In this article we discuss position paper KG:024:2022:10 of July 7, 2022 regarding the step-up facility of Article 3a, Paragraph 5 of the Dutch dividend withholding (the DDWT) Act.
In its position paper the Knowledge Group on dividend withholding tax and (other) withholding taxes has answered the question whether in case of a cross-border merger a dual resident entity qualifies for the step-up as referred to in Article 3a, Paragraph 5, of the DDWT Act.
Reason
X is a dual resident entity incorporated under Dutch law. Pursuant to Article 1, Paragraph 3 of the DDWT Act X BV is a withholding agent for Dutch dividend withholding tax. Y is incorporated under the law of another state and is not a resident of the Netherlands.
In a cross-border merger X and Y are merged, whereby X is the acquiring legal entity and Y is the disappearing legal entity.
Question
Does an entity that pursuant to Article 1, Paragraph 3 of the DDWT Act is liable to withhold Dutch dividend withholding tax qualify for the step-up as referred to in Article 3a, Paragraph 5 of the DDWT Act, in the event that this company merges as the acquiring legal entity with a disappearing legal entity that was incorporated under foreign law and is not a resident of the Netherlands?
Legal context
Article 1, Paragraph 3 of the DDWT Act
If the incorporation of an entity as referred to in the first paragraph has taken place under Dutch law, that company is always deemed to be a resident of the Netherlands.
A European public limited liability company that at the time of its incorporation was governed by Dutch law is deemed to have been incorporated under Dutch law for the purposes of the first sentence.
Article 3a, Paragraph 5 of the DDWT Act
In the event of a transfer by universal title in the context of a merger of a legal entity, with regard to all shareholders, the paid-up capital on the shares issued by the acquiring legal entity under the merger is maximized at the amount of the capital paid-up on the shares in the disappearing legal entity. If in the context of the merger an additional payment in cash is made, for the application of the first sentence the capital paid-up on the shares in the disappearing legal entity will be reduced with the amount of this additional payment. Unless the merger is mainly aimed at avoiding or deferring taxation, by way of derogation from the first and second sentences, if the disappearing legal entity is not a resident of the Netherlands, the paid-up capital on the shares issued by the acquiring legal entity in the context of the merger shall be deemed to amount to the fair market value of the assets that as a result of the merger are transferred to the acquiring legal entity insofar as the assets do not consist of shares in a company that is a resident of the Netherlands.
Answer
Yes, unless the merger is mainly aimed at avoiding or deferring tax, a legal entity, that pursuant to Article 1, Paragraph 3 of the DDWT Act is a withholding agent, (legally) merges as the acquiring legal entity, with a legal entity that is not a resident of the Netherlands, the acquiring (Dutch) entity qualifies for the step-up of Article 3a, Paragraph 5, DDWT Act. It is up to the withholding agent to demonstrate that the merger is not aimed at avoiding or deferring taxation.
From the consideration of the tax authorities
The anti-abuse legislation laid down in Article 3a, Paragraph 5 of the DDWT Act prescribes that, in the event of a legal merger, regarding all shareholders, the paid-up capital on the shares issued by the acquiring legal entity in the context of the merger is maximized ad the paid-up capital of the disappearing legal entity. The provision prevents the paid-up capital from being increased by means of a merger, and then subsequently being repaid (tax exempt).
To prevent a that a Dutch dividend withholding tax claim is being created over profits that were not generated in the Netherlands the aforementioned anti-abuse legislation does not apply to a merger with a foreign legal entity.
When applying Article 3a of the DDWT Act, the fictional place of residency as arranged by Article 1, paragraph 3 of the DDWT Act must be taken into account.
For a disappearing dual resident, the residence fiction therefore means that there is no legal entity that is not a resident of the Netherlands. As a result an such situation, no entitlement to the step-up exists.
However, in the underlying case a reversed situation exists. In the underlying case it’s not the disappearing legal entity that is a dual resident entity, but it’s the acquiring legal entity that is a dual resident, which has been incorporated under Dutch law. Consequently, in the underlying case the step-up of Article 3a, Paragraph 5 of the DDWT Act applies.
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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