Netherlands ratifies tax treaty with Sint Maarten

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1 21 January 2016 Global Tax Alert Netherlands ratifies tax treaty with Sint Maarten EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary A new bilateral Tax Arrangement between the Netherlands and Sint Maarten (TANS), which essentially functions as a tax treaty 1 was ratified by the Dutch Parliament and formally published on 13 January The TANS will apply to income received on or after 1 January The TANS is based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention and is in compliance with the OECD s views on substance and prevention of treaty abuse. As such, the countries in the Kingdom of the Netherlands will contribute to the prevention of tax evasion and avoidance and simultaneously provide new opportunities for investments and trading between the countries. Detailed discussion Corporate taxes Dividends The provisions of the TANS prescribe that the source country will provide for a full exemption of dividend withholding tax subject to certain conditions. This is a significant improvement compared to the reduced dividend withholding tax rate of 8.3% under the current arrangement. If the conditions are not met and

2 2 Global Tax Alert the source country has a right to tax under the TANS, a 15% withholding tax rate applies. However, grandfathering rules will apply to ensure that a 5% withholding tax rate will apply to existing situations 2 until the end of The current Dutch dividend withholding tax rate is 15%, whereas Sint Maarten currently does not levy withholding taxes on outgoing dividends. The Dutch dividend withholding tax consequences in the three most common situations where a Sint Maarten parent company holds the shares in a Dutch subsidiary are described in more detail below. Exemption of Dutch dividend withholding tax will apply in a number of cases. The most important are when the Sint Maarten beneficial owner holds at least 10% of the shares in the Dutch company and satisfies one of the following tests: Publicly-traded test Headquarters test Local substance test (employment of at least three local individuals) Main purpose test or competent authorities test (upon request). The competent authority confirms that the main purpose is not to make use of the benefits of the reduced dividend withholding tax rate under the TANS. The explanatory notes to the TANS explain that this confirmation may be granted if the beneficial owner meets: i) standard substance requirements, ii) is directly or indirectly held by a business enterprise, and iii) the Sint Maarten company performs an essential role by establishing a link between the business activities of its (indirect) parent company and its Dutch subsidiary and/or other indirect subsidiaries. 5% Dutch dividend withholding tax rate will apply to existing share interests of at least 25% which do not meet the requirements listed above in order to be exempt from Dutch dividend withholding tax. This grandfather clause ensures that a 5% withholding tax rate applies in these cases until the end of % Dutch dividend withholding tax rate will apply in all other situations. Permanent establishment The permanent establishment (PE) article is based on the OECD Model Tax Convention but contains a broader PE definition. A PE is deemed present in the case of services exceeding 183 days, activities relating to exploration and production of natural resources in the territorial waters exceeding 30 days and in the case of artists and sportsmen. Corporate tie breaker When a company is resident of both states, it will be determined by mutual agreement procedure in which country the company is resident. The competent authorities will work to finalize this procedure within six months. For cases where the competent authorities cannot come to an agreement, there is possibility of an arbitration procedure. Personal taxes Taxation of pension income The TANS provides for 15% taxation of pension income in respect of private employment in the country from which the pension payments are made. Pension payments that have started before 21 August 2015, the publication of the TANS, will be respected and will be treated under the pension article of the existing Tax Arrangement for the Kingdom of the Netherlands (TAK). Inheritance and gift tax Based on the TANS, a former Dutch resident who emigrated to Sint Maarten is still deemed a resident of the Netherlands if this person passes away or makes a gift within a five year period after emigration. In such cases, the Netherlands has the right to levy inheritance or gift tax. In the case of emigration to Sint Maarten before 21 August 2015, the publication of the TANS, no Dutch inheritance tax will be levied upon passing. Furthermore, the five year period will be limited to one year for gift tax purposes. Capital gains and dividends after emigration The source country shall have the right to levy its source tax with respect to dividends and capital gains, which are derived from a substantial interest in a Dutch entity held by a former Dutch resident who emigrated to Sint Maarten or vice versa. This right is for a 10 year period after emigration and limited to dividends and capital gains which have been built up in the source state before emigration. In the situation of a former Dutch resident who emigrated to Sint Maarten, or vice versa before 21 August 2015, the publication of the TANS, the 10 year period will be limited to a 5 year period and the tax on dividend income may not exceed 15%.

