this article we will discuss position paper KG:024:2022:1 of May 20, 2022 regarding the avoidance test of Article 3a, Paragraph 6 of the Dutch dividend withholding (the DDWT) Act in case of a demerger.

In its position paper the Knowledge Group on dividend withholding tax and (other) withholding taxes has answered the question whether a demerger via which the assets that are transferred to the other legal entity, or that remain with the demerged legal entity, directly or indirectly mainly consist of portfolio investments, by definition results in a distribution of profits.

 

Reason

A company intends to split off its portfolio investments and liquid assets to a newly to be incorporated entity. A large part of these assets resulted from the sale of a subsidiary.

 

Question

Does a demerger in which the assets that are transferred to the other legal entity, or that remain with the demerging legal entity, directly or indirectly, mainly consist of portfolio investments, by definition result in a profit distribution?

 

Legal context

 

Article 3a, Paragraph 4 of the DDWT Act

If the demerging legal entity is a resident of the Netherlands and the transfer by way of universal title in the context of a demerger is mainly aimed at avoiding or deferring tax, Paragraph 2, first and second sentences, shall not apply and all benefits that a shareholder enjoyed as such are regarded to constitute a profit distribution made by the demerging legal entity.

 

Article 3a, Paragraph 6 of the DDWT Act

For the purposes of Paragraphs 1, 2, 4 and 5, unless the contrary is made plausible, a share exchange, a demerger and a merger are deemed to be predominantly aimed at avoiding or deferring tax if the share exchange, the demerger or the merger, respectively, does not take place for business reasons, such as a restructuring or rationalization of the active operations of the legal entities involved in the share exchange, demerger or merger. In the case of a demerger, business considerations are furthermore not considered to be present if the assets that are transferred to the other legal entity via the demerger, directly or indirectly, mainly consist of portfolio investments, including liquid assets, or if what remains with the demerging legal entity, directly or indirectly, mainly consists of portfolio investments, unless the portfolio investments that are being transferred or remain do not represent a seclusion from the retained earnings.

 

Answer

Whether a profit distribution exists in the event of a split off of portfolio investments depends on the facts and circumstances of the specific case. Pursuant to Article 3a, Paragraph 6, second sentence of the DDWT Act 1965, in the event of a demerger whereby mainly, directly or indirectly, portfolio investments are being transferred to another company or remain with the demerging legal entity, business considerations are considered not to be present. Consequently, the legal presumption of avoidance or a deferral of tax (Article 3a, Paragraph 6, first sentence of the DDWT Act) comes into effect. The taxpayer can then still make it plausible – based on of the facts and circumstances that played a role in the specific case - that there has been no avoidance or deferral of tax.

 

Background

With this evidence rule (the legal presumption that the demerger’s main purpose is to avoid or defer tax unless the taxpayer can make plausible that this was not the main purposes of the demerger), the legislator wanted to combat the so-called dividend replacement demerger. In such a dividend replacement demerger a company's cash resources are split off to a (newly incorporated) entity that in its turn issues shares to the shareholders of the demerging legal entity in return. The shareholders then sell these newly issued shares and thus convert taxable (dividend) income into tax free capital gains realized on the sale of shares.

 

The full Dutch text of the position paper can be found here.

 

Other position papers of the Knowledge Group on dividend withholding tax and (other) withholding taxes of which we already made an English summary can be found here.

 

 

Copyright – internationaltaxplaza.info

 

 

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