Tax News. The new Income Tax Treaty between Germany and the Netherlands. Overview. April 2012

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1 April 2012 Tax News. The new Income Tax Treaty between Germany and the Netherlands On 12 April 2012 the newly negotiated Treaty between the Federal Republic of Germany and the Kingdom of the Netherlands for the avoidance of double income taxation ( TT NL New Version ) was signed. The TT NL New Version will enter into force upon the exchange of the instruments of ratification and will be applicable from 1 January of the subsequent year. Should ratification be effected in the course of the current year, the TT NL New Version would be applicable with effect from 1 January 2013; otherwise, this will probably not be before The amended version of the TT NL will replace the existing TT NL ( TT NL Old Version ), which dates back to 1959 and which, in the meantime, has been amended only with regard to selected aspects by three additional protocols. One of the main reasons why a renegotiation of this tax treaty was necessary was because a large number of the provisions set forth in the old version were not in line with the OECD Model Convention ( OECD MC ), which was not published until 1963, and thus published subsequently to the TT NL Old Version. Overview There have always been very intensive economic relations between Germany and the Netherlands. Ranking after France, the Netherlands are Germany s second most important trading partner. In 2010, foreign trade sales between the two countries amounted to approx. 132 billion ( 68.8 billion imports, 63.2 billion exports). 1 In view of these close interactions at the economic level, it was urgently necessary to update the TT NL Old Version and to bring its wording largely into line with that of the OECD MC in order to avoid tax provisions that act as a constraint on trading. From the German point of view, the aim pursued in the negotiations also was to counteract certain types of investment based on tax planning that had been enabled by the TT NL Old Version. The conduct of the negotiations by the Netherlands focused on the taxation of cross-border commuters and cross-border retirement benefits in particular. Contents Overview... 1 Detailed summary of material amendments Treaty entitlement Permanent establishment Business profits Dividends Interest and licences 4 6 Capital gains Income from employment and retirement benefits Anti-abuse and antidiscrimination provisions... 6 Your Contacts... 7 While a small number of articles remained unchanged or were amended only marginally, a large part of the provisions was subjected to a substantial revision that, apparently, was closely oriented along the lines of the current 1 Federal Statistical Office (Statistisches Bundesamt), Statistisches Jahrbuch 2011, p Amended TT The Netherlands 4/2012 1

2 OECD Model Convention. In the following, those amendments that are material for enterprises will be summarised. Detailed summary of material amendments 1 Treaty entitlement (art. 4 of the TT NL New Version) A person s treaty entitlement under the TT NL Old Version was based on the fact that such person was a resident of one of the contracting states, and in the case of bodies corporate, their place of management was deemed to be their residence. In line with the OECD MC, the treaty entitlement of an individual or a body corporate or an association is now based on whether such individual or body corporate or association is resident, or subject to resident taxation, respectively, in a contracting state, which may be determined for tax purposes on a number of bases (residence, habitual abode, place of management, seat, etc.). An enterprise that is tax resident and subject to (unlimited) corporate income tax in the Netherlands or in Germany always has a treaty entitlement. The application protocol relating to the TT NL New Version ( Protocol ) makes it clear that this also applies to Dutch corporate entities taxable for corporate income tax purposes the income of which is tax-exempt under Dutch tax law (e.g. pension funds or certain investment vehicles 2 ). Pursuant to the provisions of the OECD MC partnerships or other types of transparent enterprises have no treaty entitlement unless they themselves are taxable entities tax resident in one of the contracting states. If applicable, the partners of such enterprises might have a treaty entitlement, whereas the profits generated must be split pursuant to art. 7 of the TT NL New Version, provided that they are such that the definition of a permanent establishment is met. Art. 4 of the TT NL New Version contains for both individuals (para. 2) and bodies corporate (para. 3) so-called tie-breaker provisions that are in accordance with the OECD MC. The TT NL New Version no longer contains a provision stipulating that, in the event that a body corporate does not have its place of management in either of the contracting states, the statutory seat of such body corporate shall be decisive (cf. art. 3 para. 5 sentence 2 of the TT NL Old Version). 2 Permanent establishment (art. 5 of the TT NL New Version) Now the definition of permanent establishment is set forth in accordance with the OECD MC in a separate article and no longer in the general list of definitions. The so-called offshore clause (art. 5 para. 4 of the TT NL New Version) is an amendment to the contents of the previous definition and, at the same time, a deviation from the provisions of the OECD MC. According to this offshore clause, an 2 Corporations that serve as portfolio investment vehicles may achieve a tax-exempt status under Dutch tax law if determined requirements are fulfilled (so-called vrijgestelde beleggingsinstelling VBI or fiscale beleggingsinstelling FBI). Amended TT The Netherlands 4/2012 2

