2020 Memorandum on Tax Treaty Policy (unofficial translation)

1. Introduction

Since the adoption of the 2011 Memorandum on Tax Treaty Policy, more attention has rightly been paid to combating tax avoidance and to the special position of developing countries in relation to tax matters. Taken together with various other developments, this has altered the position adopted by the Netherlands in negotiations on tax treaties. In issuing this new Memorandum on Tax Treaty Policy, I wish to consult with parliament on the policy to be pursued by the Netherlands on tax treaties and clarify the Dutch negotiating position in advance of any future negotiations.

In preparing this memorandum, I have chosen to outline the main political and policy-related arguments underlying the position adopted by the Dutch government in negotiations on tax treaties. A new memorandum is now needed because the 2011 memorandum has been superseded by more recent domestic and international anti-tax avoidance initiatives.

The main international development in this respect is the OECD’s Base Erosion and Profit Shifting (BEPS) project commissioned by the G20. Over 130 countries are now working together, within the OECD/G20 Inclusive Framework, on the implementation of the measures proposed by the BEPS project. Both the OECD Model Tax Convention on Income and on Capital (2017) and the UN Model Double Taxation Convention (2017) have been updated to bring them into line with this project (and also in other respects).

On the domestic front, while countering tax avoidance is a key priority of the government,1 the need to ensure that legislation is enforceable in practice and also to retain an attractive business climate, as well as the growing importance of effective dispute resolution mechanisms, are all important considerations. Government policy on tax treaties should move in tandem with changes in domestic legislation. I am referring in particular to the implementation in tax treaties of the planned withholding tax on the payment of interest and royalties to low-tax or non-cooperative jurisdictions and in situations of abuse.2 As a further point, it is my intention that tax treaties signed with developing countries should take more account of their special position.

The explanation of the political and policy-related arguments underlying this memorandum is intended to ensure that the government retains broad support for the crux of its negotiating position. I realise that there will be very few occasions where the government manages to incorporate all its wishes in a tax treaty. After all, no two countries have the same domestic tax legislation, the implementation of legislation also differs from one country to another and, most importantly, the treaty partners all bring different wishes to the negotiating table. As a result, the approach adopted will be tailored to each individual case. The government will need to decide, in negotiating each tax treaty, whether the terms of a potential agreement are sufficiently in line with the policy-related arguments underlying this memorandum.

I should finally like to point out that the current international debate on profit allocation and a minimum level of taxation may lead to a further revision of the policy on tax treaties in the future (see section 2.5). I will be informing parliament separately on this matter.3

1 See the letter of 23 February 2018, Parliamentary Papers, House of Representatives 2017/18, 25087, no. 188, and the letter of 28 May 2019, Parliamentary Papers, House of Representatives 2018/19, 32140, no. 51 on the Tax Policy Agenda. 2 Withholding Tax Act 2021, Bulletin of Acts and Decrees 2019, 513. 3 See for example the letter of 10 February 2020, no. 2020-0000027423.

AVT20/FZ131562 1 2. The main features of Dutch government policy on tax treaties

2.1 Why does the Netherlands enter into tax treaties?

The object of a bilateral tax treaty or tax convention is to foster economic ties between countries by avoiding double taxation and at the same time preventing tax avoidance and tax evasion. A tax treaty apportions taxing rights between the countries in question, thus greatly reducing the risk of double taxation. This removes a potential barrier for residents of one of the two countries from undertaking economic activities in the other country. The tax treaty provides legal certainty for taxpayers in both countries.

Due to its open economy and relatively small domestic market, the Netherlands has a great deal to gain from an extensive network of tax treaties. By removing barriers preventing foreign enterprises from operating in the Netherlands, tax treaties can help create jobs in the Netherlands. It is also important to remove any barriers that could prevent Dutch enterprises from operating competitively in foreign markets. Employees, pensioners, self-employed people, sportspersons, performing artists and students who work or invest abroad, or who either live abroad or move abroad, may find themselves confronted with double taxation if more than one country (each acting on the basis of its own domestic legislation) wishes to tax the same income. Finally, a tax treaty can facilitate the taxation of individuals and entities in cross-border situations, for example by means of arrangements for the exchange of information and the provision of assistance with the collection of taxes by the tax authorities.

2.2 With whom does the Netherlands sign tax treaties?

A complex of factors play a role in any decision taken by the Dutch government on whether or not to enter into negotiations on a tax treaty with another state. While the Netherlands is willing in principle to negotiate a tax treaty with any state, capacity constraints compel the government to set priorities in this respect. The nature and scale of the economic relations (actual or potential) involved are important factors in setting such priorities. Other key considerations are the way in which the tax systems interact with each other (i.e. does double taxation occur?), as well as political and diplomatic factors.

One important consideration is whether a state features on the EU list of non-cooperative jurisdictions for tax purposes4 (‘the EU list of non-cooperative jurisdictions’) or whether it has been designated by the Netherlands as a low-tax jurisdiction.5 States are placed on the EU list of non- cooperative jurisdictions if they fail to meet certain international standards, for example in the areas of transparency or harmful tax competition. The Dutch government takes the view that, in order to successfully tackle tax avoidance and tax evasion, it is vitally important for states to comply with international standards. It is for this reason that the Netherlands does not believe in entering into negotiations on new tax treaties with any states on the EU list of non-cooperative jurisdictions. Moreover, the Netherlands has a policy of reviewing existing treaties signed with states that have featured on the EU list over a prolonged period. In doing so, the Dutch government is giving effect to the motion tabled by MPs Carola Schouten and Tjeerd de Groot.6

States are designated as low-tax jurisdictions by the Netherlands if they do not subject entities to corporation tax or if the statutory rate of corporation tax is lower than 9%. States are sovereign in setting their own tax rates and may therefore decide not to levy any corporation tax at all without

4 Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes (2020/C 64/03), OJ C 64/8, 27 February 2020. 5 The government lists each year in a ministerial order those states that are to be designated as low-tax jurisdictions during the forthcoming calendar year. The Order on low-tax and non-cooperative jurisdictions for tax purposes was adopted for the first time on 31 December 2018, Government Gazette 2018, 72064, and amended under an Order of the State Secretary for Finance on 18 December 2019 amending certain implementation regulations relating to taxes and benefits, Government Gazette 2019, 69810. 6 Parliamentary Papers, House of Representatives 2015/16, 25087, no. 122.

AVT20/FZ131562 2 contravening any international agreements. On that basis there are no objections in principle to starting talks on a new tax treaty with such a state. At the same time, there is usually a relatively low risk of double taxation involving these states, and this factor is taken into account when setting priorities for future negotiations.

If the Netherlands already has a tax treaty with a low-tax jurisdiction or with a state on the EU list of non-cooperative jurisdictions, we will seek to start talks on the renegotiation of the treaty. The objective in doing so will be to adjust the treaty in such a way as to enable withholding tax to be levied on payments of interest and royalties to low-tax jurisdictions in relevant situations. This point is discussed in further detail in section 5.3.

2.3 Countering treaty abuse and tax avoidance

It is important to bear in mind that tax treaties can be used for the purpose of tax avoidance. Preventing the abuse of tax treaties is one of the Dutch government’s policy priorities. The OECD’s BEPS project has proposed a number of solutions to the problem, including the adoption of minimum standards. Under the minimum standard proposed in Action 6 of the BEPS project, countries are entitled not to grant treaty benefits if one of the main reasons for undertaking a particular transaction, and hence making use of a tax treaty, may be assumed to be the exploitation of opportunities for non-taxation or reduced taxation. The Netherlands has chosen to go further than the minimum standard in adopting measures aimed specifically at preventing treaty abuse and tax avoidance. The subject of tax avoidance is examined in greater detail in Chapter 3.

Furthermore, because article 94 of the Dutch Constitution makes clear that bilateral tax treaties take precedence over domestic legislation, bilateral tax treaties may block the enforcement of laws enacted to implement the EU’s Anti-Tax Avoidance Directives (ATAD7 and ATAD28). The Netherlands will ensure that, whenever tax treaties are agreed or amended, the obligations imposed by the Directives will be or will continue to be enforceable under the terms of the relevant tax treaty.

2.4. Business climate and the prevention of double taxation

Tax treaties foster an attractive business climate. For this reason, the Dutch government takes careful account, in setting its negotiating objectives, of the agreements made by other countries (Western European countries in particular) in their own tax treaties with the country in question, so as to prevent Dutch enterprises from being placed at a competitive disadvantage. As a further consideration, the Dutch tax system is based on the principle of a level playing field for domestic and international enterprises, and the Dutch tax system has a number of features that help to create this level playing field. The Netherlands applies a participation exemption, which means that a Dutch company with a foreign subsidiary is not taxed twice on its subsidiary’s profits. The tax treaties substantially reduce the risk of profits or income generated in the Netherlands being liable to double taxation, provide assurance to foreign enterprises that they will receive the same tax treatment as Dutch enterprises, and create greater certainty about the tax treatment of their investments in the Netherlands. Against this background, the Netherlands is in favour of ensuring that tax treaties include mandatory, binding arbitration as the final step in the mutual agreement procedure (see section 3.2.10).

As a further point, the Dutch policy on tax treaties has traditionally upheld as far as possible the principle of capital import neutrality for active income, i.e. corporate profits and income from employment, so that Dutch enterprises and employees in foreign markets are not placed at a competitive disadvantage compared with local enterprises and employees. This is an important

7 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market. 8 Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries.

AVT20/FZ131562 3 factor, given that Dutch enterprises have only a relatively small domestic market, which means that access to foreign markets is of vital importance. In order to achieve this competitive equality, the Netherlands has adopted the principle that such profit or income should be exempted. We shall have to wait and see whether, in the years to come, this age-old principle of capital import neutrality will need to be adapted to take account of the outcome of the international debate on profit allocation and the minimum level of taxation and, if so, how.

2.5 International debate on profit allocation and minimum taxation levels

The Netherlands supports the international debate on the allocation of corporate profits among countries for taxation purposes. Under the current OECD Transfer Pricing Guidelines, the allocation of corporate profits among countries as far as possible reflects the place where value is created, i.e. based on functions, assets and risks. Prompted in part by the international debate on taxation in the digital economy, the Inclusive Framework is currently investigating (together with the OECD) whether it would be reasonable to award greater taxing rights to the country in which the customer is based. This is the subject of Pillar One of the study. Pillar Two seeks to identify whether it would be possible to agree on a minimum level of taxation for enterprises.

The Dutch government believes that this is an important initiative. The more countries adopt new international arrangements on the allocation of corporate profits for tax purposes, the more effective these arrangements will be. The same applies to the prevention of tax avoidance: international action is more effective because it is a better way of mitigating the risk of tax avoidance structures being moved from one location to another. It is also more efficient than when countries adopt unilateral measures that are not readily compatible with each other. It is for this reason that multilateral action is needed. Although the international debate on the allocation of corporate profits and minimum tax levels has yet to produce a tangible outcome, when it does, it may well affect the Dutch policy on tax treaties.

2.6 The OECD Model Tax Convention as a starting point

Many countries take the OECD Model Tax Convention on Income and on Capital as the basis on which they draft their tax treaties. A very common situation in which double taxation arises is that in which a taxpayer’s worldwide income is taxed by their state of residence, while another state, in which one of the taxpayer’s sources of income is located, taxes the same taxpayer as the state of source at the same time. The OECD Model Tax Convention divides the taxing rights between the state of residence and the state of source. This may lead to the state of source relinquishing some or all of its tax claims or, equally, to the state of residence giving up some or all of its tax claims as a result of the award of an ‘object exemption’, a tax exemption or a tax credit.

The OECD Model Tax Convention is not the only one of its kind. A UN Model Double Taxation Convention has been in existence since 1980, and is designed to regulate tax relations between developed and developing countries. Although it is broadly similar to the OECD Model Tax Convention, it goes further than the latter in granting taxing rights to the state of source. The OECD Model Tax Convention is more effective than the UN Model Double Taxation Convention in preventing double taxation. This is because the UN Model Double Taxation Convention, in addition to regulating withholding taxes on dividend and interest payments, also provides for additional withholding taxes on certain gross money flows (such as royalties and fees paid for technical services) that do not always qualify for a full credit in the state of residence because the basis of taxation in the state of residence is the taxpayer’s net income, i.e. after deduction of relevant expenses. This may have a detrimental effect on cross-border trade and investments.

