Last Tuesday (10 June) the newly proposed tax arrangement between the Netherlands and Curaçao (the "New Tax Arrangement") was published. This quasi-double tax treaty had already been announced by the Dutch State Secretary of Finance on 12 December last year, at which time he also disclosed the key features thereof.
In this Tax Alert, we will elaborate on the most salient features of the New Tax Arrangement which will replace the currently applicable tax arrangement for the Kingdom of the Netherlands (Belastingregeling voor het Koninkrijk) dating back from 1964 (the "1964 Tax Arrangement"). Our analysis below is subject to further clarifications which may be made during the ratification discussions in the Dutch Parliament.
New Tax Arrangement
In essence the New Tax Arrangement has the function of a double tax treaty between the Netherlands (including the islands of Bonaire, Saba and Sint Estatius) and Curaçao. However, pursuant to the political relationship between the Netherlands and Curaçao, the New Tax Arrangement has the form of a statute of law. The structure, content and wording are however largely in line with the OECD Model Tax Convention ("OECD Model"), although there are certain important differences. The explanatory memorandum to the New Tax Arrangement states that the OECD Model Commentary is relevant for the interpretation of the provisions of the New Tax Arrangement.
The residency article in general follows the OECD Model's residency article. Under this article a person is eligible for the benefits of the Tax Arrangement if it is liable to tax in one of the states. Furthermore, the New Tax Arrangement does not contain the usual corporate tie breaker rule (contained in the 1964 Tax Arrangement and the OECD Model) according to which an entity residing in both states is deemed to be a resident of the state in which its place of effective management is situated. Instead, the New Tax Arrangement provides that in case an entity resides in both states the competent authorities will have to agree on residency by mutual agreement. Absent such mutual agreement, the dual resident entity would not be entitled to most benefits of the New Tax Arrangement.
The New Tax Arrangement also contains a specific arrangement for hybrid entities (considered tax transparent by one state and as non-transparent by the other state). For such entities the competent authorities may endeavor to seek mutual agreement on their character for purposes of the New Tax Arrangement. For one common situation the New Tax Arrangement already contains a specific solution: if income, which is derived through a hybrid entity, is construed by state as income of one of its residents, it will also be so construed for purposes of the New Tax Arrangement.
The permanent establishment article in general follows the OECD Model's permanent establishment article. However, at the request of Curaçao, and in deviation of the OECD Model, the New Tax Arrangement contains a service permanent establishment provision. Consequently, if a Curaçao resident entrepreneur or enterprise provides services in the Netherlands (or vice versa) for a period of more than 183 days during a twelve months period, the Netherlands is entitled to levy the profits earned with those provided services.
Dividends, interest and royalties
The withholding tax rates for cross-border interests and royalties are 0% under the New Tax Arrangement. For dividends there are three rates:
- 0%: if the beneficial owner of the dividend is (i) an entity that holds at least 10% of the capital of the distributing entity and (a) is considered a qualifying entity (see below) or (b) is directly or indirectly held for at least 50% by individuals resident in one of the states, (ii) state, or any political subdivision or local authority thereof or (iii) a pension fund;
- 5%: if a Curaçao resident beneficial owner of the dividend holds at least 25% of the capital of the Dutch distributing entity, under a grandfathering clause the 1964 Tax Arrangement remains applicable until 31 December 2019 (the 5% rate will then apply instead of the 8.3% rate under the 1964 Tax Arrangement).
- 15%: in all other situations. Note that this is also the Dutch statutory dividend withholding tax rate.
The definition of a qualifying entity reads like a limitation on benefits provision with application only to the dividend article. In short, if the recipient of a dividend is (i) directly or indirectly listed and traded on a recognized stock exchange, (ii) functions as a head-office of a multinational, or (iii) provides employment for sufficient (i.e. three fte) and qualified additional personnel, it may be considered a qualifying entity.
If the recipient of a dividend is not considered a qualifying entity based on the above, it may still benefit from the 0% dividend withholding tax rate if:
- it carries out an enterprise in its country of residence and the income that is received, should be obtained in connection with, or arise from, carrying out an activity (activity test); or
- it received competent authority approval for application of the 0% rate. In short, approval should, upon request, be granted if the main purposes or one of the main purposes for the incorporation acquisition and maintaining an interest in the distributing entity is not to benefit from the 0% rate (safe harbor).
The dividend article reserves the right of the source state to tax dividends distributed to an individual shareholder who has migrated out of the source state within 10 years before the income is derived. This serves as a reservation by the Netherlands for its substantial interest levy and a similar reservation can be found in the capital gains article.
The definition of dividends for purposes of this article is quite broad and for instance includes any proceeds from a (partial) liquidation of an entity or from the repurchase of shares.
At the request of the Netherlands, the New Tax Arrangement contains a general anti-abuse provision that aims to prevent improper use of the New Tax Arrangement. Consequently, the New Tax Arrangement does not prevent the application of national anti-abuse doctrines and rules. From a Dutch perspective this relates to the general doctrine of fraus legis (evasion of the law) and for example anti-abuse provisions, such as article 17, third paragraph, under b, of the Dutch Corporate Income Tax Act 1969 (the substantial interest levy).
To prevent a conflict of this general anti-abuse provision with the specific anti-abuse provisions included in the dividend article, it has been explicitly stipulated that the substantial interest levy will not be applied in respect of dividends and capital gains if the shareholder concerned can invoke the 0% dividend withholding tax rate. A similar exception to the applicability of the substantial interest levy can be applied where the 5% grandfathering rate is applicable.
Automatic exchange of information
The New Tax Arrangement provides for an automatic exchange of information between the Netherlands and Curaçao in line with the international standards for exchange of information.
Entry into force
The New Tax Arrangement will generally apply to tax periods starting, and payments made, on or after January 1 of the calendar year following the calendar year it enters into force. The entry into force will be the first day of the second month after the publication of the Gazette in which the New Tax Arrangement is published. The Dutch State Secretary currently envisages that the New Tax Arrangement should apply as per 1 January 2015, which means that this should be published in the Gazette ultimately on October 31 of this year.
The New Tax Arrangement appears to be a sign of the times. It clearly aims to curb perceived abuse, both known (e.g. Coop-N.V. structures) and unknown. To that end it contains a general anti-abuse provision, a LOB-like provision and certain specific anti-abuse provisions. The drafting may well have been influenced by the international discussion regarding base erosion and profit shifting (BEPS). On the other hand, the New Tax Arrangement has a very modern feel as it follows the OECD Model and dispenses with all withholding taxes in many situations.
With its many opportunities for mutual agreements, it opens the door to bespoke solutions for specific situations. One could wonder whether there is a risk that the competent authorities could be overwhelmed by the sheer number of competent authority request now that many – also relatively common (hybrid entities, dual residents) – situations require competent authority approval. That said, the Dutch tax authorities are accustomed to an active and open dialogue with taxpayers.
Finally, according to the explanatory memorandum, the Netherlands will also conclude new tax arrangements with Aruba and Sint Maarten respectively. Until these tax arrangements will become effective the 1964 Tax Arrangement remains applicable (and will be terminated thereafter). We will update you accordingly when these two tax arrangements are published.