3 offshore project, as well, may be such that the definition of a permanent establishment is met, provided that such project continues for at least 30 days within a period of 12 months and unless it is excluded pursuant to art. 5 para. 5 of the TT NL New Version. 3 Business profits (art. 7 of the TT NL New Version) The article relating to business profits has been revised substantially. The provisions of art. 7 of the TT NL New Version are modelled on the provisions implementing the so-called Authorized OECD Approach (AOA) for the purpose of profit allocation set forth in art. 7 of the OECD MC, which have not been amended before While the principle of imputation pursuant to para. 1 has remained largely unchanged, for the purposes of art. 7 of the TT NL New Version and art. 22 of the TT NL New Version, art. 7 para. 2 of the TT NL New Version stipulates that the arm s length principle shall apply without limitation, and in derogation from the provisions of the OECD MC the specific distribution of functions and risks between permanent establishment and head office shall be taken into account. Furthermore, para. 3 in addition to art. 9 para. 2 of the TT NL New Version provides for the requirement that a corresponding adjustment be made in the case of adjustments of permanent establishment profits by the state of source. Cases of conflict must be resolved by way of a mutual agreement procedure or probably by a subsequent arbitration procedure. The special provisions relating to the allocation of business profits in the case of cross-border commercial areas (art. 7 para. 4 and para. 5 of the TT NL New Version) were not amended. However, now the TT NL New Version also contains a standard subsidiary clause relating to business profits. 4 Dividends (art. 10 of the TT NL New Version) The article relating to dividends has been amended in various regards, and its wording has been brought into line with that of the OECD MC, as well. Although the state in which the recipient of dividends is resident continues to have the basic right to tax, also the state of source continues to have a right to tax, the maximum rate of which is differentiated as follows: > 5% in the case of intercompany participations (i.e. the economic recipient is another corporation that holds a direct participation of at least 10%); > 10% if a specific Dutch pension fund (as defined in the Protocol) is the economic recipient; > 15% in all other cases. Payments based on rights or claims involving profit participation (e.g. silent participations, income bonds and similar hybrid financing forms) Amended TT The Netherlands 4/2012 3

4 may, however, be subject to taxation in the state of source as a whole, provided that they can be deducted by the debtor as operating expenses. In addition, art. 10 para. 6 of the TT NL New Version stipulates that, in the event of a move of residence by an individual, the exit state has a right to tax with regard to dividends or income bonds, provided that these are paid within a period of 10 years from the date of move of residence, and further provided that the exit tax (section 6 of the German Foreign Tax Act (Gesetz über die Besteuerung bei Auslandsbeziehungen AStG) on capital appreciation created prior to the move of residence from the exit state has not been finally assessed. Since the tax pursuant to section 6 of the German Foreign Tax Act has already been assessed as a result of the move of residence from Germany, however, and in the cases of section 6 para. 5 of the German Foreign Tax Act only the imposition may be postponed, this provision may insofar likely to be relevant for Dutch exit taxation only. A definition of dividend is provided in art. 10 para. 3 of the TT NL New Version (and is supplemented by the Protocol); such definition now includes distributions of a German investment fund, and profits generated from both (partial) liquidations (including capital decreases) and the acquisition of own treasury shares by a company. It should follow from this that profits generated by a shareholder from a redemption of shares are to be deemed to be a dividend and not a capital gain within the meaning of art. 13 para. 5 of the TT NL New Version. 5 Interest and licences (art. 11 and art. 12 of the TT NL New Version) The state of source continues not to have any right to tax with regard to any interest or licence fees paid under the TT NL New Version, as well. Accordingly, such interest or licence fees may only be subject to taxation in the economic recipient s state of residence. In line with the OECD MC, it is also clarified that the article relating to interest and licences only refers to the appropriate part of the payment, thus excluding any part of it that is inappropriate (which usually means: excessive) under the arm s length principle. This part of the payment may fall within the scope of application of art. 10 (as a hidden profit distribution) or art. 7 of the TT NL New Version (as business profit). The Protocol stipulates that, in the event the favourable tax regime relating to intangible assets developed by the enterprises themselves (the so-called Dutch innovation box: innovatiebox ), which is currently available under Dutch tax law, is extended to include assets that have not been developed by the enterprises themselves, the contracting states shall discuss any potential amendments to art. 11 of the TT NL New Version. Amended TT The Netherlands 4/2012 4

