On January 19, 2024, the Dutch Supreme Court gave its decision with respect to the question of whether a Dutch taxpayer can credit the Dutch dividend tax withheld on dividends distributed on listed shares in a Dutch company held as a portfolio investment. The Supreme Court cancelled the decision of the Court of Appeal, that had concluded that the anti-dividend stripping rule applied and that the Dutch taxpayer could therefore not credit the Dutch dividend tax against its Dutch corporate income tax. The Supreme Court held that the security lending transaction was not in the scope of the anti-dividend stripping rule and that therefore the main rule applies: the legal owner of the dividend, who can freely dispose of the dividend and who does not act as agent, is also the beneficial owner of the dividend, except in very specific cases. The Supreme Court referred the case back to another Court of Appeal to assess whether the Dutch taxpayer was indeed the legal owner of the shares, because this was not sufficiently established by the first Court of Appeal.

The relevant facts of this case

A Dutch taxpayer (X BV) that was part of an international banking group invested in shares in Dutch companies, and lent these shares to its indirect parent company in the United Kingdom (UK) to obtain an additional return (lending fee). Shortly before a Dutch company distributed a dividend, the UK borrower returned the shares in that Dutch company to X BV's securities account held at a French custodian bank. In a typical security lending transaction, X BV would have remained the beneficial owner of the Dutch shares during the period in which the shares were lent to the UK borrower.

Upon a dividend distribution, the Dutch company must in principle withhold 15% Dutch dividend tax on behalf of the recipient of the dividend. X BV claimed to be the legal owner as well as the beneficial owner of the dividend. In its Dutch corporate income tax return, X BV credited the Dutch dividend tax against the Dutch corporate income tax. The Dutch tax authorities argued that X BV was not the beneficial owner of the dividend on the basis of their interpretation of the anti-dividend stripping rules as laid down in the Dutch corporate income tax law, and ruled therefore that it was not possible to credit the Dutch dividend tax. The Dutch tax authorities imposed an additional corporate income tax assessment, in which it denied the credit for dividend tax.

The judgement of the Court of Appeal

The Court of Appeal addressed two questions. First, it assessed whether X BV was the legal owner of the shares as well as of the dividend. Secondly, it assessed whether X BV was the beneficial owner of the dividend. On basis of the fact that the UK borrower decided to transfer the borrowed Dutch shares back to the X BV’s securities account held at a French custodian bank just prior to the (dividend entitlement) record date without hardly any involvement of X BV, the Court of Appeal was of the view that there was no valid legal title underlying the transfer of shares. Therefore, X BV had in principle not become the legal owner of the shares.

Assuming that there might have been a transfer of the legal title to borrowed shares, the Court of Appeal addressed the second question. The Court of Appeal applied the dividend-stripping rule, which rule denies the credit (or reduction) of Dutch dividend tax in case the transferor (i.e., the UK borrower) retains the economic interest, but the acquirer (i.e., X BV) can credit the Dutch tax and shortly thereafter transfers similar amount of shares back to the transferor. The Court of Appeal assessed that X BV was not the beneficial owner of the dividends because it did not have a sufficient economic interest, and the main purpose of the transfers of shares was crediting Dutch dividend tax. 

The Supreme Court judgement

The Supreme Court overturned the Court of Appeal's judgement primarily on two grounds.

Firstly, and most importantly, the Supreme Court ruled that the Court of Appeal's reference to the beneficial ownership was not clear. Dutch law does not define who the beneficial owner is, but only defines a specific anti-dividend stripping rule where an owner is not the beneficial owner. The parliamentary documents provide no guidelines with respect to whom else is not the beneficial owner. On this basis, the Supreme Court ruled that the owner of dividends that can freely dispose of the dividends and that does not act as an agent, can only be considered not to be the beneficial owner in case the specific anti-dividend stripping rule applies.

Secondly, the Supreme Court ruled that the basis on which the Court of Appeal assessed the transfer of the legal title to the shares was unclear. For listed shares, this should have been analyzed on the basis of French law, because the securities account was held with a French custodian.

The Supreme Court has provided specific instructions to the Court of Appeal to which it referred this case. If this other Court of Appeal concludes that X BV was indeed the legal owner of the shares, then X BV should be regarded as the owner and beneficial owner of the shares.

Take away

Although this case regards the potential denial crediting Dutch dividend withholding tax against the Dutch corporate income tax on basis of the anti-dividend stripping rule, a similar anti-dividend stripping rule is provided for in the Dutch dividend withholding tax Act. From the above case it has become clear that the Supreme Court will in principle assess that the legal owner of the dividend is also the beneficial owner (main rule), except in case where the shareholder acts as an agent or nominee, as well as in case the specific anti-dividend stripping rule applies. Transactions that are not specifically covered by the latter rule, should therefore usually fall within the main rule.

If you have any questions, please contact Heico Reinoud or Roland Meuwissen.