scrumpyjack wrote:I shall vote against this, as the Dutch have not scrapped the withholding tax and seem unlikely to do so as there is a very large majority against scrapping it.
https://www.reuters.com/article/us-unil ... SKCN1LR1Q0The fall back mechanism for avoiding extra tax on UK holders looks very dodgy and unreliable. It may even mean that every 'dividend' we receive will be treated as a partial CGT disposal and not a dividend as it will be structured as a capital payment. The Dutch will then probably close that 'loophole'
If the Dutch abolition of dividend withholding tax goes ahead and is not reversed (which that Reuters article does seem to say is at least somewhat questionable), they won't care whether foreign investors' payments are structured as dividends or as 'dividend substitution payments', which is what the full scheme circular (available from
https://www.unilever.com/investor-relat ... ification/ after agreeing to a disclaimer) calls them. That's because those foreign investors won't be taxed by the Dutch either way. They might close the 'loophole' as far as Dutch income tax is concerned, but that can only affect investors who are subject to Dutch income tax, and I suspect the majority of them wouldn't pay any less tax as a result of electing for 'dividend substitution payments': what they would gain on not paying dividend withholding tax they would lose on paying more income tax.
If the Dutch abolition of dividend withholding tax doesn't go ahead, or if it is later reversed, then yes, they might well close the resulting 'loophole'. But basically, I think the worry here is about whether the Dutch abolition of dividend withholding tax goes ahead and is not reversed - and the Reuters article you link to does bring that considerably more into question for me. I.e. I'm only saying that Dutch 'loophole' closing does not strike me as a significant extra concern beyond that one.
There is also the issue of possible
UK 'loophole' closing, but that too seems unlikely to me. The reason for that is that I think this involves a bit of 'loophole' closing that the UK taxman has already done, namely the one done a few years back that brought the increasing use of 'B share schemes' (and similarly-named schemes) by companies wishing to return cash to their shareholders to an end. Those schemes involved giving the shareholders a choice about whether they wanted to receive the cash as a dividend payment or as a capital payment (*), and the tax law change was that if shareholders were given such a choice, the payment would be treated for UK tax purposes as dividend income regardless of what choice the shareholder made. This basically left it still possible for companies to run such schemes, but they would be totally ineffective at their intended purpose compared with simply paying a dividend, and since they were considerably more expensive to run than a dividend payment, companies abandoned their use.
Anyway, the point here is that Unilever's 'dividend substitution payments' involve just such a choice by its shareholders: the circular is quite clear that most shareholders (**) in Unilever plc (the current UK company) will by default get dividend substitution payments and all (I think) shareholders in Unilever NV (the current Dutch company) will by default get dividends, but either can elect to be paid by the other mechanism. So on the face of it, as far as UK tax law is concerned, the tax law change I have described above would seem to apply, with the result that either dividends or dividend substitution payments will be treated as dividend income for UK tax purposes, even though the mechanism underlying the dividend substitution payments is a capital one.
The shareholder circular also says that "
Any such dividend substitution payments received by a New NV Shareholder or New NV ADS Holder resident in the UK for tax purposes should be treated as income distributions for UK tax purposes with the same UK tax consequences as a regular dividend, as described above." There's no explanation of
why they will be treated as dividend income, so I can't say that it supports my argument above - but it does support the argument's conclusion.
Finally, something I'll point out is that the Reuters article is a bit misleading when it says that "
The Dutch tax does not apply to shareholders in the Netherlands. Other investors, such as Americans, are able to deduct dividend tax paid in the Netherlands from their U.S. taxes under a bilateral treaty." As I've indicated above, the Dutch withholding tax may not apply to shareholders in the Netherlands, but Dutch income tax does, so if a dividend from Unilever is going to a shareholder in the Netherlands, the only difference between withholding tax applying and being deducted from their income tax bill and it not applying and nothing being deducted from their income tax bill is the timing of payments. And shareholders in the UK basically have the same ability under a tax treaty to deduct Dutch withholding tax paid from their UK tax on the dividend...
But UK taxpayers would be more exposed to Dutch dividend withholding tax than taxpayers in many other countries (though the article's "
uniquely exposed" is almost certainly over the top!) for the simple reason that they can only deduct it from the UK income tax payable on
that dividend, not on any other source (which I suspect is also true in other countries) and they often have very low rates of UK tax on dividends (i.e. 0% on dividends paid by shareholdings is ISAs or covered by personal or dividend allowances, 7.5% on any remaining dividends in the basic-rate hand). Being able to deduct none or only half of a 15% dividend withholding tax is nothing like as good as being able to deduct all of it!
Anyway, what I've seen of this, including the doubts raised by the Reuters article, reinforces my belief that I don't regard this unification of Unilever as being in my interest, so I too will be voting against it. If it passes (which I strongly suspect it will), I will then have to consider whether I wish to retain my shareholding in the company, which is a harder choice as far as I am concerned... However, the expected timetable in the circular says that the shareholder meetings to vote on the scheme are expected on October 26th and the scheme (if passed) not expected to take effect until December 21st. So there should be about a couple of months to make that decision, in the light of more information about whether it's going to happen at all and probably from my brokers to confirm exactly what will be happening to each of my shareholdings, so that decision can wait!
(*) Note that the phrase "B share scheme" does only strictly speaking mean a scheme that involves using a class of shares that the company calls B shares, and occasionally companies do use a scheme involving B shares and call it a "B share scheme" without it involving the tax 'loophole' that was closed. I.e. one will still occasionally see a "B share scheme" being used - but one needs to look at the details of the scheme to see whether it's actually of the type I'm talking about.
(**) There are some exceptions for particular methods of holding the shares, which I won't try to go into in this already-long post, especially as I haven't yet absorbed everything that applies to those.
Gengulphus