The OECD Model Tax Convention was extended in 1997 with the inclusion of a separate section regulating the position of non-OECD countries. A total of 33 non-OECD countries have indicated that, while they all accept the general tenor of the articles in the OECD Model Tax Convention and the Commentary (‘the OECD Commentary’), each of them has identified certain respects in which it

AVT20/FZ131562 4 diverges from the OECD Model Tax Convention (as indeed the OECD countries do in the OECD Commentary). This has had the effect of strengthening the position of the OECD Model Tax Convention as an international standard.

The advantage of adhering to an international standard (such as the OECD or the UN convention) as closely as possible is that this is the best way of guaranteeing legal certainty about taxation in bilateral economic relations. Case law highlights the importance of the OECD Commentary for provisions in a tax treaty that correspond with the OECD Model Tax Convention. The effect of the OECD Commentary is to ensure that, as far as possible, treaty provisions that are aligned with the OECD Model Tax Convention are interpreted consistently in different countries. The Dutch government seeks to include a general provision in tax treaties confirming this principle. This is because the idea behind the OECD Model Tax Convention and the OECD Commentary is to minimise disputes and ensure that any that do arise are swiftly resolved, thanks to international agreement on the interpretation and application of tax treaties.

Not only is this conducive to legal certainty, but working with these models also makes it easier to reach agreement with other countries. For the above reasons, the Dutch objective in negotiations on tax treaties is to adhere as closely as possible to the terms of the OECD Model Tax Convention. There are, however, a few points on which the Netherlands has adopted a different standpoint, and these are discussed in detail in chapter 4.

2.7 Developing countries use the UN Model Double Taxation Convention as well as the OECD Model Tax Convention

Alongside the OECD Model Tax Convention, the UN Model Double Taxation Convention also plays a role, particularly in negotiations with developing countries. Although the UN Model Double Taxation Convention is based on the OECD Model Tax Convention, it goes further in acceding to the wish of many developing countries for the state of source to be granted more extensive taxing rights, particularly in relation to business profits and income from movable capital (such as dividends, interest and royalties). This wish stems primarily from the budgetary interests of developing countries, the majority of which are net importers of investments, capital and knowledge. Another reason cited for it is that it is relatively easy in practice to tax a gross money flow (i.e. without the deduction of relevant costs). When negotiating tax treaties with developing countries in the coming years, the Netherlands will be more willing to accept certain aspects of the UN Model Double Taxation Convention than it was in the past.

The policy on tax treaties described in this memorandum is likely to have a beneficial impact on developing countries, given that a tax treaty not only helps to strengthen economic ties by avoiding double taxation, but also helps prevent tax avoidance and tax evasion. Moreover, a treaty improves administrative cooperation by including an effective method of dispute resolution, and also provides a basis for the exchange of information and mutual assistance between tax authorities. Section 5.2 examines the policy on tax treaties in relation to developing countries in greater detail.

2.8 Constituent countries of the Kingdom of the Netherlands

As constituent countries of the Kingdom of the Netherlands (‘the Kingdom’), Aruba, Curaçao and St Maarten all enjoy tax autonomy and are free to negotiate tax treaties themselves. The policy of the Dutch government is to seek to incorporate, in any tax treaties signed by the Netherlands, a provision stating that the treaty in question may be extended, subject to certain conditions, to cover these three constituent countries of the Kingdom. If a decision is subsequently taken to extend the treaty in this way, a separate treaty must be signed to this end.

The islands of Bonaire, St Eustatius and Saba (‘the BES islands’) form part of the Netherlands. For this reason, the assumption in any negotiations on a tax treaty is that the treaty in question should

AVT20/FZ131562 5 also apply to the BES islands. However, the BES islands have a tax system of their own, which is not identical to the system in the European part of the Netherlands. As a result, not many treaty partners are prepared in practice to accept that a bilateral tax treaty should also apply to the BES islands.

2.9 Practical aspects

The practical aspects of a tax treaty for both the Tax and Customs Administration and taxpayers are taken into consideration during negotiations on a tax treaty. This is particularly relevant in those cases in which the Dutch government wishes to incorporate certain provisions in the treaty that deviate from the OECD Model Tax Convention, which often means that a compromise needs to be agreed with the country in question, enabling the Netherlands to apply certain aspects of its own domestic legislation.

2.10 Consultation

Between 25 September 2018 and 22 October 2018, an online public consultation9 was held about the Dutch policy on tax treaties and the designation of low-tax jurisdictions. Interested parties were invited to comment on the contents of a new policy on tax treaties, with a view to the proposed adoption of a withholding tax on dividends, interest and royalties. Participants were also asked for their views on the policy on tax treaties in relation to developing countries. The results of this online public consultation may be viewed by clicking on the link in the footnote (note: Dutch only).10 The consultation elicited opinions on the stated topics, i.e. low-tax jurisdictions, withholding tax and developing countries. Another topic that was raised by a number of respondents was the tax treatment of sportspersons, performing artists and orchestras performing in foreign countries. The responses to the public consultation were taken into consideration in formulating the policy set out in this memorandum.

9 https://www.internetconsultatie.nl/fiscaalverdragsbeleid_laagbelastendestaten 10 https://www.internetconsultatie.nl/fiscaalverdragsbeleid_laagbelastendestaten/reacties

AVT20/FZ131562 6 3. Preventing treaty abuse

3.1 General

The OECD’s BEPS Action Plan identifies treaty abuse, notably treaty shopping, as a major source of base erosion and profit shifting. Taxpayers who engage in treaty abuse make wrongful claims for treaty benefits, resulting in a loss of tax revenue. In order to prevent such practices, the BEPS Action Plan sets out proposals for a series of measures that are intended to combat treaty abuse.

The government made clear, in its assessment of the Final Reports on the BEPS project published on 5 October 2015, that it regards the results of the project as part of its policy on tax treaties.11

The treaty-related measures fall into two categories: a minimum standard and additional optional measures. The minimum standard to counter treaty abuse consists of measures that are regarded as constituting a minimum level of protection against treaty shopping. All countries that have signed up to the Inclusive Framework have committed to provide this protection. The additional measures are optional and are intended primarily to combat specific instances of treaty abuse. They form part of the most recent versions of the OECD Model Tax Convention and the UN Model Double Taxation Convention (and the relevant Commentaries).

The BEPS package includes a Multilateral Instrument (MLI) for implementing treaty-related measures to prevent base erosion and profit shifting.12 The MLI enables participating countries to implement treaty-related BEPS measures swiftly and efficiently in their tax treaties without requiring any bilateral negotiations.

3.2 Minimum standard

As part of BEPS Action 6, the countries taking part in the BEPS project, including the Netherlands, reached agreement on a minimum standard to counter treaty abuse. While a number of the treaties signed by the Netherlands already include various anti-abuse measures, the country’s entire treaty network eventually needs to comply with the minimum standard of protection against treaty abuse. The MLI will play a key role in this process.

Some of our treaty partners do not wish to sign the MLI, while others have decided to keep their own tax treaty outside the scope of the MLI. If the treaty in question does not meet the minimum standard and if there is also a risk of substantial treaty abuse, we will ask these countries to adopt the minimum standard after all. Although our initial preference would be to use the MLI for this purpose, another option would be to start bilateral negotiations with a view to achieving the same end. If it becomes clear that the treaty partner in question (whether current or potential) is not prepared to adhere to the minimum standard, we will then refrain from signing a new treaty or protocol with the country in question.

The minimum standard consists of the following components: i) the insertion of a preamble stating that a tax treaty is not intended as a means of creating opportunities for double non-taxation or for tax evasion or tax avoidance; ii) the insertion of anti-abuse measures in tax treaties; iii) the insertion of an effective dispute resolution mechanism in the form of a mutual agreement procedure.

11 Parliamentary Papers, House of Representatives 2015/16, 25087, no. 112. 12 Treaty Series 2017, 86, and Treaty Series 2017, 194 (rectification: Treaty Series 2019, 63).

AVT20/FZ131562 7 3.2.1 The preamble to tax treaties

Under international law, tax treaties are interpreted in accordance with the customary meaning of terms in their context and in the light of the treaty’s subject matter and object. The preamble is one of the determinants of the context and can be used as a means of expressing the treaty parties’ intentions. The report on BEPS Action 6 contains the text of a preamble that makes clear that tax treaties are intended to eliminate double taxation without creating opportunities for double non-taxation or reduced taxation, including through treaty-shopping arrangements.

3.2.2 Anti-abuse measures in tax treaties

The Netherlands regards a principal purposes test (PPT) as being the best means of bringing tax treaties into line with the minimum standard on treaty abuse. A PPT prevents any improper use of the Dutch treaty network. Based on an objectified analysis, a PPT seeks to identify one of the main reasons for a particular arrangement or transaction. If it emerges that obtaining treaty benefits is one of the principal purposes of an arrangement or transaction, the PPT prevents unwarranted curbs on the power of a treaty partner or the Netherlands to levy tax. The PPT makes use of open standards, based inter alia on subjective factors such as the purpose of the arrangement or transaction. The use of open standards allows different types of treaty abuse to be countered, without causing any harm to genuine economic activities. The use of open standards also means that the PPT can be applied to new types of treaty abuse.

In order to avoid overkill, create greater legal certainty for taxpayers and improve the information status of both contracting states, the Netherlands seeks to insert two additional provisions in the PPT. The first of these sets out that any benefits requested by the person or entity in question may nonetheless be granted if and in so far as these or any other benefits would have been granted in the absence of the arrangement or transaction in question. In other words, such cases are assumed not to involve any abuse, and it is therefore logical to grant the relevant treaty benefits.

The second provision obliges the authorities of a contracting state to consult the other contracting state about any intention the former may have of refusing treaty benefits pursuant to the PPT. Notifying a contracting state of an intention to use the PPT can prevent overkill in cases where not all facts are clear. In addition, such a provision can help to ensure that the relevant criteria are applied in a concerted, uniform and meaningful manner. At the same time, this obligation to consult does not pose an obstacle to using the PPT.

I believe that the PPT is the most suitable means of effectively countering treaty abuse at international level. Moreover, as a part of the MLI, the PPT also forms one of the means of preventing abuse as outlined in the most recent versions of the OECD Model Tax Convention and the UN Model Double Taxation Convention. In other words, in favouring the use of the PPT, the Netherlands is acting in accordance with the generally accepted international practice.

Another way of meeting the minimum standard is by combining a (simplified) limitation on benefits (LoB) clause with a PPT. Under an LoB clause, whether a taxpayer obtains access to treaty benefits depends on the results of a mechanical assessment of a number of characteristics of the entity that wishes to make use of the treaty benefits. A set of distinct criteria are formulated in order to assess whether the entity in question has a genuine presence in a contracting state or whether there are other factors that make it less likely that the treaty is being abused. These criteria are based on certain static assumptions, not all of which are accurate reflections of reality, which means there is a risk either of abuse not being prevented or of genuine economic activities being adversely affected.

If the entity fails to satisfy these criteria, it is not allowed to access any treaty benefits (unless it can invoke a safety net provision). But even entities that do satisfy the requirements of the LoB rule may be refused access to treaty benefits on the grounds of the results of the PPT. In that case,

AVT20/FZ131562 8 the advantage of legal certainty that an LoB clause is assumed to offer is cancelled out by the open standards on which the PPT is based (see above). A further drawback is that an LoB clause introduces additional complexity. In this light, it is not Dutch policy to seek the insertion of an LoB clause. Nonetheless, it is possible that a treaty partner may suggest combining a (simplified) LoB rule with a PPT in order to prevent treaty abuse. The Netherlands would be sympathetic to such a suggestion if, for instance, the treaty partner is able to demonstrate that this is necessary in order to effectively prevent treaty abuse in bilateral relations.

