December 7, 2022 Netherlands issues favorable withholding tax Decree dealing with disregarded entities
Executive summary The hybrid entity rules included in the DWHTA and the CWHTA, as well as certain applicable tax treaties, contain provisions on how to treat payments involving hybrid entities. In practice, there is ambiguity as to the application of the hybrid rules in the scenario whereby a dividend, interest or royalty payment is made to a hybrid entity while the Dutch entity (withholding agent) that is making the payment is itself also a hybrid entity (e.g., because it is treated as a disregarded entity for United States (US) federal income tax purposes). On 6 December 2022, the Dutch State Secretary of Finance published a Decree with guidance on the application of the withholding tax exemption in the DWHTA and CWHTA and in (certain) tax treaties, removing the ambiguity in these situations. Detailed discussion Application of the new Decree In the Decree, the Dutch State Secretary of Finance published new guidance on the application of the domestic withholding tax exemption as included in the DWHTA and CWHTA with respect to a Dutch entity (withholding agent) that is treated as disregarded (i.e., transparent) for US federal income tax purposes, that makes a dividend, interest or royalty payment to a US hybrid entity (i.e., non-transparent for Dutch tax purposes and transparent for US federal income tax purposes), which is itself held by a (non-transparent) US corporate shareholder. Upon a payment of a dividend, interest or royalty by the Dutch entity (withholding agent), the US hybrid entity is for Dutch tax purposes considered to be the recipient of the proceeds if it qualifies as non-transparent for Dutch tax purposes. However, as both the Dutch withholding agent and the US hybrid entity are treated as transparent from a US tax perspective, the payments of dividend, interest or royalty by the Dutch withholding agent is not visible for US federal income tax purposes and thus not as such taxed as an item of income by that US corporate shareholder. As a result, in certain situations there was uncertainty whether the Dutch domestic withholding tax exemptions as included in the DWHTA and CWHTA could be applied. Further guidance regarding the New Decree In the new Decree, the Dutch State Secretary of Finance states that the domestic withholding tax exemptions as included in the DWHTA and CWHTA can be applied (subject to the general conditions) if the Dutch withholding agent can substantiate that the underlying income from which the dividend, interest or royalty payment is made has already been recognized as income in the US in the current or prior year. In comparable situations, and if the above conditions are met, the dividend, interest or royalty is also considered as an item of income of a resident for purposes of tax treaties that include a similar hybrid provision (such as Article 24, paragraph 4, of the Tax Treaty between the Netherlands and the US). The above can be substantiated inter alia via the US federal income tax return of the US tax resident corporate shareholder evidencing that the underlying income is included, and the Decree mentions that this US inclusion can happen before the payment by the withholding agent. The Dutch State Secretary of Finance confirmed that the above interpretation also applies to structures with multiple intermediate hybrid entities (so-called "stacking of hybrid entities"). _________________________________________ For additional information with respect to this Alert, please contact the following: Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Amsterdam\
Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Rotterdam
Ernst & Young LLP (United States), Netherlands Tax Desk, New York
Ernst & Young LLP (United States), Netherlands Tax Desk, Chicago
Ernst & Young LLP (United States), Netherlands Tax Desk, San Jose/San Francisco
Ernst & Young Tax Services Limited (Hong Kong), Netherlands Tax Desk, Hong Kong
Ernst & Young (China) Advisory Limited (China Mainland), Netherlands/EMEA Tax Desk, Shanghai
Ernst & Young (China) Advisory Limited (China Mainland), Netherlands/EMEA Tax Desk, Beijing
EY Corporate Advisors Pte Ltd (Singapore), Netherlands/EMEA Tax Desk, Singapore
Ernst & Young LLP (United Kingdom), Netherlands Tax Desk, London
Ernst & Young Tax Co (Japan), Netherlands/EMEA Tax Desk, Tokyo
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