Dividendstripping

Our office will continue to monitor developments related to dividend stripping in this weblog. View the latest updates in the blue blocks. 

Dividend stripping in sight

Both the tax authorities, and the Public Prosecutor's Office make no secret of the fact that combating dividend stripping is high on the agenda. This is evident, for example, from answers given by the State Secretary for Finance - Taxation and Revenue to questions from the House of Representatives [1]:

‘The Tax Authority is alert to cases of dividend stripping. Where appropriate, the Tax Administration takes firm action against it. The ongoing approach has been intensified, partly by organising the implementation coordination from the Taxhavens and Concern Financing Coordination Group.’

And see also the FIOD's 2023 annual report [2], which reports three criminal investigations into dividend stripping:

‘In the joint approach to tax fraud, the Inland Revenue applies administrative law and the FIOD focuses on criminal law. In this regard, a number of specific developments emerged in 2023. One of these is tackling dividend stripping, where dividend tax is wrongly reclaimed. In 2023, capacity was deployed on three criminal investigations into the phenomenon of dividend stripping.’

For the parties involved, including (financial) institutions and/or professionals (and their offices), the stakes are high, not only financial. The (publicly visible) start of a FIOD investigation (the so-called ‘blow day’), quite often attracts media attention. This can have extremely damaging consequences, especially for reputation. The damage is often done by then, even though no judge has yet been involved.

Our office will continue to monitor developments in this area in this weblog. Check out the latest updates in the blue blocks. 

What is dividend stripping?

The term dividend stripping (also known as ‘dividend washing’) is not defined as such in the law. Dividend stripping has many (complex) manifestations. Multiple descriptions of the phenomenon can also be found.

See, for example, Marres:

‘That phenomenon (author's term: ‘dividend stripping’) means that a shareholder who has no or only a limited right to exemption, reduction, refund or set-off of dividend tax, arranges for the dividend to be enjoyed by another, who is entitled to exemption, reduction, refund or set-off (and who makes the equivalent of the dividend available to him in any way). In all these cases, the dividend is ‘washed off’ from the shares, in other words, the dividend is ‘stripped’.’

And the Financial Expertise Centre (FEC) in the Dividend Stripping Knowledge Paper [3]:

‘Dividend stripping’ means that a party is made (temporarily) legally entitled to dividends in order to collect dividend tax imposed on them for another person, who could not recover the dividend tax without this temporary transfer. The legal ownership of the shares (the ownership under civil law) is temporarily transferred to ‘the stripper’, while the economic interest in those shares is not transferred, but rather remains with the (foreign) investor. People therefore sometimes refer to the temporary parking of shares. Dividend stripping differs from normal securities transactions in that, during the period in which the shares are relinquished, the economic interest in those shares remains with the original shareholder.’

In short, it means that a (mostly) foreign shareholder who is not entitled to a dividend refund himself transfers his shares to a party that is entitled to do so, while that foreign shareholder retains an economic interest in the shares. The ‘proceeds’, consisting of the equivalent of dividend tax saved, are divided between the parties.

Combating dividend stripping by tax authorities

The tax fight against dividend stripping is not new. Several cases were brought to court in the past, however, without the success sought by the tax authorities. This seems to be explained mainly by the Supreme Court's strongly civil law approach to legal concepts (as “beneficial owner”). Moreover, according to the Supreme Court, a (possible) tax avoidance motive of the (foreign) seller, cannot be attributed to the buyer (who has a commercial interest in the purchase).

Finally, in 2002, the legislator introduced a number of measures to counteract (undesirable forms of) dividend stripping, namely in Article 4, paragraph 7 Dividend Tax Act 1965, Article 9.2, paragraphs 2 and 3 IB 2001 Act and Article 25, paragraphs 2 and 3 VPB 1969 Act.

These provisions are negatively worded. If the proceeds creditor is not also a beneficial owner, dividend tax cannot be credited as withholding tax. The law describes in which cases the proceeds creditor does not qualify as a beneficial owner. For example, the party entitled to the proceeds must have provided consideration for the acquisition of those proceeds. This consideration must be part of a set of transactions aimed at the selling shareholder retaining or acquiring an economic interest in the shares. And the proceeds must have benefited the selling shareholder who himself has no right of set-off (etc.), while the buyer does.