Finally, it is also possible to meet the minimum standard by combining a detailed LoB clause with an anti-conduit mechanism. An anti-conduit mechanism is generally directed at residents who channel all or a substantial part of their income, by means of one or a series of transactions, to non-residents who are not entitled to comparable treaty benefits from the original state of source, one of the principal purposes of this being to obtain more favourable treaty benefits. Unlike the anti-abuse measures discussed above, an anti-conduit mechanism has yet to be formalised at international level, which means that it is not yet clear whether it would indeed be an effective means of combating treaty abuse (and of meeting the minimum standard). For this reason, the Netherlands has adopted a cautious line in this respect. Only a very small group of jurisdictions have adopted a regular or detailed LoB clause supplemented by an anti-conduit mechanism as a means of meeting the minimum standard.

3.2.3 Effective dispute resolution by means of a mutual agreement procedure

The implementation of the recommendations ensuing from the BEPS project may increase the number of situations in which disputes arise about the interpretation and application of BEPS- related and other treaty provisions. This may lead to taxes being levied in contravention of tax treaties (double taxation, for example). One option in such an event is to instigate a mutual agreement procedure in which the competent authorities try to reach a solution. A number of Dutch tax treaties include mandatory, binding arbitration as an option, and this could be used to settle the dispute in question if a mutual agreement procedure does not produce a solution.

BEPS Action 14 sets a minimum standard for effective dispute resolution. This standard is designed to improve the mutual agreement procedure. The measures in question improve the accessibility of the procedure for taxpayers, the administrative process and the implementation of the agreed solution.

The Dutch policy is to include the minimum standard against treaty abuse and effective dispute resolution in tax treaties. The Netherlands will seek to ensure that the PPT is included in the minimum standard as a measure to combat treaty abuse. A PPT may also be agreed in combination with a (simplified) LoB clause in certain bilateral treaties.

Although the Dutch government would prefer to use the MLI for this purpose, bilateral negotiations could be initiated to the same end. New treaties and protocols fall outside the scope of the MLI. In such cases, the Netherlands will sign a treaty or protocol only if it meets the minimum standard against treaty abuse and for effective dispute resolution.

3.3 Additional measures

In addition to seeking to include the minimum standard, the Netherlands also wishes tax treaties to include the vast majority of the additional measures recommended by the BEPS project. These additional measures are as follows: • a measure regulating the application of the treaty to cases in which the income or a benefit is received by or through a hybrid entity; • a general saving clause; • a measure regulating the treaty status of entities with dual residence;

AVT20/FZ131562 9 • measures against artificial arrangements designed to avoid permanent establishment status; • a minimum shareholding period to counter dividend transfer transactions; • a look-back period for entities deriving their value principally from immovable property; • the use of a credit method instead of the exemption method in certain specific cases; • a measure to prevent any restriction of the source country’s right to tax income attributed to permanent establishments in third jurisdictions where this income is subject to a low rate of tax; • corresponding adjustments in connection with adjustments in transfer prices; • mandatory, binding arbitration.

With the exception of the general saving clause, the above measures form part of the Dutch policy on tax treaties. In addition, in response to the amendment tabled by MPs Helma Lodders and Evert Jan Slootweg13 and incorporated in the approving act, the Dutch government has made an additional proviso in relation to the MLI. The amendment calls in essence for an effective form of dispute resolution to be included in tax treaties if stricter criteria are set for a dependent or independent agent to qualify as a permanent establishment.

3.3.1 Hybrid entities

Qualification differences may result in one contracting state taxing a particular entity, whereas another contracting state ‘looks through’ the same entity and treats it as being tax-transparent. Where this difference in treatment arises, the entity in question is referred to as a ‘hybrid entity’. As part of the BEPS project, a treaty clause was drafted regulating the circumstances in which treaty benefits are granted if income or benefits are received by or through a hybrid entity. This clause assesses whether the income for which the entity is requesting a treaty benefit is indeed taxed in the other state. The idea is to prevent treaty benefits from being wrongly granted to (or wrongly withheld from) hybrid entities or their ultimate owners. The Netherlands has already ensured that a number of tax treaties include measures of this nature.

3.3.2 Saving clause

The aim of a general saving clause is to make clear that a tax treaty does not restrict a country’s right to tax its own residents, except under certain specifically cited treaty provisions. The Netherlands has made a proviso in this respect, as this is how tax treaties are always interpreted. In this sense, there is no point in inserting a general saving clause.

Nonetheless, if a tax treaty contains a clause on hybrid entities, the Netherlands has a policy of seeking to include a specific saving clause in order to ensure that the Dutch tax authorities are entitled to tax companies registered in the Netherlands that are regarded as tax-transparent by the other contracting state. Without a specific saving clause, the Netherlands could find that its right to tax the company is called into question.

3.3.3 Dual residence

In certain circumstances, both contracting states may regard a particular entity as being resident in their own country. This gives rise to a situation known as a ‘dual residence’. It is then a question of making clear in the treaty which state the entity is regarded as residing in for the purposes of the treaty. The reports on actions 2 and 6 of the BEPS project state that dual residence is often associated with tax avoidance structures. For this reason, it was decided in 2017 to include a clause in the OECD Model Tax Convention under which, in the event of dual residence, the country of residence for the relevant tax treaty would henceforth be determined with the aid of a mutual agreement procedure rather than exclusively by applying the ‘place of effective management’ test.

13 Parliamentary Papers, House of Representatives 2018/19, 34 853, no. 8.

AVT20/FZ131562 10 Before then, this clause formed part of the Commentary on the OECD Model Tax Convention. The Netherlands has already included this type of clause in a number of tax treaties.

3.3.4 Permanent establishment

Deciding whether an enterprise has a permanent establishment in another country is an important consideration in allocating the right to tax business profits under tax treaties. The BEPS project found (in Action 7) that various means are employed to artificially avoid permanent establishment status and proposed a range of measures for combating this practice.

The OECD Model Tax Convention traditionally regards a number of specific activities as not constituting a permanent establishment, because it is generally assumed that the activity in question is of a preparatory or auxiliary nature. In practice, however, these activities may well be more important, rather than being simply of a preparatory or auxiliary nature. Despite this, it has not been possible to treat them as constituting a permanent establishment. However, the most recent version of the OECD Model Tax Convention contains a requirement that the activity, or the combination of activities, must actually be of a preparatory or auxiliary nature, based on the facts and circumstances of each case.

Secondly, an anti-fragmentation rule prevents activities between closely related persons or enterprises from being artificially fragmented in order to argue that each is of a preparatory or auxiliary nature and should hence not be treated as forming a permanent establishment. In addition, a clause to prevent the splitting up of contracts is designed to prevent contracts between closely related persons or enterprises from being artificially split up so as to prevent the contracts in question from exceeding the 12-month threshold. The Convention now includes a definition of a ‘closely related person or enterprise’ in order to give effect to the measures described above.

A third change involves tightening up the criteria for dependent agent status, in order to prevent ‘commissionnaire arrangements’ from being used as a means of avoiding permanent establishment status. In commissionnaire arrangements there is a principal resident in the state of residence and an agent in the state of source, and the agent arranges contracts between the principal and customers. The criteria for independent agent status are also being tightened up, so that an agent does not qualify as an independent agent if he or she acts exclusively, or more or less exclusively, on behalf of an enterprise with which he or she is closely related.

Due to a proviso made so as to accommodate the amendment tabled by MPs Helma Lodders and Evert Jan Slootweg to the act approving the MLI, these changes do not (for the time being) affect any tax treaties registered by the Netherlands under the MLI.14 The amendment does, however, allow for these measures to be agreed in bilateral negotiations, provided that there is an effective form of dispute resolution.

3.3.5 Minimum shareholding period to counter dividend transfer transactions

Action 6 of the BEPS project proposes a minimum shareholding period of 365 days in order to prevent dividend transfer transactions. The aim is to prevent taxpayers from transferring shares for a brief period, just before dividend is due to be distributed, to a party with a better treaty status with a view to gaining more favourable treaty benefits for dividend payments.

3.3.6 Look-back period for entities deriving their value principally from immovable property (‘immovable property entities’)

Under the OECD Model Tax Convention, capital gains earned from the sale of shares or similar interests in immovable property entities may be taxed in the country in which the immovable

14 Parliamentary Papers, House of Representatives 2018/19, 34853, no. 8.

AVT20/FZ131562 11 property is located (referred to as the ‘situs state’), if 50% or more of the value of the shares or the similar interests is derived from immovable property located in the situs state. This is known as the ‘immovable property threshold’. In order to prevent a situation in which assets are transferred to the company just before the sale, in order to alter the ratio of immovable to total assets and thus avoid tax, the BEPS project proposes adopting a look-back period. This would involve taking account of the immovable property threshold for the 365 days preceding the sale. If the threshold is found to have been exceeded at any point during this period, the situs state is granted the right to tax the gains in question.

The Netherlands has included a proviso in the OECD Model Tax Convention with regard to tax levied by the situs state on capital gains from the sale of shares or similar interests in immovable property entities. However, the Netherlands is prepared, provided that certain conditions are met, to agree that the situs state should be awarded taxing rights, in which case the Dutch policy is to ensure that the treaty in question should include a look-back period.

3.3.7 The use of the credit method instead of the exemption method in certain cases

A credit or exemption method is used as a means of avoiding double taxation. In practice, however, the use of the exemption method may unintentionally lead to certain income either attracting a relatively low level of taxation or not being taxed at all. This may stem, for example, from differing interpretations of the tax treaty by the Netherlands and the treaty partner, or it may be due to a failure on the part of the treaty partners to agree on the relevant facts. This may be the case, for example, if a contracting state (i.e. the state of residence) treats certain cross-border activities performed by a taxpayer in the other contracting state as a permanent establishment, whereas the other contracting state (i.e. the state of source) takes a different view of the facts and concludes that, under the terms of the tax treaty, these activities should not be considered as constituting a permanent establishment. If the state of residence then applies the exemption method and the state of source does not tax the activities in question, a case of double non- taxation will ensue. The aim of this measure is to ensure that the credit method is used in this type of situation rather than the exemption method, thus guaranteeing an appropriate level of taxation.

3.3.8 Measure to prevent the restriction of a state of source’s right to tax income attributed to a permanent establishment in third jurisdictions where such income attracts a low rate of tax

The relevant tax treaty may restrict the right of a treaty partner, i.e. the state of source, to tax income earned by a resident of another contracting state, i.e. the state of residence, that is tax- exempt in the state of residence but is attributed to its permanent establishment in a third country in which the income is taxed at a low (or too low a) rate. This measure prevents the state of source’s taxing right from being restricted in such cases.

In order to prevent overkill, the measure does not apply to income connected with a business actively conducted by the permanent establishment. In addition, by exercising a discretionary right, the competent authority may still grant treaty benefits in situations in which it deems this to be appropriate.

3.3.9 Corresponding adjustments made in connection with adjustments in transfer prices

The OECD Model Tax Convention stipulates that a contracting state may, in response to an adjustment made by the other contracting state in the transfer prices applied between related companies, make a corresponding adjustment to the transfer prices and grant access to a mutual agreement procedure about the double taxation that may ensue from such an adjustment. Certain states take the view that, if no relevant provision is included in a tax treaty, they are not under any obligation to make a corresponding adjustment in connection with an adjustment made by their treaty partner, or to grant access to a mutual agreement procedure about the double taxation that may ensue from such an adjustment. Action 14 of the BEPS project sets out a measure, which also

AVT20/FZ131562 12 forms part of the OECD Model Tax Convention, enabling countries to make a corresponding adjustment unilaterally in cases where they regard the adjustment as being justified. This is a means of preventing this form of double taxation.

3.3.10 Mandatory, binding arbitration

If tax is levied contrary to the terms of the treaty, the first step is to try and find a solution by starting a mutual agreement procedure. The competent authorities are obliged to do their best to find a solution. Apart from the actual adjustment discussed in the mutual agreement procedure, discrepancies between the domestic laws of the various states may lead to interest, penalties and costs rising to a disproportionate level during the course of the process. In order to ensure that this does not have the effect of discouraging parties from embarking on a mutual agreement procedure, the Netherlands seeks to include in tax treaties a clause that allows the competent authorities to make arrangements about the level of interest, penalties and costs.

