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EU corporate tax residency trends following Unilever and Shell’s corporate relocation to the UK

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In November 2020, Unilever completed the relocation of its domicile to the UK) in order to unify its Anglo-Dutch structure and avoid Dutch dividend withholding exit tax (DWT). One year later, on 10 December 2021, shareholders of Royal Dutch Shell plc (Shell) showed strong support for its Board’s announcement that it was relocating its headquarters to the UK. The move of both Unilever and Shell to the UK could be related to the Dutch reconsideration of a Dutch DWT. These relocations could lead to a loss of the Dutch DWT claim which might occur when companies or head offices are relocated from the Netherlands to other jurisdictions.

Corporate exit tax in the EU

Corporate residence is considered relevant to the imposition of taxes on a domestic legal entities’ income. Under double taxation treaties concluded by the Netherlands, the legal entity’s corporate residence is determined by the legal entity’s factual seat. Generally speaking, the effective management and control of the company as well as other relevant circumstances determine the factual seat of a Dutch company.

Many jurisdictions have introduced exit taxation which prevents companies from leaving a jurisdiction regardless of the reason of the departure.

As from 2020, due to the EU Anti-Tax Avoidance Directive (ATAD 1), exit taxation is mandatory to all EU member states and will be levied on capital gains and be assessed by the ‘departure member state’. The exit tax ensures that the departure member state may tax any economic value of the unrealised capital gain generated within its jurisdiction. Apparently, when it came to making the decisions about relocation, Unilever and Shell did not expect the potential application of the Dutch corporate exit tax to be material.

A new EU trend?

While the UK is one of the few OECD members that does not levy a dividend withholding tax, there is currently no international method to apply a dividend withholding tax when a company emigrates from one country to another. The ‘departure state’ loses its ability to levy a withholding tax on existing undistributed profits, while the ‘state of arrival’ receives a tax claim for free on these undistributed profits.

In 2020, the Dutch leftwing political party Green Left made a failed attempt to introduce a DWT. The Bill attempted to tax undistributed profits by deeming them to have been distributed by a company when it relocates to another country. As the imposition of tax was based on a deemed dividend distribution and not on any actual dividend distribution, the Bill was heavily criticized by the Dutch Council of State for being in breach of double taxation treaties entered into by the Netherlands.

On 8 December 2021, Green Left gave WHT another try, this time by introducing a new Bill which includes many amendments to the original Bill of 2020. The new Bill assumes that a Dutch company that has been resident for at least five years will remain tax resident in the Netherlands for a period of ten years. Based on this assumption, under the new Bill the Netherlands will have full taxing rights regarding dividend distributions after the Dutch company’s relocation for ten years, subject to protection under double taxation treaties. The Bill will apply to all cross border reorganisation by companies in the Netherlands with a distributable profit of more than €50m. As such, not only cross border relocation of the registered offices, but also cross-border reorganisations, cross border mergers, cross-border split-offs or divisions, and cross-border share mergers will fall into the scope of the new Bill.

In conclusion

Since Green Left is an opposition party, it is still unclear whether the majority of the Dutch government will support the new Bill. Therefore, it remains to be seen whether a DWT will be enacted into Dutch Law. 

Jelle R Bakker, partner at KrestonBentacera & director-global, tax group Europe at Kreston Global

Categories: In brief