On 9 July 2019, the Senate approved the bill on tax arbitration which implements the EU Directive on tax dispute resolution mechanisms in the European Union ("EU Directive on Tax Dispute Resolution") into Dutch national legislation. The bill will be published in the Dutch Gazette as soon as possible, after which the law will take effect as from the following day.
The bill results in the new Dutch Tax Arbitration Act ("TAA"). The TAA contains the procedural rules concerning (EU-) cross border tax dispute resolution cases involving the Netherlands. The new rules will apply to all complaints invoting the TAA lodged from 1 July 2019 onwards provided that the complaint relates to income or capital attributable to a taxable year commencing on or after 1 January 2018. However, the Dutch Minister of Finance and the competent authority of the other state involved may agree to apply the TAA to complaints submitted earlier or with respect to earlier tax years.
EU Directive on Tax Dispute Resolution
The EU Directive on Tax Dispute Resolution aims to ensure the presence of mechanisms for the effective and timely resolution of tax disputes between Member States with regards to the interpretation and application of bilateral tax treaties and similar instruments. It aims at establishing a more effective and efficient procedure to resolve such disputes, ensuring legal certainty and, according to the preamble, to establish "a business-friendly environment for investments in order to achieve fair and efficient tax systems". To illustrate the need for this new, coordinated and transparent framework for dispute resolution, the preamble notes that the mechanisms currently in place such as the Mutual Agreement Procedure ("MAP") under bilateral tax treaties and the EU Arbitration Convention may not necessarily lead to the effective resolution of all relevant tax disputes in a timely manner.
Under the EU Directive on Tax Dispute Resolution, Member States are obliged to arrive at a resolution. Preferably, such resolution should be reached by mutual agreement between the competent authorities. However, if necessary, an Arbitration Commission will be formed at the request of the taxpayer. The Arbitration Commission consists of representatives of the Member States, leading independent persons and a chairman. The Arbitration Commission will then issue an advice to resolve the dispute. This advice can be followed by the Member States, but they can also deviate jointly from it. In any case, there will be a final decision. It is up to the taxpayer whether or not to accept the outcome of the procedure.
The new Dutch Tax Arbitration Act
The Netherlands implement the Directive by means of the TAA. We will briefly explain the main elements of the TAA below.
The procedure generally starts with the filing of the complaint by the taxpayer to, simultaneously, the competent authority of both the Netherlands and the other state involved. The competent authority for the Netherlands is the Dutch Minister of Finance. A complaint needs to be made within three years from the receipt of the first notification of the action resulting in, or that will result, in double taxation. The notification could be the tax assessment, but under circumstances could also be a statement made by the Dutch tax authorities in an earlier stage (for example as a result of a tax audit). The complaint is subject to a number of formal requirements (e.g. the mention of persons/companies involved, details of the relevant facts and supporting documents). Within three months from the receipt of the complaint the competent authorities may request the taxpayer to provide further information.
Within six months after the receipt of the complaint the Minister of Finance decides on accepting or rejecting the complaint. In this respect it is relevant to note that in case of an appeal against the tax assessment, the term of six month starts counting once the tax assessment is final and is no longer subject to further appeal. A complaint may be rejected, for example, if not all the required information is provided or if there is no dispute. The Directive includes an option for Member States to deny access to the Arbitration Commission if the dispute does not concern double taxation, but is for instance limited to a matter of qualification. The Netherlands, however, did not opt to deny a taxpayer's access to the Arbitration Commission if a question in dispute does not involve double taxation. Therefore, from a Dutch perspective, for example qualification questions (or the withholding tax rate applied) under a tax treaty are also in scope. Legal remedies are foreseen for the taxpayer in case of a rejection of the complaint, as explained below. In case the complaint is rejected by one of the competent authorities, an Arbitration Commission may be formed upon the request of the taxpayer to decide on the admissability of the complaint (this is a role of the Arbitration Commission that is separate from its role in advising on the dispute if a MAP has not been successful). If the Arbitration Commission decides that the complaint is admissable then the competent authoritie need to initiate the MAP within 60 days.
In case the complaint is rejected by both competent authorities, the taxpayer has the opportunity to file an administrative appeal against that decision. If such appeal is rejected, then the taxpayer subsequently has the option to bring the case before a tax court.
II. Mutual Agreement Procedure
Upon acceptance of the complaint by all competent authorities, the MAP will start. The Minister of Finance and the other competent authority will try to settle the dispute within a period of two years. This period may be extended by a maximum of one year, which however is not preferred by the Netherlands.
The purpose of the MAP is to settle the (tax) dispute between the Member States. If this goal is achieved, the Minister of Finance will inform the taxpayer accordingly. If the taxpayer accepts the outcome, the dispute will be definitively settled by means of a settlement agreement and the taxation will be adjusted accordingly. If the authorities fail to reach an agreement under the MAP, the taxpayer has to possibility (within 50 days) to file a written request to install an Arbitration Commission.
III. The Arbitration Commission
The Arbitration Commission consists of a chairman (in principle a judge), representatives of the Minister of Finance and of the other competent authority and so-called leading independent persons. These independent persons are appointed by the Minister of Finance and the other competent authorities. If Member States fail to install or to agree on the composition of the Arbitration Commission, the taxpayer has the possibility to start a civil court case. In principle, no access to the Arbitration Commission is available in cases involving a criminal offence (article 68 and 69 of the General Tax Act). The type of arbitration applied is generally speaking independent opinion-arbitration (but under circumstances other mechanisms may also be possible, such as final-offer arbitration). It is the expectation that the taxpayer (upon request) will be allowed to express their view on the case orally.
The Arbitration Commission shall issue its decision to the competent authorities within six months after the date the Arbitration Commission was installed. This period may be extended by three months. Member States may take a decision that deviates from the advice. However, if they fail to reach an agreement, the decision of the Arbitration Commission becomes binding. Consequently, in all cases, there is a final decision that the Minister of Finance submits to the taxpayer. It is up to the taxpayer whether or not to accept the outcome of the procedure .
In principle the full text of the final decision will be published on an anonymous basis, unless (amongst others) the taxpayer does not accept that approach. In such a case a summary of the final decision will be published.
The EU Directive on Tax Dispute Resolution and implementation thereof in the TAA, is an important step in ensuring efficient and timely resolutions of double taxation disputes in the EU. By providing a mandatory and binding dispute resolution mechanism with a wider range of topics covered, and an obligation for the Member States to reach a solution, the Directive and TAA may be a helpful instrument for taxpayers to solve cross border tax disputes. Existing tax treaties already may contain a MAP, where the MLI in some cases may also provide for an arbitration alternative. Accordingly, a case-by-case analysis would be required to determine which approach would work out best in a particular case.