The Dutch Dividend Withholding Tax Act (“DDWT ACT”) and the Dutch Conditional Withholding Tax Act (“CWT ACT”) on interest and royalties both contain specific clauses when payments (dividend, interest or royalties) are made by a Dutch entity to a hybrid entity. A hybrid entity in this respect is an entity that is treated as transparent for tax purposes in one jurisdiction while treated as non-transparent for tax purposes by the other jurisdiction.

Under certain specific conditions, payments made by a Dutch entity to a hybrid entity could fall under the Dutch withholding tax exemption, provided and amongst other that the underlying recipient is considered as the recipient (beneficial owner) of the payment according to the state of the recipient.

In situations with US multinational groups this resulted in uncertainty on the application of the domestic withholding tax exemption included in the DDWT ACT and CWT ACT when both the US recipient of the payment and the Dutch paying entity would be treated as disregarded entities for US tax purposes, while treated as non-transparent entities for Dutch tax purposes. Due to the US (flow through) tax treatment of the Dutch entity and the US recipient, the payment between the Dutch entity and the US entity would typically not be visible for US tax purposes.

On December 6th, 2022, the Dutch State Secretary of Finance (“State Secretary”) published a Decree which provides a favorable guidance on how to treat these payments in the following specific situation:

The Decree provides the following guidance:

  • The US LLC is considered the recipient of the dividend, interest or royalty payment by the Dutch entity for Dutch tax purposes as the US LLC is treated as non-transparent for Dutch tax purposes.
  • The Dutch entity and US LLC are however treated as transparent entities for US tax purposes and therefore,  the dividend, interest or royalty payments are not visible for US tax purposes and thus not treated as an item of income at the level of the LLC nor the US Inc.
  • According to the Decree, the domestic withholding tax exemptions as included in the DDWT ACT and CWT ACT can be applied (subject to the general conditions) if the Dutch entity can substantiate that the underlying income from which the dividend, interest or royalty payment is made has been recognized as income in the US at the level of the underlying participants. This may for example be substantiated by providing the US tax return of the underlying recipient (in this case US Inc).

Provided the above conditions are met, the dividend, interest or royalty payment is also considered as an item of income of a resident for tax treaty purposes provided the tax treaty includes a similar hybrid provision (such as article 24, paragraph 4, of the Tax Treaty between the Netherlands and the US).

Further, the State Secretary also confirmed that the above interpretation applies to structures where multiple intermediate hybrid entities are used.

Finally, it is not required that the underlying income is recognized at the level of the participant in the same year as the dividend, interest, or royalty payment was made.

Please feel free to reach out to your RSM advisor in case of questions.