If no solution is found within the time limit set, the next step is to go to arbitration. In order to achieve the desired legal certainty for taxpayers, the Netherlands wishes to go further than the minimum standard for dispute resolution and include mandatory, binding arbitration in its tax treaties. The mandatory nature of arbitration means that countries cannot disregard a taxpayer’s request for arbitration. The term ‘binding’ means that the countries are bound to accept the outcome of an arbitration procedure. Arbitration is the final stage of the mutual agreement procedure included in tax treaties.

In addition to adopting the minimum standard, the Netherlands also seeks to include the vast majority of the additional measures proposed by the BEPS project in its tax treaties. This will give the Netherlands and its treaty partners an effective set of tools with which to combat treaty abuse.

AVT20/FZ131562 13 4. The main departures from and additions to the OECD Model Tax Convention

4.1 General

The Netherlands seeks to ensure that all tax treaties it signs with other states are based as closely as possible on the OECD Model Tax Convention. The provisions of the OECD Model Tax Convention regulate the scope of the treaty, the definition of terms, and the allocation of taxing rights. This means for example that, in principle, the Netherlands proceeds on the basis that business profits are to be taxed in the state in which the enterprise is resident, unless the enterprise performs its activities with the aid of a permanent establishment located in the other state. An important point in this respect is that profits should be attributed to permanent establishments in accordance with internationally agreed principles.

The Netherlands also follows the OECD Model Tax Convention in attributing wages earned from employment in the first instance to the state of residence, unless the taxpayer is employed in the other state and a number of conditions are met.

The OECD Model Tax Convention also contains a number of specific clauses on mutual agreement and arbitration, the exchange of information, and assistance in the collection of taxes, among various other topics. Here too, the Dutch policy on tax treaties is to follow the OECD Model Tax Convention as closely as possible. Nonetheless, the Dutch position does depart from the OECD Model Tax Convention in a small number of respects as a consequence of domestic legislation, case law and policy-related factors. The main departures from and additions to the OECD Model Tax Convention are outlined below. The following sections discuss these specific elements in the order in which they appear in the OECD Model Tax Convention.

4.2 Residence

Residence status in one of the contracting states is important in order to gain access to a tax treaty. Under the OECD Model Tax Convention, a ‘resident’ is any person who is liable to tax in the state in question.15 However, it is not entirely clear what the phrase ‘liable to tax’ actually means. The article in question states that residents also include ‘the state and any political subdivision or local authority thereof’, as well as ‘recognised pension funds’.

For this reason, the Netherlands seeks to include a clause stating that all tax-exempt entities should be treated as residents for the purposes of the treaty.16 Except in cases of abuse, there is no reason in principle why a tax exemption granted by the state of actual residence should lead to an extension of the state of source’s taxing rights. This is also likely to be at odds with the intention of the state of actual residence in granting the tax exemption, for example to a charitable institution.

The Netherlands seeks to include a clause in tax treaties containing a more detailed definition of the term ‘resident’.

4.3 Investment funds

4.3.1 General

Investors may choose to invest collectively in an investment fund as a means of spreading their risks. The Netherlands divides investment funds into two distinct types in order to prevent those investors who use an investment fund from paying more tax than those investors who invest

15 This means that a person who is liable to tax in respect only of income from sources in that state is not deemed to be a resident. 16 See also Supreme Court, 4 December 2009, ECLI:NL:PHR:2009:BI7301.

AVT20/FZ131562 14 directly, i.e. the ‘exempt investment fund’ (VBI) and the ‘fiscal investment fund’ (FBI).

4.3.2 Exempt investment funds

The main characteristics of an exempt investment fund are that it has a subjective right to an exemption from corporation tax and is not obliged to withhold dividend tax. As a result of the Dutch policy on the definition of a resident in tax treaties, an exempt investment fund may be regarded as a resident for the purposes of a tax treaty. This means that the Netherlands, as the state of source, is entitled to levy income tax, for example, on dividends paid by the exempt investment fund to its foreign holders of substantial interests.

At the same time, and in accordance with the motion tabled by MPs Pieter Omtzigt and Roland van Vliet,17 the Netherlands will propose excluding an exempt investment fund from any (relevant) treaty benefits, in order to prevent it from being used for undesirable purposes. If the fund is barred from obtaining treaty benefits, the other state may, for example, charge withholding tax on dividends and interest paid to the fund, in accordance with its domestic rates. The treaty partner may well have adopted a tax regime that is comparable to that applicable to an exempt investment fund. For this reason, the Netherlands will discuss with the treaty partner whether any other entities that are covered by a comparable special regime should also be excluded from (relevant) treaty benefits in the same way as exempt investment funds.

The Netherlands seeks to reach agreement with its treaty partners that exempt investment funds and entities that are subject to comparable special regimes should not qualify for (certain) treaty benefits.

4.3.3 Fiscal investment funds

There are two main tax facilities available to fiscal investment funds, i.e. zero-rated corporation tax and rebates of dividend tax and foreign withholding tax deducted at source. A fund needs to satisfy a number of conditions in order to obtain (and retain) the status of a fiscal investment fund. These include an obligation to distribute, every year within eight months of the end of the year in which the profit was earned, its taxable profits to its investors in the form of dividend. The fund is required to deduct dividend tax from the distributed profits.

Dutch policy is not to include a clause providing for the exclusive taxation in the state of residence of dividends or intercompany dividends paid by or to a fiscal investment fund or similar fund in the other treaty state. This policy is in line with the principle that any exemption granted to intercompany dividends is not intended to apply to investment dividends.18 This means that the 15% rate for portfolio dividends applies even in situations where a taxpayer possesses a shareholding in a fiscal investment fund or where a shareholding is held by a fiscal investment fund. This also has the effect of preventing a situation in which the Netherlands is unable to tax (or fully tax) income earned from immovable property located in the Netherlands and owned by a fiscal investment fund.19

The Dutch policy on tax treaties is to apply the 15% tax rate for portfolio dividends to all dividends distributed by or paid to a fiscal investment fund or a similar institution in the treaty partner’s country.

17 Parliamentary Papers, House of Representatives 2010/11, 25087, no. 13. 18 This principle is also expressed, for example, in section 4 of the Dividend Tax Act 1965, section 13 (8) of the Corporation Tax Act, and paragraph 17 of the Commentary on article 10 of the OECD Model Tax Convention. 19 It is worth pointing out that, in part because of these problems, the government is currently studying whether it would be possible and practicable to make a specific adjustment to the tax regime for immovable property held by a fiscal investment fund. See Parliamentary Papers, House of Representatives 2018/19, 35028, no. 21 and Parliamentary Papers, House of Representatives 2019/20, 35300 IX, no. 4. The possible findings of this study will not alter the Dutch policy of applying the 15% portfolio dividend tax rate to dividends received or paid by fiscal investment funds in all situations, including those covered by a tax treaty.

AVT20/FZ131562 15

4.4 Offshore permanent establishment

Further to the definition of a permanent establishment in the most recent version of the OECD Model Tax Convention, the Netherlands wishes to extend the definition, in accordance with the OECD Commentary on the Convention, to cover offshore activities. The aim in doing so is to ensure that national rights to tax the activities in question, which by their nature are likely to be both mobile and limited in duration, can be exercised under tax treaties. Coastal states usually extend the definition along these lines.

Other than in the case of activities that are subject to the normal tax treaty rules on the allocation of taxing rights between treaty partners, offshore activities tend to be treated more readily as constituting a permanent establishment. The general tendency to assume that the entitlement to tax these activities lies with the Netherlands stems primarily from the Dutch claim to these offshore activities. After all, the activities in question are performed in, on or above the North Sea production area. Moreover, the specific nature of these offshore activities means that the Netherlands does not generally have any other taxing rights in relation to them.

The Netherlands seeks to include a specific clause in the article in which the term ‘permanent establishment’ is defined, on the basis of which the Netherlands is more likely to be entitled to tax profits from offshore activities. This extension of the definition of the term ‘permanent establishment’ also affects the provisions on income from employment and the prevention of double taxation.

4.5 Dividends, interest and royalties

4.5.1 General

The OECD Model Tax Convention grants the state of source the right to tax intercompany dividends (subject to a minimum 25% equity holding) at 5%, and other dividends at 15%. The OECD Model Tax Convention also includes a 10% withholding tax on interest. Under the terms of the OECD Model Tax Convention, the state of residence has an exclusive right to tax royalties.

The Dutch policy on tax treaties is based in part on the principles enshrined in the OECD Model Tax Convention. First, the Netherlands seeks to ensure that the state of source is entitled to levy a 15% tax on other dividends (known as ‘portfolio dividends’). This is relatively easy to administer because it is in line with the 15% domestic tax rate.

Second, the Dutch policy on tax treaties is to seek to grant the state of residence an exclusive right to tax royalties, in accordance with the terms of the OECD Model Tax Convention. However, the Dutch policy does not follow the OECD Model Tax Convention in relation to intercompany dividends and interest.

4.5.2 Intercompany dividends

The Dutch policy is that only the state of residence should be entitled to tax intercompany dividends. The reason for pursuing this policy stems from the traditional practice of granting an entity holding a substantial shareholding in another entity an exemption from corporation tax on income from that substantial holding in order to prevent the group as a whole from having to pay economic double taxation.20 Because this exemption for substantial shareholdings means that

20 The extension on 1 January 2018 of the withholding exemption in dividend tax is the logical consequence of this. The withholding exemption was extended on 1 January 2018 to include dividend payments to entities registered in a country with which the Netherlands has signed a tax treaty containing a dividend clause,

AVT20/FZ131562 16 intercompany dividends received from abroad are not taxed, it is not possible to offset any foreign withholding tax that has been levied on those dividends. This additional foreign withholding tax has the effect of making it less attractive for an enterprise to acquire or set up foreign subsidiaries. The principle that no withholding tax should be charged on intercompany dividends is also laid down in the EU’s Parent-Subsidiary Directive.21

4.5.3 Interest and royalties

The same applies to interest: here too, the Dutch policy is that, in theory, only the state of residence should be entitled to tax interest payments. An important point in this connection is that the Netherlands does not currently charge a withholding tax on interest payments, as indeed it does not on royalties.22 Moreover, in just about all cases, any withholding taxes on interest and royalties are charged on gross income, whereas the state of residence taxes net income, which means that the tax base may not be large enough to allow for the withholding taxes to be fully set off. Although the cost of any remaining double taxation will be passed on in most cases, the upshot is that foreign investors are placed at a disadvantage compared with investors from the state of source. As a result, a withholding tax on interest and royalties may form an impediment to international trade and investments. Broadly speaking, the principle of the exclusive taxing right of the state of residence is also in line with the EU’s Interest and Royalty Directive.23

4.5.4 The inclusion of exceptions (including pension funds)

If a treaty partner continues to insist on its right to levy a withholding tax on intercompany dividends, interest and/or royalties, the Netherlands will seek to prevent a situation in which Dutch taxpayers are treated less favourably than taxpayers in other similar (i.e. Western European) countries that have signed a tax treaty with the treaty partner in question.

The Dutch policy is also to include certain exceptions in relation to portfolio dividends or interest, in line with the Commentary on the OECD Model Tax Convention. The first exception the Netherlands seeks to include relates to portfolio dividends and interest paid to pension funds.24 As pension funds have a subjective right to exemption from corporation tax, it is not possible to set off withholding tax levied by a foreign country. This results in economic double taxation, as pension benefit payments are also taxed. The Netherlands seeks to follow a policy in line with the OECD Commentary with regard to a number of other exemptions from withholding tax on interest. The exemptions concern interest paid to or by a state or a subdivision thereof, interest paid to the central bank, interest paid in connection with export finance programmes, interest paid to financial institutions (notably FMO, the Dutch development bank) and interest paid in connection with instalment sales.25

The Dutch policy is that the state of residence should have an exclusive right to tax intercompany dividends, interest and royalties. Where portfolio dividends are concerned, the Dutch policy is to apply the domestic tax rate of 15%.

provided that there is no question of any abuse. See Parliamentary Papers, House of Representatives 2017/18, 34788, no. 3. 21 Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different member states, OJ L 345/8 (29 December 2011). 22 The Dutch government will be introducing a conditional withholding tax on interest and royalty payments to low-tax jurisdictions and non-cooperative jurisdictions on 1 January 2021. The consequences of these changes in the policy on tax treaties are discussed in chapter 5. 23 Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different member states, OJ L 157/49 (26 June 2003). 24 OECD Model Tax Convention (2017): Commentary on article 10 (paragraph 13.1) and Commentary on article 11 (paragraph 7.10). 25 OECD Model Tax Convention (2017): Commentary on article 11, paragraph 7.