3 Global Tax Alert 3 Other provisions Hybrid entities If double (non) taxation arises as a result of a classification of an entity in one country as transparent and the other as nontransparent, competent authorities will settle this mismatch by mutual agreement to prevent double (non) taxation resulting from the application of the TANS. General anti-abuse article Based on the TANS, domestic rules in each country regarding fraud, abuse and improper use of the TANS, may in principle overrule the articles for avoidance of double taxation. The Dutch Corporate Income Tax Act (CITA) may subject foreign entities to Dutch corporate income tax when among others they hold a substantial interest (5% or more) in a Dutch entity, subject to certain conditions (article 17, 3, b CITA). According to the TANS, this substantial interest provision does not apply (to dividend distributions or to capital gains realized upon disposition of such a subsidiary) if the Netherlands has no right to levy Dutch withholding tax under the TANS. Furthermore, based on the grandfathering rule in the TANS, the Dutch substantial interest provision should in any case not apply until the end of 2019 for other existing structures. 3 Information exchange and mutual agreement procedure The TANS contains an article for (automatic) exchange of information, which is in line with international standards. The TANS provides also for a mutual agreement procedure with a mandatory arbitration clause. This article is based on the OECD Model Tax Convention. Entry into force The TANS shall apply as of 1 January 2016 being the first day of the second month following the date of publication of the TANS in the Bulletin of Acts and Decrees. The TANS will apply to income received on or after 1 January Bilateral tax arrangements With the legal reorganization of the Netherlands Antilles in October 2010, Curaçao and Sint Maarten became autonomous countries within the Kingdom of the Netherlands. Therefore, the respective countries decided to replace the current multilateral TAK with new bilateral tax arrangements. The Netherlands agreed on a new bilateral arrangement with Curaçao, which entered into force as of 1 January Furthermore, it was confirmed that the Netherlands is currently in negotiations with Aruba for a new arrangement. Until new bilateral treaties have been concluded, the current TAK remains in place with respect to those countries which have not yet concluded a bilateral treaty. Investment structuring The TANS provides for a number of opportunities for investments and trading between the Netherlands and Sint Maarten. For structures currently in place between the Netherlands and Sint Maarten, it will be relevant to assess to what extent the TANS will result in a different outcome. Endnotes 1. Technically, the tax arrangement is a formal law for the Kingdom of the Netherlands which in essence functions as a tax treaty. 2. Existing situations which have been in place before 21 August 2015, the date the TANS was published. 3. Existing structures which have been in place before 21 August 2015, the date the TANS has been published.

4 4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young Curaçao, Willemstad Bryan Irausquin bryan.irausquin@an.ey.com Ron van der Born ron.van-der-born@an.ey.com Ivo Rietveldt ivo.rietveldt@an.ey.com Ernst & Young Belastingadviseurs LLP Helmar Klink, Amsterdam helmar.klink@nl.ey.com Michiel Swets, Rotterdam michiel.swets@nl.ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, New York Dirk Jan Sloof dirkjan.sloof@ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, Chicago Erwin Sieders erwin.sieders@ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, San Jose Sebastiaan Boers sebastiaan.boers1@ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, Beijing Yee Man Tang yeeman.tang@cn.ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, Hong Kong Bas Leenders bas.leenders@hk.ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, Singapore Barbara Voskamp barbara.voskamp@sg.ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, Sydney Yvette Gorter-Leeuwerik yvette.gorter@au.ey.com Ernst & Young LLP, Belgium-Netherlands Tax Desk, London Jelger Buitelaar j.buitelaar@uk.ey.com

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