Introduction
Today, on 15 November 2011, the adoption by the Senate (Eerste Kamer) of the Dutch Parliament marked the final substantial step of the Dutch ratification procedure of the new income tax treaty concluded by the Netherlands and Japan on 25 August 2010 (the "Treaty"). Barring certain formalities[1], the Treaty should become effective as per 1 January 2012 and as of that date, for instance, the 0% Dutch dividend withholding tax rate may apply.[2] The Dutch State Secretary of Finance ("State Secretary") expects that the Treaty will positively contribute to economic activity in the Netherlands so the Netherlands could remain the "Gateway to Europe" for Japanese companies.
This Tax Alert will not reiterate the more comprehensive discussion of the Treaty (for more details see Stibbe Tax Alert 26 Augustus 2010), but will describe certain clarifications made to the Treaty (such as regarding residency and beneficial ownership) as it was guided through the Dutch Parliament.
- Residency
Fiscal investment institution - The State Secretary stated that he assumes that according to Japan fiscal investment institutions (fiscale beleggingsinstellingen or "fbi") which are not exempt from taxation, but subject to a 0% Dutch corporate income tax rate, would - in line with Dutch tax treaty policy - qualify as resident for Treaty purposes.
Exempt investment institution - The State Secretary indicated that there may be reasonable doubt whether Japan would be willing to grant Treaty benefits, for instance, regarding dividends or interest paid from Japan to a Dutch resident exempt investment institution (vrijgestelde beleggingsinstelling or "vbi"[3]).
Closed mutual funds - With respect to closed mutual funds (besloten fonds voor gemene rekening or "FGR"), which are considered tax transparent for Dutch tax purposes, the State Secretary noted that although the Japanese Ministry and the Japanese tax authorities do not seem to dispute its tax transparent status, Japan is not yet willing to conclude a competent authority agreement (like the ones with Canada (see Stibbe Tax Alert of 9 June 2010), Denmark and the United Kingdom).[4]
Dual resident entities - The corporate tie-breaker determining the residency of dual resident entities (resident in both Contracting States under their respective domestic tax laws) allocates residency to the Contracting State in which its head or main office is situated. The State Secretary stated that the term "head or main office" has been included at the explicit request of Japan, but no difference is intended with the common OECD corporate tiebreaker based on the "place of effective management". According to the State Secretary in this respect various factors should be taken into consideration such as where the management board meetings take place, where senior management conducts its tasks, where the general management takes place, where the headquarter is located and where the administration is conducted. There seems to be some tension with Dutch case law in which has been decided that, absent nominee type situations, the effective management resides in the board of managing directors and the place of effective management is there where they exercise their authority.
Remittance limitation – The State Secretary indicated that the remittance limitation (if only a remittance of an item of income triggers taxation, this will apply to the related Treaty benefits also) has been included in the residency clause to achieve that the Netherlands do not have to grant Treaty benefits if for instance a Dutch resident individual relocates to Japan for a limited amount of time and would, based on its domestic tax law, not (yet) be effectively taxed on its worldwide income in Japan.
- Beneficial ownership
In order to be entitled to certain Treaty benefits – i.e. the reduced withholding tax rates on dividends, interest and royalties and the other income clause - the recipient should qualify as beneficial owner of that income. The State Secretary noted that the commentary to the OECD Model Treaty – which according to the exchange of notes shall take the interpretation of the term "beneficial owner" into consideration - does not result in a unequivocal description of the term beneficial owner. The State Secretary noted that both Japan and the Netherlands seek to apply the dynamic method of interpretation, under which the most recent OECD Commentary should prevail. We note that the State Secretary's statement is only a unilateral statement and its merits may therefore be limited. Also this statement seems to be at odds with article 3, paragraph 2, of the Treaty.
Furthermore, at the request of Japan, a specific anti-abuse provision has been included in the dividends, interest, royalties and other income clause, that under certain specific conduit ("back-to-back") situations the recipient of the income is not considered the beneficial owner and is therefore not entitled to the reduced withholding tax or absence thereof under the Treaty.[5] The State Secretary noted that given the detailed description of the anti-abuse provision in the dividends, interest, royalties and other income clause of the Treaty, it should not be too easily concluded that there is a back-to-back situation as a result of which a person can not be considered beneficial owner. It would however, generally be Japan, and not the Netherlands, that would apply this anti-abuse provision, so the State Secretary's comment seems of limited value.
