Dutch Treaty Developments With Gulf Cooperation Council Countries

Volume 56, Number 4 October 26, 2009 Dutch Treaty Developments With Gulf Cooperation Council Countries by Emile Bongers Reprinted from Tax Notes Int l, October 26, 2009, p. 285

Dutch Treaty Developments With Gulf Cooperation Council Countries by Emile Bongers Emile Bongers is with Stibbe in London. The Netherlands has concluded approximately 90 bilateral income tax treaties for the avoidance of double taxation. The Netherlands has also signed many tax information exchange agreements, transport tax treaties, shipping treaties, inheritance tax treaties, and bilateral investment protection treaties (BITs). The availability of the above-mentioned treaties is an important element when deciding on the tax efficient structuring of investments. The Netherlands plays an important role in this respect, since it has an extensive treaty network, a well-developed tax ruling system providing for advance certainty on Dutch tax aspects of an investment structure, a participation exemption regime exempting from tax all dividends received and capital gains realized for qualifying subsidiaries, a moderate corporate income tax rate of 25.5 percent, and no withholding taxes on interest and royalty payments. More recently, the Netherlands has focused on concluding treaties with countries being part of the Gulf Cooperation Council (GCC). The GCC is a trade group consisting of six Persian Gulf countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) with many social and economic objectives. The tax system of the GCC countries will be briefly described in Section I of this article. The Netherlands signed bilateral income tax treaties with all GCC countries, and transport tax treaties are in place with all GCC countries except Kuwait. 1 Although the tax treaties with the GCC countries are substantially in conformity with the OECD model treaty and Dutch tax treaty policy, there are some remarkable deviations. Section II will focus on the main characteristics of these treaties and highlight differences and inconsistencies between the treaties. The Netherlands has concluded BITs with Bahrain, Kuwait, and Oman and is negotiating BITs with Qatar, Saudi Arabia, and the U.A.E. The key elements of the BITs and the related tax aspects will be summarized in Section III. Finally, Section IV provides concluding remarks. I. GCC Countries Tax System The tax system in the various GCC countries is somewhat diversified. 2 Bahrain and the U.A.E. effectively do not levy taxes, while Kuwait, Oman, Qatar, and Saudi Arabia levy taxes but with substantial differences in tax rates. A. Bahrain Apart from oil and gas companies, Bahrain does not levy corporate or individual income tax. Bahrain also does not levy withholding taxes on dividends, income from debt claims, or royalty payments. Bahrain was put on the OECD s gray list of uncooperative countries, but moved earlier this year to the white list, and is committed to improving transparency and establishing effective exchange of information in tax matters. 1 The tax treaty with Oman was signed on October 5, 2009, but no details have been made public yet. 2 The below summary of the tax system of the GCC countries is based upon my understanding of the local laws, but is not verified with local tax experts. TAX NOTES INTERNATIONAL OCTOBER 26, 2009 285

B. Kuwait Kuwait does not levy income tax on individuals, but levies corporate income tax at the rate of 15 percent from foreign (that is, non-gcc) corporate entities carrying on business activities in Kuwait. For companies owned by Kuwaiti (and other GCC) nationals, zakat is levied at the rate of 1 percent on net profits. It is an accepted practice that all Kuwait shareholding companies pay 1 percent of their net profits to the Kuwait Foundation for Advancement of Science (KFAS). Kuwait does not levy withholding taxes on dividends, income from debt claims, or royalty payments. C. Oman In Oman income tax is not levied on individuals. Corporate income tax is generally levied at a rate of 12 percent (special rules for businesses engaged in the oil and gas sector apply). Foreign taxpayers and branches may be subject to a 30 percent levy (but there are proposals to reduce this rate to 12 percent, effective in 2010). Oman levies a 10 percent withholding tax on royalty payments, but no withholding tax is levied on dividends and income from debt claims. D. Qatar Qatar does not levy income tax on individuals, but levies corporate income tax at the rate of 35 percent on foreign (that is, non-gcc) corporate entities carrying on business activities in Qatar. (Special rules for businesses engaged in the oil and gas sector apply.) There are proposals to reduce the 35 percent rate to 10 percent, effective in 2010. Qatar does not levy withholding taxes on dividends, income from debt claims, or royalty payments. E. Saudi Arabia In Saudi Arabia corporate income tax is