5 6 Capital gains (art. 13 of the TT NL New Version) While the TT NL Old Version provided for the taxation of the capital gains at the applicable income source, art. 13 of the TT NL New Version contains a consolidated summary of the provisions in this respect substantially in line with the provisions of art. 13 of the OECD MC. There are, however, deviations in the following respects: In deviation from art. 13 para. 4 of the OECD MC, art. 13 para. 2 of the TT NL New Version provides that gains from the alienation of shares in certain real property companies can be taxed in the situs state of the real property, provided that the alienator holds at least 50% of the shares in the company the assets of which consist of more than 75% of real property, and the capital gains are not generated in connection with a corporate reorganisation or restructuring. Art. 13 para. 6 of the TT NL New Version grants the exit state the right to tax capital gains resulting from hidden reserves created prior to the move of residence. Amongst other things, the double taxation treaty thus safeguards German exit taxation (section 6 of the German Foreign Tax Act). 7 Income from employment and retirement benefits (art. 14 and 17 of the TT NL New Version) The articles on the allocation of fiscal jurisdiction in respect of income from employment and retirement benefits were changed in part and harmonised to some extent with the OECD MC. The material changes are listed below: > change of the reference period for the 183-days rule in the context of art. 14 of the TT NL New Version (reference to the calendar year is abandoned in favour of reference to a twelve month period which might commence and end in two different fiscal years); > changes to the provisions on tax privileges for (Dutch) frontier workers; > exclusive fiscal jurisdiction of the state of residence in relation to employment exercised aboard a ship or aircraft operated in international traffic, or aboard a vessel engaged in inland waterways transport; > expansion of the catalogue of exemptions from the principle that retirement benefits (pensions, etc.) are taxed in the beneficiary s state of residence. As a consequence, also the state from which the retirement benefits are obtained may tax such benefits (oneoff benefits in any case, recurring benefits only where an annual gross amount of 15,000 is exceeded), provided that such state has previously granted tax privileges for the contributions paid in respect of the retirement benefit plan. Amended TT The Netherlands 4/2012 5

6 8 Anti-abuse and anti-discrimination provisions (art. 23 and 24 of the TT NL New Version) Art. 23 para. 1 of the TT NL New Version contains a general provison in favour of national anti-abuse provisions (e.g. section 50d paras. 3, 9 and 10 of the German Income Tax Act (Einkommensteuergesetz EStG), sections 7 14, 20 para. 2 of the German Foreign Tax Act, section 42 of the German General Tax Code (Abgabenordnung AO). By way of this provision, which has already been included in some amended German TTs, Germany apparently intends to safeguard itself against future developments in the debate regarding the compliance of a treaty override with European and international law. If double taxation occurs as a consequence of the application of a national anti-abuse provision, it can be eliminated by way of a mutual agreement procedure between the competent tax authorities of both states. To prevent abusive practices, art. 22 of the TT NL New Version contains also a number of new provisions providing that the generally applicable exemption method is replaced by the credit method under certain conditions ( switch-over provisions ). The article on anti-discrimination (art. 24 of the TT NL New Version) was also extended and complies now with the OECD standard. Art. 24 para. 5 of the TT NL New Version provides for a prohibition of discrimination regarding group taxation. In the light of a recent decision of the Federal Tax Court (Bundesfinanzhof BFH) 3 on the possible creation of a cross-border fiscal unity, however, it is provided in the Protocol that art. 24 para. 5 of the TT NL New Version does not prevent the contracting states from restricting the application of their group taxation (Organschaft or fiscale eenheid) to residents or permanent establishments. * * * 3 Federal Tax Court decision dated 11 February 2011, I R 54, 55/10, IStR 2011, 753. Amended TT The Netherlands 4/2012 6

7 Your Contacts Contacts Dr. Sebastian Benz (+49) Prof. Dr. Jens Blumenberg (+49) Dr. Thomas Elser (+49) Florian Lechner (+49) Oliver Rosenberg (+49) Andreas Schaflitzl (+49) Authors: Dr. Sebastian Benz, Dr. Christian Böing This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2012 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. Dr. Rainer Stadler (+49) rainer.stadler@linklaters.com Königsallee Düsseldorf Telephone (+49) Facsimile (+49) Linklaters.com Amended TT The Netherlands 4/2012 7