Supreme Court ruling: tax authorities lose the battle

In its judgment of January 19, 2024, the Supreme Court provided a review framework for the application of Section 25(2) of the VPB Act. At issue was (among other things) whether or not the two specific exception situations mentioned in the second sentence of Section 25(2)(a) and (b) of the VPB Act contain an exhaustive regulation. The court held that they do not. However, the Supreme Court ruled otherwise and deduced from the genesis history of Section 25(2), second sentence of the VPB Act that the legislator intended this to be a very targeted measure limited to obvious cases of dividend stripping.

In line with this, the Supreme Court considers that article 25, paragraph 2 of the VPB Act contains an exhaustive regulation and that the provision does not prevent the set-off of dividend tax as withholding tax in cases where the party entitled to the proceeds - in the civil law sense - can freely dispose of the dividend and does not act as fiduciary or agent. In that case, the party entitled to the proceeds should in principle be regarded as the beneficial owner.

An exception to that principle is allowed only insofar as there are the cases referred to in article 25 paragraph 2 of the VPB Act (old). The inspector must prove that such cases exist. Outside those cases, (the inspector) cannot invoke the anti-abuse provision.

In doing so, the Supreme Court noted (even explicitly) that it cannot be ascertained from the legislative history of the anti-abuse provision how the legislator intended to interpret the concept of beneficial owner. In other words: substandard legislation. In such a case, tax authorities should not want to give an anti-abuse provision a broader effect.

Law changes effective Jan. 1, 2024

As of January 1, 2024, a number of measures came into effect to strengthen the position of the tax authorities (“Other tax measures 2024”[4]). For example, article 25, paragraph 2 of the VPB Act now stipulates that the taxpayer must state and - in the event of a dispute by the inspector - make it plausible that he is the beneficial owner. Thus, that burden of proof now rests with the taxpayer.

Previously, the tax inspector had to make it plausible that the proceeds creditor was not (also) the beneficial owner. Whether this change in the burden of proof will also strengthen the position of the tax authority in practice remains to be seen, taking into account the Supreme Court's January 19, 2024 ruling. After all, there it was considered that, in principle, the recipient of proceeds who can freely dispose of the dividends also qualifies as the beneficial owner. To that extent, the taxpayer's burden of proof is not too heavy.

Furthermore, the words “in any case” have been added to Article 25(2) of the VPB Act. The proceeds creditor is now “in any case” not considered the beneficial owner if the combination of transactions described in the law is carried out. Previously, it read “not.” By doing so, the legislator wanted to emphasize that the exceptional situations (in which no dividend withholding tax credit can be claimed) are meant to be non-exhaustive. Here too, it remains to be seen whether the addition “in any case not” will lead to a different assessment. After all, this wording also appeared in the establishment history of the previous version of Section 25(2) of the VPB Act.

With that, the question is whether the limited scope given to the anti-abuse provision of Section 25(2) of the VPB Act by the Supreme Court in its judgment of January 19, 2024, will be different (read: broader) after the legislative amendment. Presumably, this is not the case. After all, the concept of beneficial owner has still not been elaborated in the creation history of the revamped section 25(2) VPB Act.

Under the transitional law, the legislative changes will first apply to fiscal years beginning on or after Jan. 1, 2024. Jurisprudence will therefore be a long time coming.

Thus, the old regime - as interpreted by the Supreme Court - still applies to the years prior to Jan. 1, 2024 (which will be the subject of currently ongoing investigations and/or proceedings). In those proceedings, the tax authorities will face quite an evidentiary problem. The interested parties in those cases will have to properly dispute the facts alleged - and to be made plausible - by the tax authorities.

What about criminal law?

The Office of the Public Prosecutor is also setting its sights on dividend stripping. That will not be an easy task. In essence, dividend stripping is a form of tax avoidance. It is precisely for this reason that anti-abuse provisions have been created against it. However, tax avoidance is not punishable. Tax evasion is. That's easy to say. What is more difficult is to also make this distinction clear and thus also more to the point, so that criminal law is not used to combat tax evasion.