generally levied on non-gcc entities at a rate of 20 percent (different rules apply for oil and gas businesses); GCC entities are subject to the zakat. Income tax is not levied on individuals, except business income, which is taxed at a rate of 20 percent. GCC nationals are subject to the zakat. Saudi Arabia levies withholding taxes on dividends, income from debt claims, and royalty payments at a rate of 5 percent, 5 percent, and 15 percent, respectively. F. U.A.E. Apart from oil and gas companies and the banking sector, the U.A.E. does not levy corporate or individual income tax. The U.A.E. does not levy withholding taxes on dividends, income from debt claims, or royalty payments. According to the OECD, the U.A.E. just like Bahrain has been moved from the gray list to the white list and recognized as a jurisdiction that has substantially implemented the internationally agreed tax standards. II. Income Tax Treaties A. Bahrain-Netherlands Treaty The Netherlands and Bahrain signed a bilateral income tax treaty on April 16, 2008, which has not yet entered into force. The Bahrain treaty together with explanatory notes was sent to the Dutch parliament in August 2008 for approval, where it is still under discussion. In addition to the avoidance of double taxation, the goal of the Bahrain treaty is to prevent fiscal evasion and to provide for the exchange of information relating to tax matters. Regarding residency, it is remarkable that the Bahrain treaty only applies to persons who are liable to tax. Regarding residency, it is remarkable that the Bahrain treaty only applies to persons who are liable to tax. Since Bahrain does not levy income taxes on individuals and corporate entities (except some enterprises engaged in oil and gas activities), the Bahrain treaty may be of less practical use for Bahrain residents, with the exception of the state, local government authorities, and pension funds, which are explicitly considered residents for treaty purposes. It would have made sense if, for example, a provision similar to the Bahrain- Netherlands transport tax treaty, which states (in short) that for Bahrain the treaty is accessible for any person who under Bahrain law is domiciled or has their place of management in Bahrain, was included in the Bahrain treaty. 3 Furthermore, regarding dual residency of a corporate entity, the Bahrain treaty does not contain a tiebreaker rule, but instead provides that the countries use the mutual agreement procedure to resolve disputes (taking into account its place of effective management and its place of incorporation). If the competent authorities are unable to agree, they will try to determine by mutual agreement the mode of application of the treaty to that entity. At the request of Bahrain, the definition of permanent establishment has been extended and includes, for example, sales outlets and warehouses. The Netherlands has earlier accepted such an approach when concluding an income tax treaty with Jordan. The Bahrain treaty contains a shipping and air transport provision according to which the right to tax 3 This would also be in line with other bilateral income tax treaties concluded by Bahrain, such as the Bahrain-France treaty. 286 OCTOBER 26, 2009 TAX NOTES INTERNATIONAL

profits from the operation of ships and aircraft in international traffic is allocated to the country of residence of the enterprise engaged in these activities. The Bahrain-Netherlands transport tax treaty remains relevant and applicable; in particular, it covers customs duties. 4 However, if there was a conflict between the two treaties, the Bahrain treaty would apply if it was more beneficial for the taxpayer. A 0 percent withholding tax rate is applicable to dividends if the beneficial owner of the dividends is a company that holds directly at least 10 percent of the shares of the company paying the dividends. If, however, the tax burden in Bahrain on such dividends would be less than 10 percent, the Netherlands would in principle be allowed to levy a 10 percent withholding tax, unless the dividend is paid to the government of Bahrain, qualifying pension funds, companies listed on the Bahrain stock exchange, or the receiving company is engaged in an active trade or business in Bahrain. Even if the receiving company would not qualify based on the above, the Bahrain treaty provides that the 0 percent rate would still apply if it is established in a mutual agreement procedure that the main purpose of establishing such a company is not to benefit from the 0 percent rate. In all cases when the 0 percent rate does not apply, the Bahrain treaty provides for a 10 percent dividend withholding tax rate. In some cases when dividend distributions are made to individuals who are resident of the other state as well as of a third state, the domestic dividend withholding tax rate could be applied (15 percent in the case of the Netherlands). The Kuwait-Netherlands treaty contains a similar limitation on benefits provision. (See Section II.B below.) Under the Bahrain treaty, there are no withholding taxes on income from debt claims 5 and royalty payments. The Bahrain treaty also contains mutual agreement (including the possibility of arbitration) and exchange of information provisions, 6 which are generally in conformity with the OECD model treaty and Dutch tax treaty policy. The protocol to the Bahrain treaty, at the request of the Netherlands, provides that the competent authorities will take measures by mutual agreement to make sure that different qualifications of hybrid entities or income will not result in double taxation or double exemption. 