On March 5, 2019, the Upper House (Eerste Kamer) of the Dutch parliament approved the Multilateral Convention to implement tax treaty-related measures to combat base erosion and profit shifting. The Multilateral Instrument (“MLI”) will apply to Dutch bilateral tax treaties if the other contracting jurisdiction finalized its ratification process as well. The impact of the MLI will depend on the choices made by both the Netherlands and the contracting jurisdiction. A total of 23 Dutch bilateral tax treaties will be impacted by the MLI as of January 1, 2020.
Please also see our MLI news alert for a more detailed description on the MLI.
Five steps to take
When approaching a bilateral case in 2020, please be aware of the five steps to take (from a Dutch perspective):
* The provisions in a bilateral tax treaty may be in violation of EU law. However, in case only one of the contracting jurisdictions is an EU Member State, the bilateral tax treaty prevails over EU law. EU law only prevails over the bilateral tax treaty if both contracting jurisdictions are EU Member States and if the Member States implemented EU law correctly.
Entry into force / entry into effect
The MLI enters into force on the first day following three months after the last contracting jurisdiction finalized its ratification process. The provisions of the MLI enter into effect and therefore actually impact bilateral tax treaties:
- Withholding taxes: on the first day of the first calendar year following the entry into force; and
- Other taxes: for taxable periods beginning on or after six months after the entry into force date.
Provisions of the MLI
A brief description of the most important MLI provisions:
||Transparent entities: Income derived by or through a transparent entity or arrangement shall be considered to be income of a resident of a contracting jurisdiction if the national tax laws of this jurisdiction allow taxation of this income as if it were income of a resident.
||Dual resident entities: The competent authorities of a dual resident entity shall endeavour to determine by mutual agreement the jurisdiction of which the entity shall be deemed to be a resident for bilateral tax treaty purposes. Relevant factors: place of effective management, place of incorporation and any other relevant factors. In principle, treaty benefits will be denied in absence of an agreement.
||Prevention of treaty abuse: Jurisdictions may choose between the principal purpose test, the principal purpose test in combination with the simplified limitation on benefits rule and the limitation on benefits rule. The Netherlands chose the principal purpose test. This means that a benefit under the bilateral tax treaty shall not be granted if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless granting that benefit in the specific circumstance would be in accordance with the object and purpose of the relevant provisions of the bilateral tax treaty1.
||Dividend transfer transactions: Provisions of a bilateral tax treaty that exempt or limit the rate of dividend withholding taxes shall only apply if the conditions of these provisions are met throughout a 365-day period, including the day of the payment of the dividends. No account shall be taken of changes of ownership resulting from corporate reorganisations such as mergers or divisive reorganisations.
||Capital gains from alienation of shares deriving value principally from immovable property: Provisions granting the right to levy tax upon gains derived from the alienation of shares in a real estate company shall only apply if the relevant value (in order to qualify as a real estate company) is met at any time during the 365 days preceding the alienation. In addition, the Netherlands also chose to apply this to interests comparable to shares, e.g. partnerships and trusts.
||Anti-abuse rule for permanent establishments in third jurisdictions: The benefits of a bilateral tax treaty shall not apply to any item of income, if:
- An enterprise in a contracting jurisdiction derives income from the other contracting jurisdiction but treats such income as attributable to a permanent establishment situated in a third jurisdiction (triangular tax treaty cases); and
- Profits attributable to this permanent establishment are exempt from tax in the contracting jurisdictions; and
- The tax rate in the third jurisdiction is less than 60% of the tax that would be imposed in the contracting jurisdiction.
||Artificial avoidance of permanent establishments through specific activity exemptions: A permanent establishment shall be deemed not to include activities specifically listed in the bilateral tax treaty, the maintenance of a fixed place of business solely for the purpose of carrying on any activity for the enterprise, or a combination of these activities, if the overall activity of the fixed place of business is of a preparatory or auxiliary character. In addition, an anti-fragmentation rule applies for aggregated activities carried out by closely related enterprises in the same jurisdiction.
||Mutual Agreement Procedure: If a taxpayer considers that the actions of one or both of the contracting jurisdictions (will) result in taxation not in accordance with the provisions of the bilateral tax treaty, the taxpayer may present the dispute to the competent authority of either contracting jurisdictions. The dispute must be presented within three years as of the first notification of the actions.
||Mandatory Binding Arbitration: Provides mandatory binding arbitration in case jurisdictions are unable to reach an agreement to resolve the dispute with the Mutual Agreement Procedure.
1 Please be aware of the possible asymmetrical application of the principal purpose test and the simplified limitation of benefits provision in combination with the principal purpose test.
Please find below an overview of the most important applicable MLI provisions and the entry into effect dates: