Although the Netherlands will actively participate in the fight against tax fraud and tax evasion by seeking and supporting appropriate measures at the level of the EU, the OECD and the G20, it will continue to endeavor to maintain and innovate the attractive features of its favourable tax regime.
During the last summit of the European Council, the Dutch Prime Minister again stressed the importance of the good Dutch tax climate. Any changes in tax laws should take place at a global level he said, and the Netherlands will not seek to solve issues of profit allocation to low-tax jurisdictions or international arbitrage unilaterally, he added. By making this statement, he reaffirmed the Dutch Government's position that these issues are not specific Dutch topics. As a final comment, he mentioned that proposals by the European Council that are not in the interest of the Netherlands will be vetoed.
This firm position expressed by the Dutch Prime Minister is in line with the conclusions addressed in the letter of the Dutch State Secretary of Finance to Dutch Parliament last January. We refer to our Tax Alert .
Last Wednesday, the Dutch State Secretary of Finance further elaborated on the position of the Netherlands with respect to the international fight against tax fraud and tax evasion in a letter to Dutch Parliament (the "Letter") that was published in anticipation of a debate on the 2011 Memorandum on Dutch tax treaty policy and taxation of multinationals. In the Letter, the State Secretary points out that, like the Netherlands, many surrounding countries use their tax treaty policy to support cross-border activities and investments. These countries try to compete with the Netherlands when it comes to creating the most attractive tax regime for international investments. If the Netherlands were to refrain from entering into more tax treaties, from innovating its open tax policy, or if it were to adopt a more conservative approach, these other countries would benefit in that they would become more attractive at the expense of the Netherlands.
Today, the Dutch State Secretary of Finance also announced the signing of a new tax treaty with China. According to the Secretary of Finance: "In recent years, China's economy has grown enormously and I am very satisfied that we have now put into place a modern tax treaty with such an important trade partner. There are many Chinese companies which are active in the Netherlands and I hope that the new tax treaty will further stimulate Chinese investments in the Netherlands."
Below, we will briefly address some key elements of this new tax treaty with respect to withholding taxes and capital gain taxes. We will further elaborate on the new tax treaty with China in a separate Tax Alert.
2. Anti-tax treaty shopping measures
If tax treaties are abused to facilitate tax evasion, the Netherlands will seek to cater for anti-tax treaty shopping measures. In determining appropriate anti-tax treaty shopping measures with its counterparties, the Netherlands in principle takes the position that such counterparties are responsible themselves in seeking for appropriate anti-abuse measures. Thus, the Netherlands will not proactively devise and prevent potential abuse of its counterparties' tax regimes.
In addition, as in the view of the State Secretary under tax treaties the principle of legal certainty should prevail, the Netherlands will seek to limit as much as possible any anti-treaty shopping measures affecting such certainty with respect to the international tax treatment of cross-border investments. In this respect, it is noted that the Netherlands seeks for anti-abuse measures requiring mutual agreement procedures as much as possible, such as the corporate residency tie-breakers in the tax treaties with the United States and the United Kingdom, and the main purpose test provided for under the tax treaty with the United Kingdom.
Bearing in mind the prevailing principle of legal certainty, in negotiating withholding tax provisions the Netherlands will continue to advocate an entity- or person based approach based as much as possible on objective criteria. This means that the Netherlands will continue the current practice under which it is decisive whether a recipient of income is the beneficial owner of such income. This approach focuses on the nature and activities of such recipient. Provided such recipient satisfies the requirements set by the relevant provisions, it will qualify for treaty benefits. The Netherlands rejects a transaction based approach whereby the transactions that have resulted in the relevant income item are taken into account as well in determining the eligibility of a recipient for tax treaty benefits.
The Netherlands seeks to limit as much as possible provisions providing for transaction based and subjective criteria. If a tax treaty counterparty were to insist on including such criteria (such as a main purpose test), the Netherlands will seek, and insist to provide, for mutual agreement procedures with respect to the application thereof (see for example the main purpose test provided for under the tax treaty with the United Kingdom).
3. The role of the Netherlands at an international level
The Letter distinguishes five levels of active involvement of the Netherlands in the global fight against tax fraud and tax evasion in the OECD and under G20 initiatives.
The Netherlands is:
- an active discussion partner with other EU countries regarding the exchange of information;
- a participant of the G5 initiative to establish a new global standard for the exchange of information on an automatic basis;
- in touch with OECD representatives that are working on the OECD BEPS report;
- part of the OECD Committee of Fiscal Affairs as well as part of the task force that develops the action plan on BEPS; and
- providing a civil servant to the OECD Secretarial Office to prepare the action plan on BEPS.