4 The transport tax treaties concluded by the Netherlands with, for example, Oman and Qatar do not cover customs duties. 5 At the request of the sharia-based legislation in Bahrain, the term income from debt claims is used instead of interest, but there is no substantive difference. 6 This is in conformity with Bahrain s commitment to improve transparency and implement the internationally agreed tax standards. B. Kuwait-Netherlands Treaty The Netherlands and Kuwait signed a bilateral income tax treaty in 2001, which entered into force in 2003 (although at the request of Kuwait, some provisions can already be applied as of 2001). In addition to the avoidance of double taxation, the goal of the Kuwait treaty is to prevent fiscal evasion and provide for the exchange of information relating to tax matters. In conformity with Kuwait s tax policy, the Kuwait treaty covers not only corporate income tax, but also the KFAS and the zakat. The protocol to the Kuwait treaty provides that if Kuwait were to introduce an income tax on individuals, it would be covered by the Kuwait treaty, but so far no such tax has been introduced. The Kuwait treaty covers not only corporate income tax, but also the KFAS and the zakat. Regarding residency, the Kuwait treaty only applies to persons who are liable to tax. Although the corporate income tax rate in Kuwait has recently been substantially reduced from 55 percent to 15 percent, it generally only applies to foreign companies carrying on a trade or business in Kuwait, but not to companies incorporated in Kuwait or other GCC countries that are wholly owned by nationals of such countries. These entities instead are subject to the KFAS and/or zakat and on that basis may be able to claim treaty access. However, the Kuwait treaty may be of less use for Kuwait individuals because they will in principle not be considered residents for treaty purposes. On the other hand, the state and local government authorities are explicitly considered residents for treaty purposes. Pension funds are not listed as residents. Furthermore, the Kuwait treaty contains a tiebreaker rule for (potential) conflicts of residency of entities. At the request of Kuwait, the definition of PE has been extended and includes, for example, a building site, installation project, or supervisory activity if such site, project, or activity continues for a period of more than six months. In the absence of a Kuwait-Netherlands transport tax treaty, shipping and air transport matters are exclusively dealt with in the shipping and air transport provision of the Kuwait treaty. According to this provision, which is in line with the OECD approach, profits from the operation of ships and aircraft in international traffic will be taxed only in the country in which the place of effective management of the enterprise is situated. TAX NOTES INTERNATIONAL OCTOBER 26, 2009 287

The dividend article in the Kuwait treaty is substantially the same as in the Bahrain treaty. This means that there is a 0 percent withholding tax rate for dividends if the beneficial owner of the dividends is a company that holds directly at least 10 percent of the shares of the company paying the dividends. If, however, the tax burden in Kuwait on such dividend would be less than 10 percent (which will generally be the case for companies incorporated in Kuwait and other GCC countries that are wholly owned by nationals of such countries), the Netherlands would in principle be allowed to levy a 10 percent withholding tax, unless the dividend is paid to the government of Kuwait, companies listed on the Kuwait stock exchange, or the receiving company is engaged in an active trade or business in Kuwait. Even if the receiving company would not qualify, the Kuwait treaty provides that the 0 percent rate would still apply if it is established in a mutual agreement procedure by Dutch and Kuwaiti authorities that the main purpose of establishing such company is not to benefit from the 0 percent rate. In all cases when a 0 percent rate does not apply, the Kuwait treaty provides for a 10 percent dividend withholding tax rate. In some cases when dividend distributions are made to individuals who are resident of the other state as well as of a third state, the domestic