Netherlands: Multilateral instrument (MLI) now part of tax treaties

Netherlands: MLI now part of tax treaties

The “multilateral instrument” (MLI) is now part of tax treaties between the Netherlands and the following countries—Australia, Canada, Finland, France, Georgia, India, Iceland, Israel, Japan, Latvia, Lithuania, Luxembourg, Malta, New Zealand, Austria, Norway, Russia, Serbia, Singapore, Slovakia, Slovenia, the United Arab Emirates, the United Kingdom, and Sweden.


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The date the MLI enters into force may differ per country and per tax (refer to a list of all dates). The Ministry of Finance has published a similar list. As a rule of thumb with regard to withholding taxes, the MLI now applies to all treaties with the countries listed above with the exception of Latvia (1 January 2021), Sweden, and Russia.

Note that a large number of treaties—including treaties with Belgium and Poland—do not come into consideration for the MLI because these are still being renegotiated. It is expected that they would contain the same provisions as in the MLI.

Principal purpose test

The principal purpose test (PPT) is the general anti-abuse provision in the MLI and also the provision that will have the most impact. The PPT provides if obtaining treaty benefits is one of the main reasons for an arrangement or transaction, then treaty benefits will not be granted, unless the granting of these treaty benefits is in line with the spirit and intent of the relevant treaty provision.

There is still a lot of uncertainty about the explanation and interpretation of the PPT in the various countries. The relatively superficial and subjective test (“one of the main reasons”) makes the PPT an easy argument for tax authorities to use to combat (alleged) treaty abuse. However, the OECD has provided several examples that can be used as guidance for interpreting the PPT.

Dual residency determined on the basis of a mutual agreement procedure (MAP)

The tax residence of a dual resident will in the future be determined on the basis of a mutual agreement procedure. As long as this procedure has not been completed, treaty benefits cannot in principle be applied. The Netherlands has recently taken the “sharp edges” off this provision by, for example, stipulating that if the state of residence has already been determined on the basis of a current treaty, it is not necessary to submit a new request for a MAP. However, this is subject to conditions.

Amending the definition of permanent establishment

The MLI applies the permanent establishment (PE) concept in accordance with definitions arising from the base erosion and profit shifting (BEPS) Action 7. The Netherlands has made an important reservation with regard to the provisions combating the artificial avoidance of a PE by means of commissionaire arrangements. The Netherlands will only apply this provision once there are clear rules about the profit attribution to agency PEs or if there is effective conflict resolution with sufficient MLI partners. The reservation does not apply to other MLI provisions relating to PEs—for example, the provisions covering the splitting of contracts, the PE in a third country and the distinctions concerning preparatory and support activities, and the anti-fragmentation provisions.

Holding period for reduced withholding tax on dividends

The Netherlands has opted to apply Article 8 of the MLI. Consequently, a reduced withholding tax rate is only allowed under matching treaties if a holding period of 365 days has been met.

If the Netherlands is the distributing entity, this provision will have little relevance in light of the broad national dividend withholding tax exemption that has no holding period. However, the holding period may be important if the Netherlands is the recipient country. The 365-day period does not necessarily have to be completed before the dividend is distributed; it can also be met after the participation has distributed the dividend. It is however still unclear how the withholding or refund in the source country will be dealt with in practice.

Tax on capital gains on real estate companies

The Netherlands has opted to have the capital gain realized on the sale of shares in real estate companies take place in the country where the real estate is located. The right to tax can, thus, change dramatically in respect of real estate arrangements set up for the purpose of selling property via (untaxed) share transactions. The question is, of course, whether arrangements that were set up for the purpose of having the right to tax such capital gains untaxed fall in the Netherlands are not already affected by the PPT.

Read an April 2020 report prepared by the KPMG member firm in the Netherlands

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