AVT20/FZ131562 17 4.6 Income from a substantial interest

4.6.1 Protective assessment and deferral of payment

Where a shareholder with a substantial interest in a company emigrates, the rise in the value of the substantial interest during the period in which the shareholder was resident in the Netherlands is taxable in the Netherlands. In that case, the Netherlands imposes a preserving assessment and grants EU and EER residents an automatic deferral of payment of the tax in question. If the shareholder emigrates to a non-EU country, he or she may ask for a deferral of payment, which may be granted on condition that security is provided. The deferral is lifted (on a pro rata basis) if, for example, some or all of the shares are alienated or if the enterprise distributes a profit. These are generally points at which cash becomes available that can be used for paying Dutch tax.

The Supreme Court has confirmed in a number of rulings that the taxation of emigrant shareholders with a substantial interest and the rules on the granting and lifting of a deferral of payment are not inconsistent with the arrangements on the taxation of gains from the alienation of property as set out in the article on capital gains in Dutch tax treaties.26 Strictly speaking, there is no need to include a separate clause in tax treaties in this connection.

4.6.2 Capital gains article in tax treaties

Despite what has been said above, there may still be a tax concurrence if the shareholder’s new state of residence taxes the capital gain on which the Netherlands also has a tax claim. In order to prevent such a situation, Dutch policy is to make specific arrangements about this in tax treaties. The Netherlands wishes to include in the article on capital gains an exception for holders of a substantial interest, in order to make absolutely clear that the former state of residence is entitled to tax the emigrant shareholder. This proviso is also intended to act as a step-up clause, preventing the new state of residence from taxing a capital gain attributable to the Netherlands.

4.6.3 Dividend article in tax treaties

The Netherlands also seeks to include in the dividend article a clause preventing the effectuation of the Dutch tax claim from being deferred. Under this clause, the Netherlands is entitled to tax dividend paid on a substantial interest at the domestic income tax rate (under box 2), as long as the preserving assessment still applies. The assumption is that this type of dividend payment may be attributed to the (as yet untaxed) capital gain arising at the time of the shareholder’s emigration. The Dutch tax on the income from a substantial interest is then deducted from the preserving assessment imposed when the shareholder emigrated.

4.6.4 Unilateral preventive action

If a tax treaty does not include any arrangements about income from a substantial interest or if a tax concurrence cannot be prevented, the Netherlands will take unilateral action to prevent emigrant taxpayers from facing a higher tax burden than would have been the case had they remained resident in the Netherlands. This means that, in the event of the alienation of shares forming part of a substantial interest, the Netherlands grants a remission of the preserving assessment up to a sum equal to the amount of tax actually charged on the alienation by the new state of residence.27 In the case of a dividend payment, this means that tax continues to be deferred (in so far as the payment is taxed by the new state of residence).28

26 Supreme Court, 20 February 2009, ECLI:NL:HR:2009:AZ2232, ECLI:NL:HR:2009:BD5468, ECLI:NL:HR:2009:BD5481, and Supreme Court, 16 January 2015, ECLI:NL:HR:2015:65. 27 Section 26 (5) (b) of the Collection of State Taxes Act 1990. 28 Section 25 (8) (b) of the Collection of State Taxes Act 1990.

AVT20/FZ131562 18 4.6.5. Make full use of taxing powers created by foreign tax liability

Finally, the Netherlands wishes to extend the proviso applying to holders of a substantial interest to a situation in which, even after the shareholder’s emigration, a state does not actually tax the increase in the value of the assets forming part of the substantial interest. An example would be a situation where the treaty partner operates a ‘territorial tax system’. By extending the proviso applying to holders of a substantial interest, the Netherlands can make full use of the taxing powers created by the foreign tax liability with regard to the increase in the value of these assets.

The Dutch policy on tax treaties is to seek to insert a proviso applying to holders of a substantial interest, in both the capital gains article and the dividend article.

4.7 Income from the repurchase of shares or winding up

For dividend tax purposes, income from the repurchase of a company’s own shares and the winding up of a company is treated as being equivalent to income from shares. However, the situation since 1997 for income tax purposes has been that, where such income is received by the holder of a substantial interest, it is treated as a (notional) capital gain on a substantial interest. In the wake of two Supreme Court rulings29 stating that the income referred to should be treated as capital gains for tax treaty purposes, a clause should be included stating that the dividend article rather than the capital gains article applies to these items of income. The presence of this clause means that the Netherlands is able to tax income from the repurchase of shares or the winding up of a company, even where a tax treaty is in effect.

The Netherlands seeks to include a provision stating explicitly that income from the repurchase of shares or the winding up of a company is subject to the dividend article.

4.8 Shares or similar interests in immovable property entities

Under the OECD Model Tax Convention, the right to tax capital gains on the sale of immovable property is assigned to the country in which the property is located (known as the ‘situs state’). This situs state tax can be avoided by transferring the property in question to an entity and then alienating the shares or similar rights rather than the underlying property itself. In order to combat this practice, the OECD Model Tax Convention contains a clause under which the situs state is entitled to tax any capital gains generated by the sale of shares or similar rights that derive at least 50% of their value, either directly or indirectly, from immovable property located in the situs state.

In principle, the Netherlands wishes to adhere as closely as possible to the basic rule set out in the OECD Model Tax Convention, under which the state entitled to tax capital gains, irrespective of the nature of the corporate assets concerned, is the state of residence. It is of particular importance to the Netherlands that capital gains that are covered by the tax exemption for shareholders with a substantial holding (the ‘participation exemption’) are attributed exclusively to the alienator’s state of residence, in order to avoid any economic double taxation. Nonetheless, with a view to combating treaty abuse, the Netherlands is prepared to accept that the situs state should be entitled to tax capital gains on the alienation of shares in immovable property entities. However, the way in which this entitlement is defined in the OECD Model Tax Convention equates in practice with a general state of source entitlement to tax all capital gains on the sale of shares in immovable property entities. In other words, the taxing right does not apply exclusively to cases of abuse, which means that it may extend to situations in which there is no tax motive. In the light of these objections, the Netherlands has included a proviso in the OECD Model Tax Convention in relation to the capital gains article.

29 Supreme Court, 12 December 2003, ECLI:NL:PHR:2003:AI0450 (income from repurchase of shares), and Supreme Court, 9 June 2006, no. 41.376, ECLI:NL:HR:2006:AX7341, (income from winding up).

AVT20/FZ131562 19 The Commentary on the capital gains article in the OECD Model Tax Convention offers various options for limiting the article’s scope. In line with the Commentary, the Netherlands will seek to negotiate a higher percentage (i.e. more than 50%) in relation to capital gains on the alienation of shares in immovable property entities, in combination with certain exceptions, for example for commercial property, for gains on disposals resulting from group reorganisations, and shares in listed companies. Such cases are not likely to involve any treaty abuse.

Dutch policy is that capital gains should be attributed as far as possible to the state of residence. However, in order to prevent treaty abuse, the Netherlands is prepared to accept that the situs state should be entitled to tax capital gains on the sale of shares in immovable property entities. In such cases, the Netherlands will seek to limit the scope of the taxing right to cases of abuse.

4.9 Entertainers and sportspersons

Under the OECD Model Tax Convention, the right to tax income earned by sportspersons and entertainers is assigned to the country in which they perform. Since the publication of the 2011 Memorandum on Tax Treaty Policy, Dutch policy has been to argue that, rather than following the relevant article in the OECD Model Tax Convention, the rules for taxing the income of entertainers and sportspersons should be based on those set out in the same Convention for taxing income from business activities or income from employment. This would mean that the state of residence would be entitled only to tax one-off performances or performances of limited duration.

The Dutch government’s divergence from the terms of the OECD Model Tax Convention stems from a desire to avoid any practical problems surrounding the cross-border taxation of income earned by entertainers and sportspersons in foreign countries. The obligations arising from a separate article on entertainers and sportspersons as set out in the OECD Model Tax Convention place a considerable administrative burden on taxpayers and have all sorts of practical consequences for the Dutch Tax Administration. A further complication is that foreign income earned by entertainers and sportspersons is taxed in the country in which they perform without expenses being deductible in all cases, whereas the tax is offset in the Netherlands on the basis of income less expenses. As a result, it is not always possible to set off the entire amount of the foreign tax paid. These adverse consequences of the state of source’s right to tax such income still persist today.

In practice, virtually all our current and potential treaty partners wish to see a separate article on entertainers and sportspersons incorporated in tax treaties. This standpoint stems from the fact that both the OECD Model Tax Convention and the UN Model Double Taxation Convention include a separate clause on entertainers and sportspersons. For this reason, the majority of our treaty partners oppose the Dutch government’s wish not to include such a clause, which means that the Netherlands has rarely been successful in achieving this aim. As a result, foreign income earned by Dutch entertainers and sportspersons is generally liable to tax in the state of source, even though the Netherlands does not tax income earned by foreign entertainers and sportspersons from performances in the Netherlands.

Given that we are not likely to achieve our negotiating objective in this respect, we need to find another way of going as far as possible to uphold this principle of Dutch policy. If we are to encourage support for our revised position among current and potential treaty partners, we will have to formulate our policy within the confines of the current international framework. In the knowledge that it will be difficult to negotiate any radical departures from the OECD Model Tax Convention, we will seek to fall into line with international practice and hence to negotiate a clause on entertainers and sportspersons involving the granting of a limited taxing right to the state of source.

The OECD Commentary on the clause on entertainers and sportspersons proposes a range of options for restricting the scope of the state of source’s taxing right. Given that the Netherlands will generally be the party asking for a restriction of this taxing right, a (current or potential) treaty

AVT20/FZ131562 20 partner may well turn down such a request. The following are the main optional measures that the Netherlands will seek to incorporate in the treaty.

One of these involves setting a threshold in the clause on entertainers and sportspersons. As long as the threshold is not exceeded, all income earned by entertainers and sportspersons will be taxed exclusively in the state of residence and not in the state of source. The precise value of the threshold is a matter for bilateral negotiation.

Secondly, the OECD Commentary offers the possibility of agreeing that the state of source will be entitled to tax the net income earned by entertainers and sportspersons. To a certain extent, the current problems surrounding this issue stem from the fact that the income earned by entertainers and sportspersons is generally liable to tax in the country in which they perform without their being able to deduct expenses.30 The tax charge is then offset in the Netherlands, based on the income earned after the deduction of expenses. This means that part of the foreign tax charge may not qualify for set-off, thus resulting in double taxation. An arrangement along the above lines can resolve this problem, at least in part.

Thirdly, the Commentary offers the possibility of an exclusive right for the state of residence to tax activities performed by entertainers and sportspersons, if over 50% of the value of such activities is funded from the public purse. A large number of the tax treaties signed by the Netherlands include a clause along these lines. Entertainers and sportspersons who satisfy these conditions are taxed exclusively in the state of residence and not in the state of source.

The Netherlands seeks to include in tax treaties a clause giving the state of source a (limited) right to tax income earned by entertainers and sportspersons. The Netherlands will seek to negotiate i) a threshold value; ii) state of source taxation based on the net income; and iii) state of residence taxation of activities performed by entertainers and sportspersons that are funded largely from the public purse.

In order to accommodate the objections described above that apply to non-residents and the Tax and Customs Administration, the liability of foreign entertainers and sportspersons to tax in the Netherlands has been restricted since 2007. As a result, one-off performances and performances of limited duration by entertainers and sportspersons from states with which the Netherlands has signed a tax treaty are no longer taxable in the Netherlands. This is in line with the policy that the state of residence should have an exclusive right to tax income earned by entertainers and sportspersons. However, now that Dutch policy is aimed at giving the state of source a (limited) taxing right, we will examine the possibility of introducing a practicable tax liability for this particular category of taxpayers.