dividend withholding tax rate could be applied (15 percent in the case of the Netherlands). According to the Kuwait treaty, there are no withholding taxes on interest; at the request of Kuwait the Kuwait treaty provides for a 5 percent withholding tax on royalties. Royalty payments made by a tax resident of the Netherlands are not affected by this because under Dutch domestic tax law no withholding taxes on interest and royalties are levied. Kuwait generally does not levy withholding taxes on royalty payments under its domestic tax law. In deviation from the OECD model treaty and the Dutch tax treaty policy, taxes on directors fees are assigned to the country of residence of the director, although the source country may levy taxes with a maximum of 25 percent of the fees. Furthermore, the Kuwait treaty contains mutual agreement (including the possibility of arbitration) and exchange of information provisions, which are generally in conformity with the OECD model treaty and Dutch tax treaty policy. C. Netherlands-Qatar Treaty The Netherlands and Qatar signed a bilateral income tax treaty in 2008, but it has not yet become effective. The Qatar treaty together with explanatory notes was sent to the Dutch parliament in November 2008 for approval, but is still under discussion. In addition to the avoidance of double taxation, the goal of the Qatar treaty is to prevent fiscal evasion and to provide for the exchange of information relating to tax matters. According to the Dutch explanatory notes to the Qatar treaty (unlike the Kuwait treaty), zakat is not covered by the Qatar treaty because the payment thereof is not a legal obligation in Qatar. Regarding residency, the Qatar treaty applies to a company having its place of effective management in Qatar 7 and to any individual person who has a permanent home, his center of vital interest, or habitual abode in Qatar. 8 Also the state, local government authorities, and pension funds are explicitly considered residents for treaty purposes. The Qatar treaty also contains a tiebreaker rule for (potential) conflicts of residency of entities. However, there is an antiabuse provision regarding dual residency and place of effective management for dividends. At the request of Qatar, the definition of a PE has been extended and includes, for example, a building site, construction, assembly, or installation project or a supervisory activity if such site, project, or activity continues for a period of more than six months. The Qatar treaty contains a shipping provision according to which profits from the operation of ships in international traffic will be taxable only in the country in which the place of effective management of the enterprise is situated. Regarding air transport, the Qatar treaty provides that the Netherlands-Qatar transport tax treaty as signed in January 2008 is applicable. The transport tax treaty provides for a reciprocal exemption according to which profits from the operation of aircraft in international traffic will be taxed only in the country in which the place of effective management of the enterprise is situated. There is a 0 percent withholding tax rate for dividends if the beneficial owner of the dividends is a company that holds directly at least 7.5 percent of the shares of the company paying the dividends. However, the 0 percent rate does not apply if the main reason for establishing or maintaining the company is to benefit from the 0 percent rate (the main purpose test). The competent authorities will consult each other before denying the 0 percent rate by invoking the main purpose test. For pension funds and collective investment vehicles, a 0 percent rate also applies. In all other 7 Using this wording instead of the typical OECD wording requiring liability to tax has as a benefit that Qatar-based companies (and other GCC companies) are considered residents for purposes of the Qatar treaty, despite not being subject to tax. Only non-gcc entities carrying on a business in Qatar are subject to income tax. They are currently taxed at the rate of 35 percent, but it is proposed that the rate will be reduced to 10 percent by 2010. 8 This provision for individuals is favorable because they generally do not pay any income taxes. It is also not restricted to Qatar nationals (unlike in the U.A.E. treaty, in which only U.A.E. nationals can be considered residents); Dutch individuals having their center of vital interests in Qatar are also covered. 288 OCTOBER 26, 2009 TAX NOTES INTERNATIONAL

