Supreme Court rulings on the application of the anti-abuse test for the withholding tax exemption for dividend tax
Recently, the Supreme Court of the Netherlands issued two rulings regarding the application of the withholding tax exemption for dividend tax and the anti-abuse provision to a dividend payment by a Dutch feeder company (‘feeder’) to a Belgian holding company. Both judgements focus on the application of the anti-abuse provision in international holding structures.
The anti-abuse provision of the withholding exemption
Pursuant to article 4, paragraph 2, Dutch dividend tax Act 1965, under certain conditions, no dividend tax is withheld on dividend distributions within international holding structures. However, an important exception to this exemption is in the case of an artificial arrangement that is not related to economic reality and that has been set up with the aim (or one of the main aims) of avoiding dividend tax for another party.
Facts and the rulings of the District Court and Court of Appeal
In the first case (Supreme Court 18 July 2025, 22/02691, ECLI:NL:2025:1162), a Belgian company held a 38.71% interest in the feeder and functioned as a Belgian holding company for three family members residing in Belgium. This Belgian company was initially established to hold shares in another Belgian company. At some point after the sale of those shares in 2011, the company made the investment in the Dutch feeder. At the time of the dividend distribution in 2018, the Belgian company had little economic substance in Belgium. Apart from holding the shares in the feeder company, the Belgian company did not engage in any other activities. In addition, the company still had two classic cars on its balance sheet.
Both the District Court and the Court of Appeal ruled that the anti-abuse rule was met and the withholding exemption did not apply. The main arguments for this were that the Belgian company did not carry out any other economic activities, did not employ any staff and did not have any office space at its disposal. The fact that the Belgian company’s purpose was to ‘pool’ the investments of its shareholders was considered insufficient justification, as a result of which the structure was classified as abuse.
In the second case (Supreme Court 18 July 2025, 22/02695, ECLI:NL:2025:1163), another Belgian company held a 24.39% interest in a Dutch feeder company. This Belgian company managed investments for a Belgian family. The Belgian company held several participations in Belgium and the Netherlands with a material business. In addition, these other participations were actively managed and governed by the Belgian company. One of the (indirect) shareholders and his spouse formed the management of the Belgian company (in return for remuneration) and they carried out their work from a separate workspace in their home.
The District Court and the Court of Appeal reached different conclusions. The District Court ruled that there was no abuse in this case and that the withholding exemption applied. According to the District Court, economic activities were carried out from the Belgian company, as a result of which the Belgian company operated a material business and also held the interest in the feeder company in that context. The Court of Appeal, on the other hand, reasoned differently and refused to apply the withholding tax exemption. Without the intermediary of the Belgian company (and the holding companies above it), dividend tax would ultimately be payable on dividend distributions by the feeder company directly to the ultimate shareholders (individuals resident in Belgium). Furthermore, it considered that the interest in the feeder could not be functionally attributed to the Belgian company’s business, as this company had no involvement in the feeder’s activities and/or the shareholdings held by the feeder. According to the Court, there was insufficient relevant substance present at the Belgian company. The Belgian company had no staff of its own (the staff were hired from another entity of the shareholders) and the company had no office space at its disposal (the workspace in the home was not specifically available to the Belgian company). The Court ruled that, on this basis, the withholding tax exemption did not apply to the dividend distribution to the Belgian company and Dutch dividend tax was payable.
Supreme Court ruling
The Supreme Court upheld the Court’s ruling in both cases and confirmed that these situations constituted abuse and that the withholding tax exemption did not apply. The Supreme Court confirmed that the anti-abuse provision was intended to align with the EU legal concept of anti-abuse and that case law of the European Court of Justice (‘ECJ’) is therefore also relevant for the interpretation of this provision. The Supreme Court also aligned itself with the case law of the ECJ with regard to the burden of proof.
In addition, the Supreme Court ruled that maintaining a structure that was originally set up for business reasons that reflect economic reality may, in changed circumstances, lead to the structure being regarded as artificial. According to the Supreme Court, whether abuse has taken place is a highly factual assessment. A factual assessment only forms grounds for cassation if the reasoning is incomprehensible or insufficient. This is not the case in both rulings from the Court of Appeal. The Supreme Court therefore upheld the Court of Appeal’s conclusions that both structures qualify as abuse.
The Supreme Court adds two elements to the assessment framework for abuse used by the Court of Appeal; namely a material element and a temporal element.
Material element. The Supreme Court emphasizes that a construction can consist of several steps or components, and that it is not necessary for the entire structure to be artificial in order to fall under the anti-abuse provision. It is sufficient that one or more components or steps within the structure can be regarded as artificial. The Supreme Court introduces a layered approach to abuse: the assessment can focus on specific elements within a broader structure. The fact that a company operates a material business does not necessarily mean that there is no abuse. The shares held must also be attributable to that business. It is therefore important that there is active involvement in the management and government with regard to those participations.
Temporal element. In addition, the Supreme Court rules that the assessment of whether abuse has occurred is not limited to the moment when the structure was set up. Subsequent changes in circumstances may also lead to an initially legitimate structure being regarded as artificial. For example, when the economic function of a company ceases to exist or when new, artificial elements are added to the structure. This dynamic approach means that facts and circumstances arising after the structure was set up may also be relevant for the application of the anti-abuse provision. It follows from case law of the ECJ that the extent to which the intermediate holding company actually has control over the dividends received is relevant. The Supreme Court reiterates that the court of appeal considered that, in fact, the underlying family members who are shareholders of the Belgian companies can decide whether to distribute the realized profits and that the power of disposal for this does not therefore lie with the recipients of the dividends themselves. The recipients of the dividends were also under no obligation to reinvest.
Commentary by Aegis Tax Lawyers
The two rulings once again emphasize that it is not a given fact that the withholding exemption will continue to apply once it has been established that there is no abuse. Even at a later stage, a structure that has been set up on the basis of economic reality may still qualify as abuse due to a change in circumstances.
Particularly in the case of passive investments held by family holding companies or personal holding companies, there is a risk that there is insufficient economic substance to disprove the artificial element of the abuse test for the withholding tax exemption.
In addition, if the recipient of the dividend is a material business enterprise, it is important that the abuse test for the withholding exemption be assessed per shareholding to determine whether this is functionally attributable to that business enterprise. In this context, it is relevant whether that business enterprise is actively involved in the management and government of the company in which the interest is held.
Furthermore, the degree of control exercised by the shareholders of the recipient of the dividend over the appropriation of profits is relevant. It is relevant if the shareholder(s) of the recipient of the dividend can decide entirely at its own discretion whether the dividends received are distributed to the shareholders or reinvested. In that case, the recipient of the dividend (in this case, the Belgian company) does not have free disposal over the dividends it receives. Another factor is that the recipient of the dividend is under no obligation to reinvest all or part of the profits received. In assessing whether the structure constitutes abuse, the Supreme Court therefore appears to take into account the fact that, in the present case, it is the ultimate shareholders of the recipient of the dividend who are actually entitled to the dividend. In this regard, it seems relevant that the shareholders are also directors of the recipient of the dividend. In situations where there is an independent or third-party board, this may be different.
In summary, the consequences of these two rulings may be far-reaching and extend beyond family holding companies or personal holding companies. These rulings emphasize the importance of a case-by-case analysis and may affect a wide range of cross-border investment structures that invest in or through the Netherlands. For the application of the withholding tax exemption, shareholders must carefully assess the economic substance and the actual functional link between their holding companies and Dutch (passive) investments.
If you have any questions on this subject, please feel free to contact one of our advisors.