4.10 Pensions, annuities and social insurance benefits

4.10.1 General

The Dutch policy on tax treaties is to negotiate a comprehensive state of source right to tax both private and civil-service pensions.31 No distinction is made in this respect between recurring and non-recurring pension benefits. This is because the Netherlands facilitates pension accrual through postponement of the taxation, i.e. contributions made into pension funds are tax-deductible, on the understanding that benefit payments are then taxable. A similar system applies to annuities, i.e. contributions are tax-deductible and benefits are taxed. For the sake of simplicity in this memorandum, all references to ‘pensions’ in the remainder of this chapter are assumed to include annuities. Assigning a comprehensive taxing right to the state of source prevents the Netherlands from losing, following a taxpayer’s emigration, its rights to tax pensions that have accrued on a

30 For situations in the EU, a ruling of the European Court of Justice (12 June 2003, C-234/01, Arnoud Gerritse, Jur., pp. I-5933) greatly restricts the member states’ right to tax the gross income of foreign entertainers and sportspersons. 31 This relates to the second pillar of the Dutch pension system, based on the principle of full funding.

AVT20/FZ131562 21 tax-deductible basis in the Netherlands. Similarly, the Netherlands wishes to retain a comprehensive right to tax benefit payments made under a state’s social insurance legislation (such as Dutch state pensions)32 to a resident of the other state.

This objective diverges from the principle enshrined in the OECD Model Tax Convention under which the state of residence has an exclusive right to tax private pensions and social insurance benefits. The OECD Commentary lists a number of reasons justifying the principle of granting the state of residence an exclusive taxing right: first, the state of residence has a better view of the taxpayer’s overall financial situation, making it better placed to take this into account. Second, it reduces the administrative burden placed on the taxpayer as he or she has only one tax administration to deal with.

At the same time, the OECD Commentary also states that countries may disregard the principle if the pension contributions paid by the taxpayer during his or her working life in the state of source were tax-deductible.

Countries can also opt for a comprehensive or partial taxing right for the state of source in order to avoid double non-taxation. This is the case if taxpayers are entitled to commute a pension on a tax-free basis if they move abroad for a relatively short period, and also if the new state of residence does not tax regular pension benefits received from a foreign country. It is for these reasons that the OECD Commentary suggests an alternative treaty wording for countries wishing to have a comprehensive or partial right to tax pensions. The OECD Commentary also suggests an alternative treaty wording for those countries (such as the Netherlands) that would like the state of source to be entitled to tax pension benefits and other payments made under social insurance legislation.

The text cited in the OECD Commentary which may be used in order not to give the state of residence an exclusive taxing right, applies to the Dutch pension system. In the light of the Dutch pension system, and also for budgetary reasons, there are good grounds for arguing that pension benefits and a lump-sum commutation payment should be taxed in the Netherlands if the relevant pension contributions were tax-deductible in the Netherlands. As a further point, in order for the pension system to continue to enjoy broad support, the risk of non-taxation needs to be limited where a pension is commuted following the taxpayer’s temporary or permanent emigration. The greater the value of the pension in question, the stronger these arguments weigh.

4.10.2 Treaty negotiations

As the party wishing to depart from the text of the OECD Model Tax Convention, the Netherlands will generally be the party asking for the state of source to enjoy a comprehensive taxing right. For this reason, the treaty partner may well turn down a Dutch request along these lines. Where this happens, it may be possible to agree on an alternative allocation of taxing rights as a compromise. Depending on the bilateral situation, the Netherlands may for example agree to the state of source having only a partial taxing right. Whether this type of compromise can be reached depends in part on the budgetary interests at stake, the ability of the tax administration to carry out the compromise arrangements in practice, and the administrative burden placed on the taxpayer. If it does not prove possible to reach agreement on a comprehensive taxing right for the state of source, the Netherlands will seek to retain the right to tax large pensions and all lump-sum commutation payments.

4.10.3 Transitional arrangements

Where a change is agreed in the terms of an existing treaty, this may result in some or all of the taxing rights being transferred from the state of residence to the state of source. This may in turn affect the incomes or purchasing power of various groups of taxpayers. It can be desirable to

32 This relates to the first pillar of the Dutch pension system, based on the pay-as-you-go principle.

AVT20/FZ131562 22 include a transitional clause in the treaty so as to limit the impact on incomes and/or to lessen the budgetary impact on the treaty partner. A transitional clause ensures that the new allocation of taxing rights between the treaty partners is phased in. The importance of cushioning the above effects needs to be weighed against the budgetary impact on the Netherlands (given the delay to the introduction of full taxing rights for the state of source), the practical aspects and the administrative burden, bearing in mind that a transitional arrangement may prove complex to implement in practice. The longer the transitional arrangement lasts, the greater these drawbacks will be.

Whether and to what extent it is desirable to agree a transitional arrangement varies from one case to another and depends on factors such as the need to avoid a direct budgetary impact on the treaty partner’s treasury, the number of pensioners receiving a Dutch pension income (i.e. the budgetary effect) and the impact on incomes. The actual text to be included in the treaty remains the result of negotiation and is not susceptible to standardisation.

The Netherlands wishes to reach agreement that the state of source should be entitled to tax pensions that have accrued on a tax-deductible basis and to tax social insurance benefits.

4.11 The credit method applied to foreign tax paid on the remuneration of members of company boards and supervisory boards

In principle, Dutch policy is to exempt active income in the tax treaty article on eliminating double taxation. However, in the case of income from activities that are not generally performed at a fixed location and in relation to which it is not always clear whether and how they are taxed abroad, it makes more sense to allow the taxpayer in question to offset the foreign tax than to exempt such income from tax. This applies equally to the remuneration received by company directors and supervisory directors. If the credit method is used to offset foreign tax, such income is then taxed as if it had been received in the Netherlands (unless it was subject to a higher rate of tax in the foreign country in question).

Most tax treaties provide for the credit method to be used in respect of income received by a director or supervisory director of a foreign company. Nevertheless, under the Double Taxation (Avoidance) Order,33 the Netherlands grants a unilateral tax exemption on condition that such income is not subject to a more favourable regime in the other country than would apply to a normal form of remuneration for work. This is done so as to treat such income in the same way as ordinary income from employment.

However, given that these activities do not generally need to be performed in the country in which the company is resident, but could also be performed in a different country, such as the Netherlands, there is no longer any need to exempt the income in question from tax. The above Order will therefore be repealed. This means that income received by a director or supervisory director of a foreign company who is resident in the Netherlands will be taxed in the same way as income received by a director or supervisory director of a Dutch company.

The Netherlands will continue to include a provision for applying the credit method to this type of income in the article on eliminating double taxation.

In the article on eliminating double taxation, the Netherlands will only apply the credit method to tax on the remuneration received by company directors and supervisory directors. As a consequence, the relevant provisions of the above Order will be repealed.

4.12 Benefits

33 Order of 18 July 2008 of the State Secretary for Finance, no. CPP2007/664M, Government Gazette 2008, no. 151.

AVT20/FZ131562 23

The Tax and Customs Administration is responsible for the payment of income-related benefits, i.e. healthcare benefit, housing benefit, childcare benefit and child budget. In order to be able to recover overpaid benefits, the Netherlands wishes to include a clause in tax treaties creating a legal basis for the exchange of information and the provision of assistance with the recovery of all types of benefit. In a European context, this clause will apply in particular to housing benefits. This is because, unlike with the other types of benefit, European Union law (i.e. Regulation 883/200434 and Regulation 987/200935) does not offer a legal basis for the recovery of overpaid housing benefits.

The Dutch policy on tax treaties is to ensure that the clauses on the exchange of information and the provision of assistance in the collection of tax also apply to Dutch income-dependent benefits.

4.13 Fictions

On 18 November 2016,36 the Dutch Supreme Court delivered a judgment on the customary pay scheme in relation to the tax treaty between the Netherlands and Portugal. The judgment makes clear that, even if the customary pay scheme already formed part of Dutch law at the time when the treaty between the Netherlands and Portugal was signed, this does not necessarily mean that the treaty partner accepted the fiction. This must be apparent either from the treaty’s legislative history or from other sources. It follows from this judgment that it is important to make clear, in relevant tax treaty situations, that the treaty incorporates certain fictions or fiction-like arrangements under domestic law. This ensures that these fictions or fiction-like arrangements can also be applied under the treaty.

The Dutch policy on tax treaties is to make clear, in relevant tax treaty situations, that the treaty incorporates certain fictions or fiction-like arrangements under domestic law.

34 Regulation (EC) no. 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social insurance systems. 35 Regulation (EC) no. 987/2009 of the European Parliament and of the Council of 16 September 2009 laying down the procedure for implementing Regulation (EC) no. 883/2004 on the coordination of social insurance systems. 36 Supreme Court, 18 November 2016, ECLI:NL:HR:2016:2497.

AVT20/FZ131562 24 5. Tax treaties with specific types of country

5.1 Tax treaties with neighbouring countries

5.1.1 General

Cross-border workers live and work in different states, which means that they are subject to the laws of the state(s) in which they are employed (the state of employment) and the state in which they live (the state of residence). This can create tax disadvantages. For this reason, the Dutch policy is to remove the tax obstacles facing cross-border workers. The Netherlands will continue to work on this problem in the future, in order to stimulate the economy in its border regions. The tax treaties signed with the Netherlands’ neighbours, i.e. Belgium37 and Germany,38 have been broadly successful in removing these impediments.

5.1.2 Equality in the street and in the workplace

The Dutch policy on cross-border workers has led to the incorporation of specific clauses in the tax treaties with Belgium and Germany that are designed to achieve the greatest possible degree of ‘equality in the street’ and ‘equality in the workplace’. ‘Equality in the street’ means that cross- border workers who live in the Netherlands and work in Belgium or Germany should not be treated any worse, in terms of their eligibility for certain forms of tax relief, than residents of the Netherlands whose income from employment is fully subject to Dutch tax. For this reason, the Netherlands has included a compensation mechanism in its tax treaties with Belgium and Germany, which enables cross-border workers who live in the Netherlands to claim tax relief under Dutch law.39

The Dutch policy is also to achieve ‘equality in the workplace’ by removing as many tax disadvantages as possible confronting cross-border workers in the state of employment. This is why the tax treaty between the Netherlands and Belgium includes a ‘pro rata’ clause40 under which cross-border workers have a pro rata entitlement in the state of employment to the same personal allowances, tax credits and deductions by virtue of their marital status or the composition of their family as do residents of the state in question, in proportion to the gains and income taxed in the state of employment as a share of the taxpayer’s worldwide income. It is also important to ensure that this does not lead to any double non-taxation.41

5.1.3 Avoiding discoordination

Finally, the Netherlands aims where possible to avoid any discoordination between the payment of taxes and social insurance contributions. Discoordination is caused by the fact that the allocation of taxing rights in the European Union is based on bilateral tax treaties, whereas the coordination of social insurance is based on EU Regulation no. 883/04.42 This means that the country entitled to levy tax is not in all cases the same as the country that is entitled to collect social insurance contributions. This problem affects, for example, university professors living in either the Netherlands or Belgium and working in Belgium or the Netherlands respectively. The Netherlands is trying to find a solution to this problem in the current negotiations with Belgium.43

37 Treaty Series 2001, 136. 38 Treaty Series 2012, 123. 39 Article 27 of the tax treaty between the Netherlands and Belgium (2001) and article XII of the Protocol to the tax treaty between the Netherlands and Germany (2012). 40 Article 26 (2) of the tax treaty between the Netherlands and Belgium (2001). This pro rata clause complies with the ECJ judgment of 9 February 2017 (C-283/15, X, ECLI:EU:C:2017:102). 41 Parliamentary Papers, House of Representatives 2018/19, 26834, no. 41. 42 Regulation (EC) no. 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social insurance systems, PB L 166/1 (30 April 2004). 43 Parliamentary Papers, House of Representatives 2016/17, 32851, no. 35.

AVT20/FZ131562 25 The Dutch policy on tax treaties with Germany and Belgium is to achieve the maximum degree of ‘equality in the street’ and ‘equality in the workplace’ for cross-border workers and to prevent, where possible, any discoordination between the payment of taxes and social insurance contributions.