cases, a 10 percent rate applies. For individuals, a most favored nation clause is included in the Qatar treaty, providing that if after signing this treaty the Netherlands were to agree to a lower rate with a third country, such reduced rate would then automatically apply to Qatar residents. The protocol to the Qatar treaty provides a further antiabuse provision for dividends, which should prevent Dutch companies with their assets substantially consisting of cash to transfer their place of management to Qatar and subsequently distribute dividends in a tax-free manner. According to this provision, if an entity is effectively managed in Qatar and has been managed in the Netherlands at any time in the preceding three years and at any time during a 12-month period before transferring the place of management to Qatar the assets of the entity consisted principally of liquid assets, the tiebreaker rule regarding residency will not apply, unless the competent authorities determine by mutual agreement that there are bona fide commercial reasons for the transfer. According to the Qatar treaty, there are no withholding taxes on interest; at the request of Qatar, the Qatar treaty provides for a 5 percent withholding tax on royalties. Royalty payments made by a tax resident of the Netherlands are not affected by this because under Dutch domestic tax law no withholding taxes on interest and royalties are levied. Qatar does not levy withholding taxes on royalty payments under its domestic tax law, but may introduce a 10 percent withholding tax on royalties. The Kuwait treaty contains a similar provision for royalties. Furthermore, the Qatar treaty contains mutual agreement (including the possibility for arbitration) and exchange of information provisions, which are generally in conformity with the OECD model treaty and Dutch tax treaty policy. D. Netherlands-Saudi Arabia Treaty The Netherlands and Saudi Arabia signed a bilateral income tax treaty in 2008, but it has not yet become effective. The Saudi Arabia treaty has not been sent to the Dutch parliament yet; therefore, no explanatory notes have been published. In addition to the avoidance of double taxation, the goal of the Saudi Arabia treaty is to prevent fiscal evasion and to provide for the exchange of information relating to tax matters. The residency provision is substantially in conformity with the OECD model treaty and the Dutch tax treaty policy, meaning that any person liable to tax in one of the two countries by reason of domicile, residence, place of management, or any other criterion of a similar nature is in principle considered a resident for treaty purposes. Since both Saudi Arabia-based individuals and entities are generally subject to (corporate) income tax, they should in principle be able to claim treaty protection. Also, the governments, pension funds, and tax-exempt legal persons established for religious, charitable, and educational purposes are generally considered tax residents for treaty purposes. Furthermore, the Saudi Arabia treaty contains a tiebreaker rule for (potential) conflicts of residency of entities. The definition of PE has been extended and includes, for example, a building site, construction, assembly, or installation project or a supervisory activity if such site, project, or activity continues for a period of more than six months. The Saudi Arabia treaty contains a shipping and air transport provision in which profits from the operation of ships and aircraft in international traffic will be taxable only in the country in which the place of effective management of the enterprise is situated. For air transport, the Saudi Arabia treaty provides that the 1992 Netherlands-Saudi Arabia transport tax treaty is applicable. The transport tax treaty provides for a reciprocal exemption according to which income and profits from the operation of aircraft in international traffic will be taxed only in the country in which the place of effective management of the enterprise is situated. In case of a conflict the transport tax treaty will prevail. There is a 5 percent withholding tax rate for dividends if the beneficial owner of the dividends is a company that holds directly at least 10 percent of the shares of the company paying the dividends. The treaty does not contain any antiabuse provisions regarding dividends as the other GCC countries do. 9 There seems to be less need for such antiabuse provisions because Saudi Arabia levies a 5 percent dividend withholding tax under its domestic tax laws. In case the conditions for the 5 percent rate of the Saudi Arabia treaty do not apply, a 10 percent rate applies. To eliminate double taxation, the country of residence of the beneficial owner of the dividend should generally allow for a tax credit for the dividend withholding tax levied by the other country if the dividend is taxed in the former country. This will not be the case if the beneficial owner can apply the Dutch participation exemption, since it provides for a full tax exemption of the dividends in the hands of such owner. Remarkably, however, the Saudi Arabia treaty does not require the Netherlands to grant a credit if the 5 percent dividend withholding tax rate applies. The Saudi Arabia treaty provides for a withholding tax on income from debt claims 10 and royalties of 5 9 The protocol to the Saudi Arabia treaty provides, however, that the competent authorities of both countries will enter into negotiations in case of a significant change of the system on dividend withholding tax in one of the two countries after the signing of this treaty. 10 At the request of Saudi Arabia, reference is made to income from debt claims instead of interest. (See supra note 5.) TAX NOTES INTERNATIONAL OCTOBER 26, 2009 289

