The Netherlands is known for its extensive treaty network with close to 100 tax treaties and its focus on international trade and investment.
In order to negotiate new tax treaties or updates to existing tax treaties, the Dutch competent authorities use a Memorandum on Tax Treaty Policy. The 2020 Memorandum on Tax Treaty Policy (2020 Memorandum), a revised memorandum, was presented in May 2020 by the State Secretary of Finance for Taxation. The 2020 Memorandum is an update to the 2011 version of the Memorandum on Tax Treaty Policy, which had not been updated in the interim.
The OECD BEPS project, the multilateral instrument (MLI) and increasing media attention for tax avoidance and environmental, social and governance (ESG) issues has led to significant changes in the way governments, including the Dutch government, shape their international tax policies.
The previous Memorandum on Tax Treaty Policy was published in 2011 and already anticipated a more globalised economy. However, the outcome of major international collaboration, such as the BEPS project, and advanced collaboration in the area of direct taxes within the EU were not yet implemented nor anticipated.
The negotiating position as set out in the 2020 Memorandum is generally in line with the MLI and the OECD Model Tax Convention of 2017 (and, in relation to developing countries with respect to certain sources of income, the UN Model Tax Convention of 2011). There are, however, some nuances and deviations from these model tax conventions that require some elaboration.
Changes and clarifications
Compared with the previous memorandum there is a stronger emphasis on applying the UN Model Tax Convention in negotiations with developing countries. The UN Model Tax Convention grants more taxing rights to source countries in relation to, for example, interest, dividend and royalty payments. Where the Netherlands would generally not agree to such source taxation in relation to developed countries, it is willing to agree to this approach in relation to developing countries, as a form of development aid.
It is important to note that the Netherlands prefers to act collectively in this matter and is willing to provide more taxing rights at the source country.
A deviation from the OECD Model Tax Convention, but in line with the 2011 memorandum, the place of tax residence provision also includes certain tax-exempt persons and entities. As a result, the place of residence provision, and therefore the access to the treaty, is broader than under the OECD Model Tax Convention. In addition, the negotiating position as set out in the 2020 Memorandum includes a provision that aims to include fictions provided for in the national law in the treaties.
Also, the 2020 Memorandum explicitly states that if international tax treaties interfere with provisions of Dutch tax law implemented pursuant to European law, the tax treaty prevails. However, the 2020 Memorandum also states that the Netherlands will try as much as possible to meet its obligations under the relevant EU directives.
The 2020 Memorandum states that the Netherlands wishes to implement in their tax treaties, at the very least, the minimum standards of the MLI. From a high level perspective these minimum standards cover three subjects: (i) inclusion in the preamble that one of the goals of the tax treaties is to prevent abuse, (ii) a principal purpose test and (iii) a(n improved) mutual agreement procedure (MAP). The 2020 Memorandum states that if countries are not willing to meet these minimum standards, no new treaty or protocol will be concluded with these countries.
The Netherlands has opted-in for most optional choices in the MLI. The 2020 Memorandum reflects that position. This means that, among other things, the Netherlands will only grant treaty benefits to hybrid entities if the income derived by or through such entity is treated as taxable income in the other state. This rule is also called the ‘look-through approach’. This means that the reservation that was made for the look-through approach in OECD Partnership Report 1999 and the previous memorandum has been withdrawn.
It must be noted that the Netherlands has made a reservation with respect to the dependent agent permanent establishment rule in the MLI. This rule lowers the threshold for the presence of a dependent agent permanent establishment (i.e. an agent not of independent status that—under this new rule—plays an important role leading to the conclusion of contracts that are regularly concluded by the enterprise). The Netherlands does intend to agree to this rule bilaterally, if the treaty partner agrees to mandatory and binding arbitration.
Furthermore, contrary to the 2011 memorandum where a corporate tie breaker was included, the Netherlands has opted for a MAP tiebreaker. The MAP tie breaker follows from the implementation of the MLI and seeks to prevent abusive dual residency situations.
It is interesting to note that on February 3 2021, the Dutch Council of State confirmed that a taxpayer can appeal against the refusal of the tax authorities to open a mutual agreement procedure in tax treaty situations. In previous case law the State Secretary of Finance argued that such decision was not appealable. However, after the amendment of the Mutual Agreement Procedure Decree in 2020, taxpayers were granted additional legal protection against the decision of the Dutch tax authorities regarding the mutual agreement procedure. The Dutch Council of State has now confirmed this approach.
It is no surprise after the implementation of the MLI, the 2020 Memorandum underlines the minimum standards and provisions that the Netherlands has opted-in to.
However, it is important to note that:
- In deviation from the OECD Model Tax Convention of 2017 and the previous memorandum, the 2020 Memorandum intents to include fictions provided for in national tax laws into tax treaties; and
- In addition, a broader residency provision is envisaged. As a result, certain exempt persons and entities will also have access to treaty benefits.
In general, the 2020 Memorandum has a strong focus on international collaboration, where the Dutch government emphasises that it will consider the approaches of other (neighbouring) countries to preserve an attractive business climate.
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