On 18 July 2008, the State Secretary for Finance published Decree No. CPP2007/664M on the avoidance of double taxation under tax treaties and the Tax Regulation for the Kingdom of the Netherelands (TRK). The Decree entered into force on 9 August 2008 and has retroactive effect from 18 July 2008.
The Decree integrates and amends previous decrees on the avoidance of double taxation under tax treaties and the TRK. In addition, the Decree contains clarifications and a number of new policy decisions. The most important matters include:
(a) The avoidance of double taxation with respect to foreign employment income. Based on the decision of the Netherlands Supreme Court (Hoge Raad der Nederlanden) of 23 September 2005, the exemption for foreign employment income is calculated by means of the following formula:
[A x C] divided by [(365 or 366) - B]
A = foreign working days and sickness days on which the taxpayer would have worked
B = weekend days and annual private and public holidays
C = taxable employment income
The Decree defines the term "holidays" as the paid vacation days actually taken, and not the number of paid vacation days to which the employee is entitled.
(b) The cost deduction of foreign taxes. Instead of applying a credit method, the taxpayer can opt for a cost deduction with respect to foreign tax. This option can be made per country and is available only if the taxpayer does not opt for the overall method to avoid double taxation. However, if the overall method is applied, the option for the cost deduction remains available for tax withheld by a country:
|-||with which no tax treaty was signed;|
which provides for a tax credit; and
|-||which does not qualify as a developing country.|
Furthermore, it is not possible to opt for the cost deduction with respect to an unused part of a credit for foreign withholding tax that was carried forward.
(c) The application of the credit method to debentures if the purchase and sales price includes a compensation for accrued interest. The Decree indicates that the numerator for the calculation of the credit is equal to:
the interest compensation received, less the interest compensation paid, at the time of purchase of the debenture; plus
the interest compensation received at the time of subsequent sale of the debenture.
(d) Timing issues surrounding foreign withholding tax on dividends, interest and royalties. The treatment of the foreign withholding tax on dividends, interest and royalties withheld in the year following the year in which dividends, interest and royalties are included in the taxable income in the Netherlands. In principle, foreign dividends, interest and royalties are included in the taxable income of companies (Box III) in a year preceding the year in which foreign withholding tax is imposed. As such, no credit is available at the moment of taxation since no foreign tax has been withheld as yet. To avoid double taxation, the Decree provides that the Netherlands will grant a credit for the foreign withholding tax in the year it is actually withheld (i.e. the year following the year of taxation in the Netherlands of dividends, interest and royalties).
Decree on reduction, exemption and refund of withholding tax on dividends under tax treaties published
In the Official Gazette of 30 July 2008, Decree of 18 July No. CPP2008/1537M on the reduction, exemption and refund of withholding tax on dividends under tax treaties was published. The Decree, which applies from 1 August 2008, amends the general rules for avoidance of double taxation on dividends under tax treaties concluded by the Netherlands and the special rules applicable under the tax treaties concluded with Switzerland, the United States and under the Tax Regulation for the Kingdom of the Netherlands, applicable to Aruba and the Netherlands Antilles. The most important details are summarized below.
Reduction or refund of withholding tax on portfolio dividends
With respect to dividend payments on hybrid loans or profit-sharing bonds, authorized representatives may submit to the tax authorities a general authorization document when applying for the reduction or refund of withholding tax on dividends paid. Previously, the authorization document was required for each single request for reduction or refund of withholding tax on portfolio dividend.
Representatives of non-residents
Representatives of non-residents may file requests for the refund of withholding tax on dividends electronically, provided certain conditions are met (inter alia, a minimum of 25 requests in each electronic application). This possibility does not apply to Swiss residents.
Collective request for refund by transparent foreign entities
Transparent foreign entities may, under certain conditions, make a collective request for the refund of withholding tax on dividends for all their individual and corporate participants/investors resident in their state of establishment or a third state. The most important conditions are that certain data and a certificate of residence for each participant, dividend note or other documentary proof on the dividend payments must be provided. A certificate of residence submitted to tax authorities remains valid for a period of 2 years.
To avoid abuse, each participant must participate in the transparent entity for at least 1 year.
The collective request procedure does not apply to a collective investment entity under the tax treaty between the Netherlands and Belgium. However, such entity may file the request from the tax administration for non-residents (Limburg/Buitenland, P.O. Box 2865, 5401 DJ Heerlen) the administrative conditions under which a collective request for refund can be made.
Refund of withholding tax on dividends for entities and organizations that are not subject to corporate tax
Exempt pension funds, non-profit organizations and government institutions established in a treaty state may, on the basis of reciprocity, request a full or partial refund of withholding tax on dividends.
With effect from 1 January 2007, exempt pension funds, non-profit organizations and government institutions established in an EU Member State may always request a full or partial refund from withholding tax on dividends, since reciprocity is no longer required.
Tax treaty with Switzerland
(a) Exemption procedure. An exemption from withholding tax on dividends paid to a Swiss recipient will only be granted for qualifying participations of at least 25% in a Dutch company. Otherwise, the exemption does not apply and a refund must be requested. A request for an exemption can be made either by the Dutch company paying dividends or the Swiss recipient.
(b) EU-Switzerland Savings Directive Agreement. The Decree clarifies that the tax treaty between the Netherlands and Switzerland prevails if it provides for a more beneficial treatment of dividends than the EU-Switzerland Savings Directive Agreement.