percent 11 and 7 percent, respectively. The domestic withholding tax rates for income from debt claims and royalties in Saudi Arabia are 5 percent and 15 percent, respectively. As noted above, the Netherlands does not levy a withholding tax on interest and royalty payments. While the Saudi Arabia treaty requires Saudi Arabia to grant a credit for taxes levied by the Netherlands as source country (which it does not levy currently), no such requirement seems to be present for the Netherlands to grant a credit in the reverse situation. As a result, potential double taxation could arise. In deviation from the Dutch tax treaty policy, the Saudi Arabia treaty provides that capital gains realized by a resident of one of the countries regarding the transfer of shares in a company that is resident in the other tax treaty country may be taxed in that latter country. This right to levy tax for the source country does not apply if the beneficial owner of the shares is a company that holds directly or indirectly at least 10 percent of the capital of the company and such shares have been acquired after the signing of the treaty (after October 13, 2008). Also, the source country can postpone and retain its capital gains tax entitlement in some situations with respect to investments made prior to the signing of the treaty, in case of a reorganization whereby the final ownership of the shares does not change. Furthermore, the Saudi Arabia treaty contains mutual agreement (but without the possibility for arbitration) and exchange of information provisions that are generally in conformity with the OECD model treaty and Dutch tax treaty policy. The protocol to the Saudi Arabia treaty provides that profits that are exempt for a period of time not exceeding 10 years from tax on income in Saudi Arabia under the provisions of encouragement of its investment laws will be deemed to be subject to a tax on income for purposes of the Dutch participation exemption. This is an important provision because it suggests that a Dutch company holding shares of at least 5 percent in a Saudi Arabia-based company benefiting from a tax holiday is deemed to meet the subject to tax test and therefore should generally qualify for the participation exemption regime. According to this regime, all dividends and capital gains realized by a Dutch company regarding its subsidiary should be exempt from Dutch corporate income tax in the hands of such company. E. Netherlands-U.A.E. Treaty The Netherlands and the U.A.E. signed a bilateral income tax treaty in 2007, but it has not yet become effective. It is expected that the U.A.E. treaty together 11 There is a 0 percent rate if income from debt claims is paid or received by either government. with explanatory notes will be sent to the Dutch parliament for approval shortly. In addition to the avoidance of double taxation, the goal of the U.A.E. treaty is to prevent fiscal evasion and to provide for the exchange of information relating to tax matters. Regarding residency, the U.A.E. treaty applies to a company having its place of effective management in the U.A.E. and to any individual person who is a U.A.E. national having a substantial presence or permanent home in the U.A.E. This means that individuals not having the U.A.E. nationality (such as Dutch individuals residing in the U.A.E. for tax purposes) do not have access to this treaty. The state, local government authorities, and pension funds are explicitly considered residents for treaty purposes. Furthermore, the U.A.E. treaty provides that in case of dual residency of entities the competent authorities of both states will determine by mutual agreement of which country the entity will be considered a tax resident, taking into account the place of effective management and the place of incorporation. The U.A.E. treaty contains a shipping and air transport provision according to which profits from the operation of ships and aircraft in international traffic will be taxable only in the country in which the enterprise is resident. Regarding air transport, the protocol to the U.A.E. treaty provides that the 1992 Netherlands- U.A.E. transport tax treaty will remain in force, but the U.A.E. treaty will be applicable if it provides for a more beneficial treatment of the items of income concerned. There is a 5 percent withholding tax rate for dividends if the beneficial owner of the dividends is a company that holds directly at least 10 percent of the shares of the company paying the dividends. For the state, local governments, pension funds, and other institutions such as the Abu Dhabi Investment Authority, a 0 percent dividend withholding tax rate applies. In all other cases, a 10 percent rate applies. The dividend provision contains an antiabuse rule stating that the reduced rates do not apply if the main purpose for establishing the structure is to take advantage of this provision. According to the U.A.E. treaty, there are no withholding taxes on interest and royalty payments. Furthermore, the U.A.E. treaty contains mutual agreement (including the possibility for arbitration) and exchange of information provisions, which are generally in conformity with the OECD model treaty and Dutch tax treaty policy. The protocol to the U.A.E. treaty contains a remarkable provision stating (in short) that the benefits of the treaty are not applicable to companies or other persons that are wholly or partly exempted from tax by a special regime. It is not clear what this means, because except for the oil and gas companies and the banking sector, no (corporate) income tax is levied in the 290 OCTOBER 26, 2009 TAX NOTES INTERNATIONAL

U.A.E. Also, most companies are based in one of the so-called free zones within the U.A.E. These zones grant certainty regarding the tax-free status of the relevant entities for a specific number of years. It would not make sense if, for example, companies based in these zones would be excluded from the benefits of the treaty based on this protocol provision. Hopefully, this will be clarified soon in the explanatory notes that will be published when the U.A.E. treaty is sent to the Dutch parliament. III. Bilateral Investment Protection Treaties BITs establish the terms and conditions for direct investment by nationals and entities of one country in the other country. BITs generally include provisions regarding fair and equitable treatment, protection from expropriation, free transfer of funds, and a dispute resolution mechanism through international arbitration. The BITs concluded with Bahrain, Kuwait, and Oman are based on these principles. The Bahrain, Kuwait, and Oman BITs provide that the national 12 and most favored nation 13 treatment are extended to taxes, fees, charges, and fiscal deductions and exemptions. However, these BITs exclude from such treatment any special fiscal advantages accorded by a country under a tax treaty for the avoidance of double taxation by virtue of its participation in a customs union, economic union, or similar institution or on the basis of reciprocity with a third country. The Kuwait BIT states that if there is a difference of interpretation between the Kuwait BIT and the nondiscrimination clause in the Kuwait treaty, the latter clause will prevail. 12 National treatment means that a country may not treat foreign investors in a less favorable manner than its own investors. 13 Most favored nation treatment means that a country may not treat the investors of the other country in a less favorable manner than other foreign investors. Regarding BIT compensation payments, the question is how such payment should be qualified for tax purposes. The BITs do not address the tax qualification of such payment. For a Dutch investor receiving compensation payments for investments made in the other BIT jurisdiction, it will depend on the facts and circumstances whether the payments will be tax exempt. For example, if it could be argued that the Dutch investor receives the payment in (direct) relation to the shares it holds in the subsidiary located in the other BIT country and this shareholding qualifies for the participation exemption, then the compensation may be tax exempt in the hands of the Dutch investor. It makes sense that an investor demanding compensation payments through an international arbitration process as provided for in the relevant BIT requests a grossed-up amount. Also, according to a decree issued by the Dutch Ministry of Finance, payments received by an investor under an insurance policy covering the risk that the assets of a subsidiary are confiscated by local authorities do not qualify for the participation exemption and are therefore not tax exempt. IV. Concluding Remarks SPECIAL REPORTS The Netherlands has substantially extended its tax treaty network with the GCC countries, thereby making it an attractive jurisdiction for investors from these countries to invest in or through. Also, the position of Dutch businesses investing in the GCC region has been much improved as a result of this policy. The bilateral income tax treaties are welcomed and are mainly in line with the OECD model treaty and Dutch tax treaty policy, although there are some deviations. It is important that the approval proceedings in the various countries become finalized and that specific provisions in these treaties get clarified. The BIT network continues to be a valuable element for investors by guaranteeing their investments. TAX NOTES INTERNATIONAL OCTOBER 26, 2009 291