5.2. Tax treaties with developing countries44

5.2.1 General

The Netherlands wishes to help foster effective tax systems in developing countries45 and this is an aspect that the Netherlands takes into account in negotiating tax treaties. First, the Netherlands seeks to include both general and specific anti-abuse clauses in tax treaties with developing countries so as to ensure that developing countries’ taxing rights are better protected. Second, due to the special status of developing countries, it is more likely that the Netherlands will be willing to accept certain aspects of the UN Model Double Taxation Convention in negotiating treaties with developing countries. These specific aspects of the Dutch policy on tax treaties are discussed in detail below.

Finally, the debate on a new international tax system for the digital economy may well have far- reaching consequences, including for relations with developing countries. See section 2.5 in this connection.

5.2.2 Anti-abuse clauses

The International Bureau of Fiscal Documentation (IBFD) performed a study in 2013 into the tax treaties signed by the Netherlands with developing countries.46 The study revealed that these tax treaties were broadly similar to the treaties that the developing countries in question had signed with other countries. It also showed that the treaties signed between the Netherlands and developing countries contained relatively few anti-abuse clauses, as was the case with other treaties signed by the same developing countries. One of the reasons for this is that the abuse of tax treaties was not a major international issue at the time when these treaties were negotiated. Since the Dutch government decided in the autumn of 2013 that a change was needed, it has proposed, in negotiations with 23 developing countries, to include anti-abuse clauses in their tax treaties.47 Moreover, the MLI is now available as a swift and efficient means of adopting the measures proposed by the BEPS project in tax treaties signed by the Netherlands.

The Netherlands has now agreed on the inclusion of anti-abuse clauses in tax treaties with 13 of these developing countries, either as a result of bilateral negotiations or through the MLI. The BEPS project measures have now also been incorporated in the Dutch policy on new tax treaties (see chapter 3).

Developing countries were involved in the discussions and decision-making process for the BEPS project.48 The Inclusive Framework was designed as a means of keeping track of and reporting on the implementation of the measures proposed as a result of the BEPS project. Over 130 countries have now signed up to the Framework, including a large number of developing countries. Although

44 Countries are defined as ‘developing countries’ in accordance with (the first three columns of) the list published by the OECD’s Development Assistance Committee (DAC). This list includes the LDCs (least developed countries), OLICs (other low-income countries, with a per capita GNI (gross national income) of less than USD 1,005 in 2016) and LMICs (lower middle-income countries, with a per capita GNI of between USD 1,006 and USD 3,955 in 2016). 45 This objective follows from the UN Sustainable Development Goals (SDGs), which serve as the international guiding principle for Dutch policy on foreign trade and development cooperation. Fostering developing countries’ ability to generate more of their own income is a key component of this policy. 46 Parliamentary Papers, House of Representatives 2013/14, 25087, no. 60. 47 Parliamentary Papers, House of Representatives 2013/14, 25087, no. 60. 48 Parliamentary Papers, House of Representatives 2015/16, 25087, no. 112.

AVT20/FZ131562 26 the latter stand to benefit from action taken to protect their tax base, not all developing countries have signed the MLI yet.

During the plenary debate on the MLI, the government pledged to explain in this memorandum why this is the case.49 The answer lies first of all in the fact that many developing countries have signed either very few or no tax treaties at all. As a result, it may make more sense for these countries to use bilateral negotiations rather than the MLI as a means of implementing relevant measures from the BEPS project in their tax treaties. Secondly, a number of developing countries joined the BEPS project at a relatively late stage and are still planning to sign up to the MLI. Finally, the fact that a developing country has already adopted anti-abuse clauses in treaties and its domestic laws, or a decision to give priority to other issues, may explain why it has not (yet) signed up to the MLI.

The Netherlands made notifications in respect of almost all its tax treaties when it signed up to the MLI. This gives the Netherlands’ treaty partners, including developing countries, the option of adopting the anti-abuse measures following from the BEPS project in these tax treaties, even if the countries in question do not sign up to the MLI until a later stage. Currently, the following eight developing countries with which the Netherlands has concluded a tax treaty, have now signed up to the MLI:50 Armenia, Egypt, Georgia, India, Indonesia, Nigeria, Pakistan and Ukraine.

The Netherlands believes it is very important to include anti-abuse clauses in tax treaties with developing countries.

5.2.3 Withholding taxes on dividends, interest and royalties

In principle, the Netherlands seeks to base the allocation of taxing rights in its tax treaties on the method set out in the OECD Model Tax Convention, whereas many non-OECD countries, including developing countries, have chosen to base the allocation of taxing rights on the UN Model Double Taxation Convention. The UN Model Double Taxation Convention goes further in acceding to the wishes of many developing countries for the state of source to enjoy greater taxing powers. The Netherlands recognises the special position of developing countries and this is reflected, inter alia, by the relatively high withholding taxes on dividends, interest and royalties that the Netherlands is prepared to negotiate with developing countries. At the same time, Dutch negotiators make a point of stressing that excessively high withholding taxes on dividends, interest and royalties could create an additional barrier to the foreign investments so urgently needed by developing countries. Moreover, and as a more general consideration in protecting the competitive position of Dutch taxpayers, the Netherlands needs to take account of the agreements already reached by a treaty partner with other, similar (Western European) countries.

However, keen as it is to foster developing countries’ future development, the Netherlands will not consistently seek to negotiate withholding taxes down to the lowest possible level. The Netherlands is even willing to accept a higher level of withholding tax than the developing country in question has agreed in its tax treaties with countries similar to the Netherlands, provided that the country is able to demonstrate that it has changed its policy in this respect.

Due to the special position of developing countries and the importance that the Netherlands attaches to the successful development of their tax systems, the Netherlands is more willing than otherwise to accept relatively high withholding taxes in its tax treaties with developing countries.

5.2.4 State of source taxation of services (based on net income)

49 Proceedings of the House of Representatives 2018/19, no. 50, item 8. 50 OECD, Signatories and Parties to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Status as of 18 October 2019), retrievable from: https://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf.

AVT20/FZ131562 27

The Netherlands is prepared to accept a broader definition of the term ‘permanent establishment’ in negotiations with developing countries. Unlike the OECD Model Tax Convention, the UN Model Double Taxation Convention extends the definition of the term ‘permanent establishment’ to include the provision of services in the state of source. Under the relevant provision in the UN Model Double Taxation Convention, a permanent establishment is deemed to exist if a resident of a state performs (related) services in the state of source for more than 183 days in a 12-month period.. This gives developing countries greater powers to tax activities performed in their own countries than they would have under the OECD Model Tax Convention. Recognising the special position of developing countries, the Netherlands is prepared to include a clause on this type of ‘permanent establishment for services’ in its tax treaties with developing countries. The presence of a permanent establishment for services means that the taxpayer’s net income is taxed, and guarantees that tax is levied only in the state of source, provided that there is a connection between the service and the state of source.

It is worth bearing in mind that the debate on a new international tax system for the digital economy could affect the way in which profit is attributed to a permanent establishment in a developing country.

The Netherlands is prepared to accept the inclusion of a ‘permanent establishment for services’ in tax treaties with developing countries.

5.2.5 State of source taxation of international shipping

In line with the relevant clause in the OECD Model Tax Convention, the Dutch policy is that income from the international operation of ships and aircraft is liable to tax only in the contracting state in which the shipping company or airline is resident. This clause prevents shipping companies and airlines, many of which operate in a number of different countries, from encountering problems concerning the correct allocation of profits to a number of permanent establishments.

In addition to the above clause from the OECD Model Tax Convention, the UN Model Double Taxation Convention contains an alternative provision granting a limited right of taxation to the state of source in relation to income earned from international shipping. As part of a final compromise in negotiations with developing countries, a limited state of source right of taxation may be agreed to. Because of the practical problems that may be posed by a state of source right of taxation, the Netherlands takes a cautious line in this respect. Moreover, in exercising this right, many countries tax gross income, which means that the tax base may not be large enough to fully offset state of source tax. This could prove to be an impediment to international trade.

Should it become clear during negotiations that the treaty partner attaches great importance to a state of source tax on income from international shipping, the Dutch policy is to propose a relatively low tax rate. In doing so, the Netherlands will take account of the relative competitive positions of Dutch and foreign shipping companies, with a view to ensuring that Dutch companies are not placed at a competitive disadvantage.

The Netherlands exercises caution in accepting requests from developing countries for a limited state of source right to tax income earned from international shipping and air traffic.

5.2.6 State of source taxation of fees for technical services (based on gross income)

The Netherlands will probably find itself receiving, in its treaty negotiations with developing countries, more frequent requests for the state of payment to be given the right to tax fees paid for services. To a certain extent, this is a consequence of the wording of the UN Model Double Taxation Convention which, unlike the OECD Model Tax Convention, has since 2017 included a

AVT20/FZ131562 28 special clause granting the state of source the right to tax fees for technical services (see article 12A of the UN Model Double Taxation Convention).

The Netherlands is not an advocate of this provision and does not tax fees paid for technical services as the state of source. The clause in the UN Model Double Taxation Convention does not restrict the state of source’s taxing right in accordance with the place where the services in question were provided. This means that the state of source is still permitted to tax the fees paid for the services, even if there is only a tenuous link between the state of source and the services provided. Another problem with a state of source taxation of fees for technical services is that the tax base may not be large enough to permit an offset. This is because the state of source taxes the gross income, whereas the tax offset is based on the net income. As a result, any state of source tax that cannot be offset is likely to be passed on to the entity receiving the services, thus creating an obstacle to foreign investment. Finally, many other, similar (i.e. Western European) countries also do not include a state of source tax on fees for technical services in their tax treaties with developing countries. For this reason, the inclusion of this type of tax could cause disproportionate harm to the interests of Dutch taxpayers.

Nonetheless, the Netherlands understands that, for developing countries with limited enforcement capacity, a state of source tax on fees for technical services may be a straightforward way of generating tax revenue. For this reason, the Netherlands is prepared to accept a state of source right to tax fees paid for technical services in negotiations with the poorest group of the most vulnerable developing countries.51 A key consideration for the Netherlands is that a state of source right to tax fees for technical services is permitted only if the services are provided in the state of source, thus guaranteeing that there is a connection between the service and the state of source. There is a logical link here with the Double Taxation (Avoidance) Decree 2001, under which the Netherlands accepts unilaterally (i.e. in non-treaty situations) that tax paid on fees for technical services may be offset, but only if the services have been provided in the developing country in question.52 In other words, the Netherlands is not in principle prepared to agree, in negotiations with the other developing countries, to a state of source right to tax fees for technical services. Notwithstanding the above, it is conceivable that, in certain specific situations (for example, where a developing country has very few alternative sources of tax revenue), the Netherlands might nonetheless accept a state of source right to tax fees for technical services as part of an overall compromise covering a set period of time.

The Netherlands is prepared to accept, in negotiations with the poorest group of developing countries, a state of source right to tax fees for technical services provided that the services are performed in the developing country in question.

5.2.7 State of source taxation of capital gains on shares

Unlike the OECD Model Tax Convention, the UN Model Double Taxation Convention states that, subject to a given minimum threshold, the state of source is entitled to tax capital gains obtained from the alienation of a block of shares. This clause supplements the clauses in the OECD Model Tax Convention and the UN Model Double Taxation Convention providing for a state of source tax

51 The poorest group of developing countries is assumed to consist of those countries listed in the first column of the list of ODA recipients published by the OECD’s Development Assistance Committee (DAC). These include the Least Developed Countries (LDCs). The following countries appear in the first column of the DAC list for 2018 and 2019: Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Comoros, Democratic Republic of the Congo, Djibouti, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Lao People’s Democratic Republic, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, South Sudan, Sudan, Tanzania, Timor-Leste, Togo, Tuvalu, Uganda, Vanuatu, Yemen and Zambia. 52 See Explanatory Memorandum, Decree of 21 December 1989, Bulletin of Acts and Decrees 1989, 594 and Explanatory Memorandum, Decree of 21 December 2000, Bulletin of Acts and Decrees 2000, 642, pp. 32 and 33.

AVT20/FZ131562 29 on capital gains obtained from the alienation of shares that derive their value, either directly or indirectly, from immovable property located in the state of source (i.e. the ‘situs state’).

