In more detail

These two landmark decisions emphasize the increased risks of triggering anti-abuse provisions, particularly in structures without an operating company or active investment manager (indirectly) 'above' the Netherlands and/or where the Dutch company (or its subsidiaries) is not actively managed by such operating company/investment manager. These rulings may particularly affect private equity or family-owned structures, but could also affect multinational groups.

The rulings serve as a critical reminder that exemption eligibility requires not only genuine economic substance and decision-making authority at the foreign holding company level, but also that the foreign holding company should be actively involved in the business of the Dutch company (or its subsidiaries). These rulings are relevant in all structures in which the Dutch DWT Exemption is applied (so the scope is not limited to Belgium).

Key takeaways

• The Dutch DWT Exemption may be denied if dividends benefit individual shareholders directly or indirectly without sufficient substance at the foreign holding company level, particularly where decision-making authority with respect to the Dutch subsidiary (or its subsidiaries) is not genuinely exercised by the holding company.
• Even if the structure's original economic rationale is robust, a lapse of time or the addition of non-substantive elements to that structure may still result in the application of the relevant anti-abuse rules.

Recommended actions

To mitigate risks and ensure compliance with the Dutch Supreme Court's interpretation, we recommend that foreign corporate shareholders consider the following steps:

1. Identify whether they fall within the category of shareholders with an increased risk, and if so prioritize the steps mentioned hereafter.

• Structures without an operating company or active investment manager (indirectly) 'above' the Netherlands and/or where the Dutch company (or its subsidiaries) is not actively managed by such operating company/investment manager may face an increased risk following the respective rulings.

2. Substantiate commercial and economic rationale.

• Document and clearly articulate the valid business purposes underlying the use of the foreign holding company. Maintain contemporaneous records that demonstrate commercial reasons beyond tax benefits.

3. Enhance operational substance at holding company level.

• Establish a physical presence with dedicated office space and qualified employees actively engaged in managing investments.
• Ensure the foreign holding company undertakes real economic activities, such as strategic decisions, financial management, and operational oversight of the Dutch subsidiary (or its subsidiaries) and properly document the foregoing.
• Demonstrate that shares in the Dutch subsidiary are functionally allocated to the foreign shareholder's active business enterprise. This includes active management and oversight beyond passive ownership.

4. Reinforce decision-making autonomy.

• Confirm that dividend distribution decisions are made by the foreign holding company's governing bodies independently, rather than merely following instructions from ultimate individual shareholders.
• Have clear internal governance procedures documenting dividend policies and approvals.

5. Regular structure and substance reviews.

• Perform periodic assessments of the group structure to identify any substantial changes that could undermine the commercial rationale or substance, particularly after transfers of assets or changes in business focus or management.
• Reassess withholding tax risks if the holding company no longer undertakes significant business functions.
• Where insufficient substance or decision-making authority exists, consider restructuring the holding company or dividend payment mechanisms.