In this article we will discuss position paper KG:024:2022:8 of May 20, 2022 regarding the consequences of optional dividend for Dutch dividend withholding tax purposes.

In this position paper the Knowledge Group on dividend withholding tax and (other) withholding taxes has answered the question whether the fact that a shareholder is given the option to chose whether he prefers to receive a profit distribution or whether he prefers to receive a repayment of capital must be respected for the application of the Dutch dividend withholding tax (DDWT) Act?

Reason

The board of an entity decides to give shareholders the right to a distribution in the form of a profit distribution, or instead to receive the same amount as a repayment of capital. Pursuant to Article 3, Paragraph 1, sub a of the DDWT Act profit distributions are to be regarded as income. If the correct steps as laid down in Article 3, Paragraph 1, under d of the DDWT Act are followed a repayment of capital is not regarded to be income.

In general, the choice of the shareholder will depend on whether he qualifies for application of the withholding exemption or for a refund or set-off of the Dutch dividend withholding tax to be withheld over the profit distribution. If this is not the case, the shareholder most likely will opt for a (tax exempt) repayment of capital.

Question

If a shareholder has the choice between a profit distribution and a repayment of capital, must the choice of the individual shareholder them be followed for application of the DDWT Act?

Legal context

Article 3, Paragraph 1, subs a and d of the DDWT Act read as follows:

1    The proceeds include:

a.   direct or indirect distributions of profit, under which name or in what form whatsoever, including that what is distributed in excess of the average paid-up capital on the relevant shares in the occasion of a buyback of shares, other than for reasons of temporary investment;

(…)

d.   partial returns of what has been paid up on shares, if and insofar as there is net profit available, unless the general meeting of shareholders has previously decided to make such a return and the nominal value of the relevant issued shares has been reduced by an equal amount by amending of the Articles of Association;

(…)

Answer

Yes, the choice of the individual share holder has to be followed for the application of the DDWT Act in the situations in which a shareholder has been given the choice to opt for either a profit distribution or for a repayment of capital.

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.

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