A-G Wattel stated in his opinion that preceded the Supreme Court's illustrious Credit-Suisse ruling [6]:

“The fact that the interest deduction turns out to be refusable only by application of fraus legis means that the ordinary methods of interpretation do not allow for this and that in particular the legislative text and clear precedents in case law do not lead to non-deductibility. In my opinion, this already implies that the position that the interest is deductible is not only objectively pleading, but also - at the time of making the returns - was subjectively pleading.”

Wattel thus places a reliance (successful or unsuccessful?) on fraus legis in the key of a pleading position, which, the Supreme Court's jurisprudence now shows, excludes intent, including conditional intent (read fraud).

Viewed this way, the application of fraus legis by definition results in a pleading position. The reasoning then is that if fraus legis must be invoked (as an ultimum remedium) in order for a certain set of facts to still fall within the scope of the law, the taxpayer's position - that the facts do not fall within the scope of the law - must be regarded as pleading. At the very least, in that case, room arises for an appeal to a pleading position, which - in view of the Supreme Court's jurisprudence - did not have to be in front of the taxpayer at the time of filing the tax return and may therefore have arisen later.

Incidentally, it has also been noted in the literature that the doctrine of the pleading position is not necessary to interpret the impunity of tax evasion. It is then argued that the intent of the tax evader (also law evader) is not aimed at filing an incorrect return. On the contrary, the tax evader intended to remain within the limits of the (vague) law, but appears (whether or not in retrospect) to have acted contrary to the purpose and spirit of that law.

See also on this subject A-G Wattel in the conclusion just mentioned [6]:

“The fraudster and the law evader have the same goal: to pay less tax than the legislature intended him to pay. But their means differ. The fraudster ignores the law and realizes that he is breaking the law (usually by lying about or concealing the facts); the tax evader, on the other hand, does not want to break the law and takes careful note of the law, in order to subsequently arrange the facts in such a way that he remains (just) outside the scope of the law (when it comes to taxable facts) or (just) falls within it (when it comes to deductions or exemptions), with an intended result that clearly deviates from what the legislator had in mind. It will probably not even appeal to the nuanced NRC reader that failing law evaders with large-scale constructions such as (the concern of) the interested parties cannot be fined and caught fraudsters can, but the judge cannot remove that difference; he is not even allowed to.”

It is also sometimes argued in the literature that proof of the incorrectness of a declaration, i.e. regardless of the alleged intent, should not be assumed if fraus legis is to be applied. Otherwise, the interpretation of the law would be at odds with the principle of legality.

What about the relationship between anti-abuse legislation and criminal law?

The Supreme Court ruled in its judgment of January 19, 2024 [4] that Article 25, paragraph 2 of the VPB Act contains an exhaustive provision, describing a number of cases in which a proceeds creditor cannot be regarded as a beneficial owner after all. In other words, outside those legally defined cases, this anti-abuse provision cannot be invoked by the tax authorities.

De Vries notes in his note under the judgment that the Supreme Court “ (...) expressly refused to fill the gap that the (tax) legislature not only deliberately created at the time but moreover subsequently left in place for years (...).”

It should be noted that in this case, the court also ruled that the legislator intended to adopt an exhaustive rule with Section 25(2) of the VPB Act. This was also the ground for the court to rule that there is no room for fraus legis outside article 25, paragraph 2 of the Wet VPB (which has not been discussed again in cassation).

The bottom line is that cases other than those exhaustively provided for in the law do not qualify as dividend stripping. Those other forms of dividend stripping can therefore not be challenged under Section 25(2) of the VPB Act, even by invoking fraus legis.

If fraus legis cannot be applied because the (anti-abuse) law falls short, so to speak, the taxpayer cannot be blamed for violating the law and there is no place for a fine or criminal prosecution.

In conclusion: an appeal (cry for help)

Criminal and fine law should be reserved for obvious cases of fraud, where the intent is clearly directed at the legal incorrectness of a declaration or for cases where knowingly untrue facts are stated in a declaration and/or the true facts are concealed.

So the criminal law (again) as an ultimum remedium.