Note 1 – Taxation
Royal Dutch Shell is incorporated in England and Wales and tax-resident in the Netherlands. As a tax resident of the Netherlands, it is generally required by Dutch law to withhold tax at a rate of 15% on dividends with effect from January 1, 2007 (in 2006 the withholding tax rate was 25%) on its ordinary shares and ADSs, subject to the provisions of any applicable tax convention or domestic law.
The following sets forth the operation of the provisions on dividends on Royal Dutch Shell’s various ordinary shares and ADSs to US and UK holders, as well as certain other tax rules pertinent to holders. Each holder should consult their tax advisor.
Dividends paid on the Dividend Access Share
There is no Dutch withholding tax on dividends on Royal Dutch Shell Class B ordinary shares or Class B ADSs provided that such dividends are paid on the Dividend Access Share pursuant to the Dividend Access Mechanism (see above section “dividend access mechanism for Class B ordinary shares”).
Dividends paid on the Dividend Access Share are treated as UK-source for tax purposes and there is no UK withholding tax on them. Also, under UK law, individual shareholders resident in the UK are entitled to a UK tax credit with dividends paid on the Dividend Access Share. The amount of the UK tax credit is 10/90ths of the cash dividend and the credit is not repayable when it exceeds the individual’s UK tax liability.
All dividends with respect to Class B ordinary shares and Class B ADSs have to date been paid on the Dividend Access Share pursuant to the Dividend Access Mechanism.
Dutch withholding tax
When Dutch withholding tax applies, a United States holder will be subject to Dutch withholding tax at a rate of 15% from January 1, 2007. A United States holder who is entitled to the benefits of the 1992 Double Taxation Convention between the United States and the Netherlands and as amended by the protocol signed March 8, 2004 (the “convention”) will be entitled to a reduction in the Dutch withholding tax, either by way of a full or a partial exemption at source or by way of a partial refund or a credit as follows:
- If the US holder is an exempt pension trust as described in article 35 of the Convention, or an exempt organisation as described in article 36 thereof, the US holder will be exempt from Dutch withholding tax.
- If the US holder is a company that holds directly at least 10% of the voting power in Royal Dutch Shell, the US holder will be subject to Dutch withholding tax at a rate not exceeding 5%.
In general, the entire dividend (including any amount withheld) will be dividend income to the US holder, and the withholding tax will be treated as a foreign income tax that is eligible for credit against the US holder’s income tax liability or a deduction subject to certain limitations. A “US holder” includes, but is not limited to, a citizen or resident of the United States, or a corporation or other entity organized under the laws of the United States or any of its political subdivisions.
When Dutch withholding tax applies on dividends paid to UK-resident holders (that is, dividends on Class A ordinary shares or Class A ADSs, or on Class B ordinary shares or Class B ADSs that are not paid on the Dividend Access Share pursuant to the dividend access mechanism), the dividend will typically be subject to withholding tax at a rate of 15% with effect from January 1, 2007.
Pension funds, meeting certain defined criteria, can however, claim a full refund of the dividend tax withheld effective January 1, 2007. Also, resident corporate shareholders holding at least a 5% shareholding are exempted at source from dividend tax.
For 2006 the 25% withholding tax rate applied, unless the UK holder was entitled to the benefits of the main tax convention between the Netherlands and the UK, and submitted an appropriate claim with the Dutch Revenue, in which case the reduced withholding tax rate of 15% was applicable. Such UK holder will be entitled to a credit (not repayable) for withholding tax against their UK tax liability.
For shareholders who are resident in any other country, the availability of a whole or partial exemption or refund of Dutch withholding tax is governed by Dutch tax law and/or the tax convention, if any, between the Netherlands and the country of the shareholder’s residence.