- Capital gains
In deviation from the Dutch tax treaty policy, the capital gains clause in the Treaty provides, at the request of Japan, that the source country - rather than the country of residence of the shareholder - has the right to levy taxes on gains realized in connection with the sale of shares in a company or of interests of a partnership or trust where the shares or the interests derive at least 50% of their value, directly or indirectly, from immovable property situated in the source country. However, such capital gains may only be taxable in the country of residence of the shareholder if the relevant class of shares or interest is traded on a recognized qualifying stock exchange and the shareholder, together with its related persons, owns in the aggregate 5% or less of that class of shares or the interests.
In addition, also at the request of Japan, capital gains derived by a resident of a Contracting State on shares acquired in a financial institution resident in the other Contracting State which has received substantial financial assistance from the other Contracting State, may be taxed in the other Contracting State provided that the alienation is made within five years from the first date on which such financial assistance was provided. This provision does not apply to shares acquired before the entry into force of the Treaty or pursuant to a binding contract entered into before the entry into force of the Treaty.
- Miscellaneous
Interest clause – the definition of "interest" in the Treaty, contains certain additions compared to the OECD Model Treaty which were included at the request of Japan: (1) all other income that is subjected to the same taxation treatment as income from money lent by the tax laws of the Contracting State in which the income arises, is also regarded as interest and (2) income dealt with in the dividends clause shall not be regarded as interest for Treaty purposes (e.g. interest on loans that function as equity). In addition, in deviation from the OECD Model Treaty, penalty charges for late payment are not excluded from the definition of interest.
Arbitration – On 1 September 2010 the Netherlands and Japan signed an implementing arrangement regarding the (application of the) arbitration procedure. The implementing arrangement lays down further rules for, inter alia, the time for submission of the case to arbitration, the relevant information to be provided, the selection, eligibility and apportionment of arbitrators, and the implementation of the arbitration decision. The implementing arrangement in principle applies to requests for arbitration after the Treaty becomes effective.
Grandfathering - The entry into force clause provides for a grandfathering clause that where any person entitled to benefits under the current treaty would have been entitled to greater benefits thereunder than those under the Treaty, the current treaty will, at election of such person, continue to apply in its entirety for the period of twelve months from the date on which the provisions of the Treaty otherwise would apply. This may be the case in situations where a person does not qualify under the LOB-clause. However, even then a person may still request the competent authority of the other Contracting State to confirm its entitlement to Treaty benefits. The State Secretary stated that such requests will be settled in a timely manner so a taxpayer would – in case the request would be rejected – have sufficient time under the grandfathering clause to make the necessary changes to its business model before 1 January 2013.
Tokumei Kumiai – Under the Protocol of the Treaty, Japan preserved its right to withhold tax, in accordance with its domestic tax laws, on any income and gains derived by a Dutch resident person pursuant to a silent partnership (Tokumei Kumiai or "TK") contract or other similar contract. The State Secretary noted that the Dutch tax inspector will, based on Dutch domestic tax law, determine the qualification of income derived from a TK and who will be considered recipient of that income. Whether the Netherlands will grant an exemption or credit for the avoidance of double taxation will depend on the facts and circumstances of the specific situation. The State Secretary noted that a ministerial decree may be published in the future regarding situations under which uncertainty exists on the avoidance of double taxation under the Treaty.
Final remarks
The Treaty becoming effective as per 1 January 2012 is an important milestone in more than 400 years of trade relationships between the Netherlands and Japan. As it was guided through the Dutch Parliament the State Secretary repeatedly emphasized the importance of the Treaty – and the application as of 1 January 2012 - given the volume of the mutual investments[6] and the economic boost it will bring as a result of, for instance, the 0% Dutch withholding tax for certain dividends, interest and royalties. It is expected that the Treaty will stimulate mutual investments and further strengthen the economic ties between the Netherlands and Japan.
In addition, the income tax treaties concluded by the Netherlands with Hong Kong[7] and Switzerland will also generally become effective as per 1 January 2012.[8]
