Netherlands tax treaty policy – anti abuse and substance

The Netherlands has announced a review of it tax treaty policy with developing countries. It appears that this is a political judgement which balances the fact that the Netherlands doesn’t want to give up its attractiveness as a holding company location but has been under pressure and scrutiny about the ability to flow income through the Netherlands from Lesser Developed Countries.

Earlier this year it was announced that the Tax Treaty with Tunisia was undergoing an amendment to terminate the additional tax sparing credit. The amendment comes into effect on 1 January 2011. To quote from the Dutch government website:

“A tax sparing credit means that the Netherlands sets off more taxes than the taxes that have actually been paid in the source country. The measure was originally intended in order not to counteract the lower rates used by Tunisia so as to attract investments for the stimulation of the economy by still levying in full in the Netherlands. But because the treaty does not refer to specific stimulating measures, the Netherlands actually grants a general subsidy to investments in Tunisia.

The Tax Treaty between the Netherlands and Tunisia dates from 1995. It lays down that the tax sparing credit can be terminated after fifteen years. The Netherlands has used this opportunity, also because of the fact that such agreements have not been made with similar countries in the region (such as Morocco).”

The announcement on 30 August, again from the Dutch government website, on tax treaty policy addresses anti abuse provisions.

“The Netherlands will improve tax transparency and update tax treaties with low-income countries and low middle-income countries. Tax treaties with Zambia and 22 other poor countries will be revised to allow the incorporation of anti-abuse clauses where necessary. This was announced by Ploumen, Minister for Foreign Trade and Development Cooperation and Weekers, State Secretary for Finance in a letter to the Dutch Lower House in which they also responded to studies by SEO Amsterdam Economics (SEO) and the International Bureau of Fiscal Documentation (IBFD).

The Netherlands has tax treaties with over 90 countries. The studies show that these international treaties of the Netherlands are not out of line compared to tax treaties of other countries. However, the tax treaty with Zambia, stemming from 1977, is outdated, and most treaties comprise no anti-abuse clauses. This, among other things, means that their unintended use continues to be a risk in the Netherlands.

Ploumen: ‘By making use of loopholes in tax treaties in combination with differences between national tax rules, internationally operating companies can avoid paying tax. It means that poor countries miss out on tax revenues, funds they clearly need for matters such as infrastructure and education.’

The Netherlands wants to help developing countries put a stop to this loss, preferably by means of internationally binding measures.

Weekers: ‘The Dutch government favours a worldwide tightening of the rules and greater transparency through consultations in the OECD, G20 and the EU. Measures taken by the Netherlands on its own cannot prevent companies from using a different route; they merely shift the problem. But there are some things we can do. And so we will focus our efforts on improving transparency.’

The government is taking the following measures:

General measures

  • The substantial activity requirements (companies must run genuine      risks in the Netherlands and the actual management of the company must be      conducted in the Netherlands) will apply to more companies.
  • The Netherlands will inform its treaty partners spontaneously when,      in retrospect, a company turns out not to meet the substantial activity      requirements. Thanks to this improved information exchange with the source      country, that country will be in a position to deny the treaty benefits to      a company.
  • Information exchange will also apply to particular financing      companies that have obtained advance certainty.
  • The Tax Administration will process requests for a tax ruling from      holding companies (these companies receive dividends from non-residents      and pay out dividends to non-residents) only if the group in which they      operate has sufficient ties with the Netherlands.

Specific measures aimed at low-income countries and low middle-income countries

  • The Netherlands will suggest to Zambia that the treaty, dating from      1977, be renegotiated and that anti-abuse provisions be included in the      new treaty. The Netherlands will also approach the other low-income      countries and low middle-income countries to see if they wish to add      anti-abuse clauses to the existing treaties. In concluding new treaties,      what anti-abuse clauses they could incorporate will be given careful      consideration in close consultation with the partner countries. As a      follow-up to the IBFD study mentioned above, the tax treaties with other      developing countries will be reviewed to see if they might be conducive to      unintended risks of tax evasion.
  • The Netherlands provides technical assistance to strengthen tax      administrations in low-income countries and low-middle income countries so      that they can collect more tax revenues, reduce the number of unnecessary      tax exemptions and combat tax evasion and tax avoidance. This support will      be expanded wherever possible. If necessary, the government will release      extra funds for this purpose.”

So the key changes are the requirement for greater substance in terms of Dutch holding companies, the spontaneous exchange of information including for finance companies and the tighter rules on the flow through of dividends through Netherlands to third countries.

The Netherlands is also concerned that they don’t lose their competitive position hence the reference to OECD,EU etc, see both Weekers and Ploumen’s comments above.

These changes show that the BEPS process is having a real effect on international tax policy and that we can expect more emphasis on transparency, exchange of information and the use of anti abuse clauses. Presumably these measures will have little effect on Dutch based multinationals both due to their substance in the Netherlands and the fact that they are not using the Netherlands as a conduit. The burden will fall on non-Dutch multinationals and one would expect that they will need to review their Dutch structures in the light of these changes. What will be interesting is to see whether other holding company jurisdictions follow the Dutch lead? And whether the Dutch government looks at either the role dutch entities play in US European tax planning or puts pressure on the Irish government through either the EU or OECD.

Finally, I would recommend to you the short video on the BBC website from Stephanie Flanders where she explains how the fictitious “Big Bizz Co” avoids high tax bills. Concise and accurate and importantly what non tax think.

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