The Letter addresses the ongoing discussion on the so-called 'letterbox' companies. In essence, this discussion boils down to the question whether the Netherlands is responsible for enabling that these letterbox companies are beneficial owner of the income received by them, whether they comply with the additional anti-abuse measures under the relevant tax treaty, and whether they are (thus) entitled to tax treaty benefits.
The fact that the Netherlands has its own domestic substance requirements in place contributes to internationally being considered a reliable tax treaty partner. In the Letter, reference is made to the fact that the current Dutch substance requirements are generally considered sufficient to prevent treaty abuse. It is, however, noted that the risks of our current policy are under review as well as whether it is desirable to change our policy on substance requirements.
The Letter also refers to the image the Netherlands seems to have. The numbers on cross-border direct investments published in the BEPS report imply that the Netherlands is one of the biggest financial flow-through jurisdictions instead of a jurisdiction in which companies are actually established and where investments are made. The State Secretary explains that the investments in the Netherlands are made through physical establishments and provide for extensive economic activity in the Netherlands. In addition, he stresses that the Netherlands is not only attractive because of its good tax climate: its prominent place in international trade and services is to a large extent also the result of its open economy, reliable legal system, geographical position and well educated labor force.
As mentioned in numerous publications on the position of the Netherlands in light of the BEPS discussion, these non-tax related elements contribute to the attractiveness of the Netherlands for international investments as much as its favorable tax regime.
4. International exchange of fiscal information
A further development of exchange of information can contribute to the expansion of legal certainty, transparency and will contribute to fight tax evasion. In the 2011 Memorandum on Dutch tax treaty policy, the Netherlands already acknowledged that it desires a broader scope of the exchange of information.
In this context, the Netherlands supports the EU in promoting automatic exchange of information as the new international standard, for example through existing EU arrangements and TIEA’s concluded by the Netherlands in recent years. The Netherlands will also actively support efforts made in the G8, G20 and OECD to develop a global standard for automatic international exchange of fiscal information.
The discussion on the exchange of information ties in with the current developments on the FATCA rules. After the publication of the FATCA model agreement by the G5 countries in July 2012, the Netherlands started negotiations with the United States on a FATCA agreement. According to the Letter, the Netherlands will shortly sign this agreement with the United States. The agreement furthermore envisages establishing a mutual automatic exchange of information with the United States as per 30 September 2015.
At the level of the EU, the European Commission intends to propose amendments to the Directive on administrative cooperation with a view to extend the scope for automatic exchange of information to all types of income. The Netherlands also supports adopting a revised EU Savings Directive before the end of this year. Furthermore, the Netherlands will also actively support the alignment of European Union's agreements with Switzerland, Liechtenstein, Monaco, Andorra and San Marino with this Directive. Finally, the Netherlands will also participate in a FATCA based exchange of information pilot project initiated by Germany, France, Italy, Spain and the United Kingdom.
5. New tax treaty with China
In summary, with respect to withholding taxes and capital gain taxes, the new tax treaty with China provides for the following new features:
- under the dividend withholding tax provision, the withholding tax in respect of dividends is reduced to 5% provided the recipient is the beneficial owner and holds at least 25% of the capital in the distributing entity;
- the withholding tax provisions with respect to dividends, interest and royalties contain an anti-abuse provision in the form of a main purpose test; and
- the capital gains provision inter alia provides that gains derived by a resident of a Contracting State from the alienation of shares in a company resident in the other Contracting State, may be taxed in that other Contracting State if at any time in the twelve-month period preceding the alienation of the shares the alienator held an interest of at least 25% in the aforementioned company.
As discussed, we will further elaborate on the new tax treaty with China in a separate Tax Alert.
The Netherlands will continue to actively participate in the international fight against tax fraud and tax evasion by seeking and supporting appropriate measures at the level of the EU, the OECD and the G20, including automatic international exchange of fiscal information. However, no unilateral changes will be made to the Dutch tax regime which could affect the good Dutch tax climate and thus its competitive position in attracting international investors. Only if and when its tax regime is instrumental to tax fraud or abusive tax evasion the Netherlands may seek to provide for further anti-abuse measures. The conclusion of the new tax treaty with China evidences the continued Dutch approach to maintain its attractive tax climate.