The Netherlands – Tax update

Published on April 28, 2021


Over the last 2 months, the Dutch government has released several measurements as part of their roadmap to reduce the risk of tax avoidance through the use of the Dutch civil- and tax system. The package of measurements includes:

  • bill of law introducing a conditional withholding tax on dividend payments to related
  • companies established in “low-tax jurisdictions and in situations of abuse;
  • a consultation document including a draft bill of law and explanatory memorandum targeting reverse-hybrid mismatches;
  • a consultation document on targeting mismatched resulting from the application of the at-
  • arm’s length principle (basically abolishing the Dutch ‘informal capital doctrine’); and
  • a consultation document including a draft bill of law and explanatory memorandum on targeting international mismatches by implementing the use of two supplementary methods for the classification of foreign legal forms, redefining the open-end mutual fund (open fonds voor gemene rekening) and abolishing corporate income tax liability for open limited partnerships (open commanditaire vennootschappen).

Through these consultation documents, Dutch government sought input from the public. Flynth has provided input to the government on the last mentioned consultation document (i.e. the abolition of CIT liability for open limited partnerships).

Conditional withholding tax on dividend payments to related companies established in “low-tax jurisdictions (effective as of 1 January 2024)
The conditional withholding tax would apply with effect from 1 January 2024. The tax is referred to as "conditional" as it only applies to:

  • dividend payments to related companies established in "low-tax jurisdictions" (i.e. jurisdictions with a statutory tax rate on profits below 9%); and
  • in situations of abuse, i.e. where artificial arrangements are employed to avoid the imposition of Dutch dividend withholding tax

An important consequence of this conditional withholding tax is that all dividend payments made to low-tax jurisdictions will be taxed. This means, among other things, that the participation exemption cannot prevent application of the new withholding tax if the payments meet the conditions set out above.

The conditional withholding tax on dividend will be implemented in the existing law as that for the conditional withholding tax on interest and royalties, which took effect from 1 January 2021 already.

Dutch tax experts have already issued negative comments about the way this conditional withholding tax will be structured in a separate tax law, next to the already existing Dutch dividend tax legislation.

Reverse hybrid measures (effective as of 1 January 2022)
Under the proposed bill of law, a reverse hybrid entity is an entity that is considered transparent in its jurisdiction of incorporation/establishment, whereas the entity is considered a non-transparent entity in the jurisdiction of one or more related participant. A ‘related participant’ is defined as a participant who holds directly or indirectly 50% or more of the voting rights, capital interest or profit rights in the entity.

As a result of the newly proposed reverse hybrid measures, a reverse hybrid will become subject to Dutch corporate income tax only to the extent that the profit is attributable to related participants that classify the entity as non-transparent. In addition, distributions by a reverse hybrid entity are only subject to Dutch (dividend) withholding tax to the extent the distribution is attributable to related participants which classify the entity as non-transparent.


  • BCV is transparent from Dutch tax perspective, which results in allocation of its profits to both Inc A and Inc B.
  • Both US participants, located in the US, classify BCV from a US tax point of view as non-transparent, so no allocation of the royalty payment and no US tax.
  • Under the regular hybrid mismatch rules (ATAD2) payments made by BVX to BCV are non-deductible at the level of BVX.
  • Under the reverse hybrid rules, BCV is considered non-transparent from a Dutch perspective, which results in Dutch CIT for BCV, and a deduction for BV X.


As both US entities classify BCV as non-transparent BCV is considered 100% reverse-hybrid, any dividend distributed by BV X to BCV would be exempted from Dutch dividend withholding tax. However, whereas a foreign participant in BCV would consider BCV as transparent, the dividend attributable to that participant’s part would be subject to Dutch dividend withholding tax if there is no qualifying tax treaty or EU/EEA State is in place).

Amendment at arm’s length principle (effective as of 1 January 2022)
Under current Dutch tax law, at arm’s length expenses are deductible, regardless if there is corresponding taxation at the level of the recipient (so called informal capital doctrine).

The proposed amendment aims to include a corresponding matching mechanism regarding at arm’s length expenses, preventing adjustments which could result into double-taxation.

Abolition of CIT liability for open limited partnerships (effective as of 1 January 2022)
The Dutch classification policy of certain legal forms currently deviates from other countries. As a result, hybrid mismatches may arise because one country classifies an entity as transparent, as a result of which the underlying participants are taxed, while the other country classifies it as a non- transparent entity. Although hybrid mismatches can be countered by measures under ATAD2 (and as aforementioned), the underlying cause of the mismatch is not removed.

The bill of law proposes:

  • to amend the classification policy of (foreign) legal forms;
  • to abolish corporate income tax liability of open limited partnerships; and
  • to redefining the open-end mutual fund.

As, within the international tax practice, both the open limited partnerships and the open-end mutual fund are rarely used compared to the national tax practice, the draft bill has a substantial negative financial effect on national structures. Existing structures are deemed to have transferred their participation and debt claims on the limited partnership at fair market value as of 31 December 2021. To avoid direct taxation of the limited partners facilities will be introduced. However, these facilities will not apply for participants in so called family open-end funds.

As to foreign legal forms (to be) established in the Netherlands, of which no comparable legal form exists (e.g. the UK LLP), two supplementary classification methods will be implemented:

  • the symmetric method, whereas the Netherlands will follow the tax treatment of the foreign entity in its state of residence This method will be used if (i) a foreign entity owns a participation in a Dutch entity which is subject to corporate income tax; or (ii) a Dutch entity subject to corporate income tax owns a participation in an entity established under foreign law for which a non-comparable Dutch legal form exists; and
  • a method under which the foreign entity is deemed to be a Dutch resident for the application of Dutch corporate income tax.

Flynth has provided commentary on this consultation document, as this proposed draft law will have a major financial impact on many of our clients.

For any questions regarding your Dutch clients i.e. clients with Dutch interest, please do contact Mr. Erwin J.A. Deijmann LLM