Publicatiedatum

12-4-2012

Tax Flash: New Dutch German income tax treaty 2012

undersigned
After decades of negotiation rounds Germany and the Netherlands
have undersigned a new double tax convention ( the Treaty ) on
April 12, 2012. The existing tax treaty dates back from 1959, even
before the first (1963) version of the OECD Model Tax Convention (
OECD MTC ). The main changes to the Treaty concern treaty
entitlement, permanent establishment, business profits, income from
capital/withholding tax rates, and anti-abuse measures. The Treaty
will enter into force as from January 1st of the year following the year
in which the Treaty will have been ratified. It seems unlikely that the
Treaty will be ratified before the end of this year. Assuming that
ratification will be in 2013, the Treaty will only enter into force as from
January 1st, 2014.
Treaty entitlement
The Treaty uses the standard residency clause (Article 4) of the
OECD MTC. However, the Protocol to the Treaty gives some special
rules for Dutch resident entities and for hybrid entities. All Dutch
resident entities for Dutch corporation tax purposes qualify as Dutch
treaty residents, even in case such entity is tax exempt (such as
pension funds, investment vehicles ( FBI and/or VBI ), and charities).
With respect to hybrid entities the Treaty only provides for the OECD
MTC framework solution for resolving allocation conflicts in inbound
situations. All other cases of double (non-) taxation related to hybrid
entities must be solved by the MAP. Furthermore, the Treaty contains
special rules for fiscally transparent partnerships and
investment/mutual funds (like the Dutch disregarded mutual fund:
besloten FGR ) for claiming treaty benefits by the general partner/fund
manager on behalf of the partners/investors.
Permanent establishment
In line with the OECD MTC and the existing tax treaty, a building site
or construction or installation project will be deemed to constitute a
permanent establishment if it continues longer than 12 months.
Certain projects are considered together (e.g. same contractor or
economically or geographically related). Unlike the OECD MTC and
the current tax treaty the Treaty contains an offshore clause. Offshore
projects are qualified as permanent establishments, unless the

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duration is less than 30 days in the last 12 months.

Business profits
The Treaty uses as one of the first Dutch tax treaties the new (2010)
Article 7 OECD MTC. The Treaty also follows the standard OECD
provisions where it concerns associated enterprises. This implies the
introduction of a mutual agreement procedure with arbitration clause
for transfer pricing disputes. For shipping, inland waterway transport
and air transport the effective place of management remains decisive
with a special rule for situations where the effective management is
aboard the ship.
Income from capital withholding tax rates
As already is the case under the current tax treaty, there will be no
withholding taxes for interest and royalties. With respect to dividends,
the general withholding tax rate will still be 15%. A reduced 5%
withholding tax rate applies to inter-company dividends if the
beneficial owner of the dividend is a company with a direct or indirect
shareholding of 10%. Furthermore, a withholding tax rate of 10% will
apply if the beneficial owner of the dividend is a qualifying pension
fund resident in the Netherlands.
Dividends
The notion of dividend also includes distributions by German
investment funds. Further, it is explicitly provided for that both
liquidation proceeds and income from the redemption of shares fall
under the scope of the dividend article. Another deviation from the
current tax treaty concerns the treatment of dividends or interest
arising from rights or debt-claims participating in profits (including
income from typical silent partnerships). Such dividend or interest
payments may be taxed in the state of source if they are taxdeductible for the debtor.
Capital gains
The capital gains article contains a special provision for shareholdings
of 50% or more in companies the assets of which consist for 75% or
more of immovable property in the other contracting state. Capital
gains which a resident of a contracting state derives from the
alienation of such shares may be taxed in the other contracting state
unless they arise in the course of a reorganization.
Substantial shareholdings ( aanmerkelijk belang )
The Treaty also includes special provisions dealing with capital gains
and dividends to safeguard the right of the prior state of residence of
an individual to enforce the levy of its exit taxes with respect to
substantial shareholdings in case of emigration.
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Income from employment

The major changes in the Treaty are:
- The employment income is taxable in the working state, unless the
exception under the 183-days rule applies. In line with the OECD
MTC, to meet the 183 days test (among certain other criteria) the
physical presence in the working state must not exceed in the
aggregate 183 days in a 12 months period commencing or ending in
the relevant tax year. According to the current tax treaty the reference
period is a calendar year.
- The right to levy tax on remuneration for labour performed aboard a
ship or aircraft operated in international transport or aboard a boat
engaged in inland waterways transport will be allocated to the country
of residence of the employee. Under the current tax treaty the
remuneration in principle is taxable in the country in which the
company operating the ship, aircraft or boat has its place of effective
management.
- Fees paid to (supervisory) directors and other similar payments
derived by a resident of one of the states in his capacity as a member
of the (supervisory) board of directors of a company which is a
resident of the other state may be taxed in the state in which the
company is resident. Avoidance of double taxation is provided for by
using the tax credit method.
- The income of artistes and sportsmen may be taxed in the state in
which the personal activities are exercised (subject to exceptions),
also in case a third party is entitled to the remuneration.
- Pensions and other similar remuneration (including state
pension/social security pension) will in principle be taxable in the state
of residence only. The state from which the pension is paid will,
however, also be entitled to levy tax if the gross payment exceeds
EUR 15,000 in the calendar year and only to the extent that a tax
relief was granted in that state with respect to contributions paid.
- The Netherlands and Germany have agreed to a compensatory
measure (additional personal income tax relief) for cross-border
workers (i.e. employees, directors, artists, sportsmen and persons
performing government services) resident in the Netherlands if the
total amount of tax and social security contributions exceeds the
Netherlands personal income tax and National Insurance premiums
which would have been due if the person had been solely taxable and
subject to National Insurance premiums in the Netherlands.
Anti abuse
In Article 23 of the Treaty, it is explicitly mentioned that this Treaty
does not prohibit the States to apply national tax measures to tackle
tax avoidance. Should this lead to double taxation or the taxable
person is of the opinion that the taxation is not in accordance with the
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Treaty, this person can apply for a mutual agreement procedure

whereby the competent authorities of both States will consult together
for the elimination of double taxation.
This reference to national anti-abuse measures provides in particular
Germany the right to apply the German national anti-abuse measures,
such as the general fraus legis measure, measures dealing with the
use of a non-German (intermediary) holding company for an
investment in a German company in order to avoid withholding tax
(anti-treaty-shopping) and CFC-rules. Germany applies these
measures already under the existing tax treaty, irrespective of treaty
override discussions.

DISCLAIMER
Although this publication has been compiled with great care, Loyens
& Loeff N.V. and all other entities, partnerships, persons and practices
trading under the name 'Loyens & Loeff', cannot accept any liability
for the consequences of making use of this issue without their
cooperation. The information provided is intended as general
information and cannot be regarded as advice.

2012 Loyens & Loeff