The Commentary on the UN Model Double Taxation Convention states that countries might seek to omit the above provision if, for example, they apply a participation exemption to capital gains.53 The existence of the participation exemption rules out the possibility of offsetting a state of source tax on capital gains, thus leading to the economic double taxation of such capital gains and thereby forming an impediment to the acquisition or establishment of foreign subsidiaries. Because the Dutch tax regime includes a participation exemption for capital gains, the Netherlands is in favour of granting an exclusive right to the alienator’s state of residence to tax capital gains on the alienation of shareholdings.

It should be stressed that any abuse can be countered by including a general anti-abuse clause in the relevant tax treaty. A PPT can be used as a means of preventing treaty benefits from being awarded in respect of a transaction or arrangement whose principal purpose is to obtain such benefits. This may mean, for example, that, where a (shell) company in the Netherlands is used as an intermediary in an arrangement of which one of the principal purposes is to avoid a tax claim on capital gains in the state of source, the state of source can use the outcome of the PPT to exercise its right to tax capital gains on the alienation of shares.

Despite wishing to pursue this objective in treaty negotiations, the Netherlands has in fact agreed to the inclusion of a state of source taxing right in a number of tax treaties (as part of an overall compromise).54 The clauses in question generally contain restrictions, such as a maximum tax rate and an exception for internal reorganisations. It would make sense for the tax rate to be the same as that applying to intercompany dividends.

The Netherlands favours granting an exclusive right to the alienator’s state of residence to tax capital gains made on the alienation of participations. Any abuse can be countered by including a general anti-abuse clause in the relevant tax treaty.

5.2.8 Technical assistance

In order to ensure that developing countries are themselves better able to protect their own tax base and use the anti-abuse measures proposed in the BEPS project, the Netherlands is keen to strengthen the capacity of developing countries’ tax administrations. The Netherlands pursues this aim by providing technical assistance through a range of bilateral and multilateral programmes. The Netherlands is involved in a number of bilateral programmes for providing technical assistance to various developing countries. The support provided by the Netherlands enables specialists from organisations such as the Dutch Tax and Customs Administration and the International Bureau of Fiscal Documentation to share their expertise with developing countries. The Netherlands also supports programmes operated by the IMF, the OECD, the UN and the World Bank targeting a large number of developing countries. With the support of the African Tax Administration Forum, the Netherlands fosters information-sharing and capacity-building among African tax administrations.

The Netherlands will continue to offer technical cooperation in the years ahead, with a view to strengthening the capacity of tax administrations in developing countries.

5.3 Treaties with non-cooperative and low-tax jurisdictions

5.3.1 States on the EU list

53 UN Model Double Taxation Convention (2017): Commentary on Article 13, paragraph 15. 54 See, for example, the treaties with China (2013), Argentina (1996), India (1988), Mexico (1993; see also the 2008 protocol), Nigeria (1991), Saudi Arabia (2008), Turkey (1986) and Zimbabwe (1989).

AVT20/FZ131562 30 States are placed on the EU list of non-cooperative jurisdictions if they fail to meet internationally agreed standards, for example in relation to transparency or harmful tax competition. The Netherlands believes that, in order to successfully combat tax avoidance and tax evasion, it is very important for states to comply with internationally agreed standards. For this reason, the Netherlands does not believe in entering into negotiations on new tax treaties with any states on the EU list of non-cooperative jurisdictions.

5.3.2 Low-tax jurisdictions

The Netherlands designates states as low-tax jurisdictions if they do not subject entities to a tax on profits or if the statutory rate of such a tax is lower than 9%. States are sovereign in setting their own tax rates and may therefore decide not to levy any tax on profits at all without contravening any international agreements. On that basis there are no objections in principle to starting talks on a new tax treaty with such a state. As there is usually a relatively low risk of double taxation involving these states, the government does not regard negotiating with them on a tax treaty as a high priority. The risk of double non-taxation is an important consideration in any negotiations that do take place.

5.3.3 New withholding tax

The Dutch government will be introducing a conditional withholding tax on interest and royalty payments on 1 January 2021. The aim of this tax is, firstly, to stop the Netherlands from being used as a gateway to low-tax jurisdictions and, secondly, to reduce the risk of tax avoidance resulting from the transfer of the Dutch tax base to low-tax jurisdictions. The withholding tax will be due if an entity established in the Netherlands or if a Dutch permanent establishment of a foreign entity pays interest or royalties to a group company that is established, or to a permanent establishment of the group that is located, in a designated state that does not have a tax on profits with a statutory rate of at least 9% or is included on the EU-list of non-cooperative jurisdictions for tax purposes.and in cases of abuse. In cases of abuse, either the PPT in the treaty or a clause of a similar nature will provide the means of collecting the withholding tax.

As set out in chapter 4, the Netherlands wishes in principle to agree in tax treaties on an exclusive right for the state of residence to tax interest and royalties. However, in the light of the policy objectives associated with the conditional withholding tax on interest and royalties, it would not be appropriate for the Netherlands to agree to an exclusive taxing right for the state of residence in treaty negotiations with low-tax and non-cooperative jurisdictions. For this reason, the Netherlands has set a new negotiating objective for these countries, i.e. that it must be feasible to collect the conditional withholding tax on interest and royalties.

5.3.4 Renegotiating or reviewing existing treaties

If the Netherlands already has a tax treaty with a low-tax jurisdiction, or with a state included on the EU list of non-cooperative jurisdictions for tax purposes, the Netherlands will actively seek to renegotiate the current tax treaty. The Dutch government will then seek to adjust the treaty in such a way as to ensure that the withholding tax on interest and royalties paid to low-tax jurisdictions can be collected. A second objective will be to ensure that a withholding tax can be charged on dividends, including intercompany dividends, distributed to low-tax treaty partners. The above should be seen in the context of the study currently under way into the integration of the existing dividend tax with a conditional withholding tax on dividend payments to low-tax jurisdictions. Nevertheless, it may be appropriate, in case of genuine (commercial) situationsthat the state of source should charge either a lower rate of tax or no tax at all, also with respect to low-tax jurisdictions. In such genuine situations, there are a number of options either for negotiating a reduced rate or for agreeing that the state of residence should have an exclusive taxing right. For example, certain requirements could be set regarding the nature and scale of the

AVT20/FZ131562 31 activities performed by the recipient of the interest or royalty payments, or regarding the degree to which either the recipient or the payments are subject to an (effective) tax liability.

The precise nature of the Dutch negotiating objectives is a matter to be decided for each individual country, based on the specific characteristics of the tax system of the low-tax or non-cooperative jurisdiction in question. This will enable the Netherlands to devise customised solutions, taking account of the specific risks of tax avoidance stemming from each country’s tax system and at the same time ensuring as much as possible that genuine businesses are not faced with double taxation.

Existing treaties concluded with states that are included . on the EU list over a prolonged period will be reviewed in accordance with the motion tabled by MPs Carola Schouten and Tjeerd de Groot.55

There have also been a number of relevant developments in an OECD context. The OECD is looking at the possibility of treaty clauses designed to restrict treaty benefits in relation to certain payments (such as interest and royalties), unless the recipient pays a sufficient amount of tax (see section 2.5 on these international developments).

The Dutch policy is to ensure that a conditional withholding tax on interest and royalty payments can be fully implemented with respect to non-cooperative and low-tax jurisdictions. The Netherlands seeks customised solutions in the case of genuine situations, and may set certain requirements regarding the nature and scale of the activities performed and the extent to which the recipient is subject to tax.

55 Parliamentary Papers, House of Representatives 2015-16, 25087, no. 122.

AVT20/FZ131562 32 Appendix 1: List of standard criteria for assessing tax treaties (under 2020 policy on tax treaties)

2020 Yes No Partly N.a. See Memorandum section on Tax Treaty no. Policy

I Elimination of double taxation: main deviations and additions compared with the OECD Model Tax Convention in Dutch tax treaties

General 4.2 Inclusion of a clause containing a more detailed definition of the term ‘resident’. 4.3 Inclusion of a clause under which exempt investment funds and entities that are subject to comparable special regimes are excluded from (certain) treaty benefits.

Capital income and capital gains 4.4 Inclusion of a clause under which the Netherlands is more likely to be entitled to tax profits from offshore activities (offshore permanent establishment). 4.5 Inclusion of a clause assigning the state of residence an exclusive right to tax intercompany dividends, interest and royalties. If not, the following percentages apply: If not, inclusion of an exception for pension funds 4.3 Application of a 15% tax rate for portfolio dividends distributed by or paid to a fiscal investment fund or similar institutions in the other treaty country 4.6 Inclusion of a proviso for holders of a substantial interest, in both the capital gains article and the dividend article. 4.7 Inclusion of a clause stating that income from the repurchase of shares or the winding up of a company is subject to the dividend article. 4.8 Inclusion of a clause entitling the state of residence to tax capital gains on the sale of shares in immovable property entities, except in cases of abuse.

Labour 4.10 Inclusion of a clause entitling the state of source to tax pensions that have accrued on a tax-deductible basis, and social insurance benefits. 4.9 Inclusion of a clause assigning the state of source a (limited) right to tax income earned by entertainers and sportspersons.

Other 2.8 Inclusion of a clause stating that the treaty also applies to the Netherlands in the Caribbean (Bonaire, St Eustatius and Saba). 2.6 Inclusion of a clause stating that the treaty should be interpreted in accordance with the Commentary on the OECD Model Tax Convention. 3.3.10 Inclusion of a clause under which the competent authorities may arrange that taxpayers should not be charged interest, penalties and costs while a mutual agreement procedure is being conducted. 4.12 Inclusion of a clause to ensure that the clauses on the exchange of information and the provision of assistance in the collection of tax also apply to Dutch income-dependent benefits. 4.13 Inclusion of a clause making clear that, in relevant tax treaty situations, the treaty in question incorporates certain fictions or fiction-like arrangements under domestic law.

AVT20/FZ131562 33 II Elimination of double taxation: clauses in Dutch tax treaties that are consistent with the OECD Model Tax Convention 4.1 Any provisions not listed above (in section I) are consistent with the OECD Model Tax Convention. If not, list the provisions here:

III Prevention of treaty abuse: clauses in Dutch tax treaties that are consistent with the BEPS project

Minimum standards 3.2 Inclusion of the minimum standards set in the BEPS project.

Other measures recommended by the BEPS project 3.3 Inclusion of the other additional measures recommended by the BEPS project. If so, list the other measures here:

IV Treaties with specific types of country

Treaties with neighbouring countries regulating the status of cross-border workers 5.1 Inclusion of clauses designed to achieve ‘equality in the workplace’

5.1 Inclusion of clauses designed to achieve ‘equality in the street’

Treaties with developing countries 5.2 Inclusion of a clause entitling the state of source to tax intercompany dividends, interest and royalties. If so, the following percentages apply: 5.2 Inclusion of other clauses taken from the UN Model Double Taxation Convention in support of the policy on If so, list the clauses taken from the UN Model Double Taxation Convention here:

Treaties with non-cooperative and low-tax jurisdictions 5.3 Inclusion of a clause entitling the state of source to tax intercompany dividends, interest and royalties. If so, the following percentages apply:

AVT20/FZ131562 34 Appendix 2: Overview of Dutch tax treaty policy

Article Relevant clause in the Deviations and MLI provisions OECD Model Tax additions compared Convention with the OECD Model Tax Convention See section See section

1 Persons covered 2 Taxes covered 3 General definitions 4 Resident 5 Permanent establishment 6 Income from immovable property 7 Business profits 8 International shipping and air transport 9 Associated enterprises 10 Dividends 11 Interest 12 Royalties 13 Capital gains 14 -- 15 Income from employment 16 Directors’ fees 17 Entertainers and sportspersons 18 Pensions 19 Government service 20 Students 21 Other income 22 Capital 23 Methods for elimination of double taxation 24 Non-discrimination 25 Mutual agreement procedure 26 Exchange of information 27 Assistance in the collection of taxes 28 Members of diplomatic missions and consular posts 29 Entitlement to benefits 30 Territorial extension 31 Entry into force 32 Termination

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