On December 14, 2010, the Upper House approved the new tax treaty between the Netherlands and the United Kingdom that was signed in September 2008. This means that the treaty will, in all likelihood, come into force this year, as the United Kingdom had already ratified it in February 2009. As such, the treaty will be able to be applied in the Netherlands as of January 1, 2011; in the United Kingdom the treaty will apply as of April 1, 2011, for corporate income tax purposes, and as of April 6, 2011, for personal income tax and capital gains tax.
The new treaty is a complete revision of the current treaty, which was last amended by protocol in 1989. It forms part of the further stimulation of the economic relationship between both countries, and the prevention of tax evasion.
Abolition of “corporate tie-breaker provision”
The provision regarding dual residence of companies will be replaced by a provision to the effect that the place of effective management will no longer be used as a tie-breaker in determining residence of such companies under the treaty. Instead, residence will be established by way of agreement between the two treaty countries. The aim is to be able to provide clarity on this matter within six months.
If, prior to the treaty coming into force, a company is, according to the domestic legislation of the treaty countries, considered to be both a resident of the Netherlands and the United Kingdom, and the place of residence of the company has been determined by means of the tie-breaker in the old treaty, then a request for the mutual agreement procedure does not have to be made, provided that the facts and circumstances remain unchanged. In that case, the place of residence remains unchanged.
Dividends
Under the old treaty, participation dividends are subject to a maximum dividend withholding tax of 5% where the shareholding is at least 25%. Under the new treaty, participation dividends are exempt from dividend withholding tax where the shareholding is at least 10%. In effect, not much has changed for participation dividends as an exemption has been applicable in the Netherlands for quite some time, i.e. since 2007 for a shareholding of 5% or more. In the United Kingdom withholding tax is generally not levied on dividends.
An exemption from dividend withholding tax is also prescribed for dividends paid to pension funds and charitable institutions, regardless of the size of the shareholding. It may be noted that under current Dutch treaty policy, such entities can, in certain circumstances, also claim treaty benefits.
The dividend withholding tax rate for dividends distributed to individuals and companies with shareholdings of less than 10% will be reduced from 15% to 10%.
Interest and royalties
The exemption from withholding tax on interest and royalties included in the old treaty, will be continued in the new treaty.
Capital gains
The new treaty will implement the possibility to have capital gains on shares in certain real estate companies taxed in the state where the real estate is located. For the time being, this right cannot be exercised under Dutch domestic tax law. An additional provision will be implemented in connection with the sale of shares by a former resident of one of the treaty states. This provision seems to be primarily aimed at British shareholders that emigrate to the Netherlands.
Directors’ remuneration
As a result of the new treaty, remuneration received by a director in his capacity as a member of the board of directors will be taxed in the state where the entity of which he is a director, is resident, if, and to the extent that, this remuneration is attributable to the activities performed in that state. If the director performs the relevant activities in the state in which he is resident or in a third state, the right to levy tax on the activities related to the remuneration will henceforth belong to the director’s state of residence. Under the old treaty, the right to tax is allocated to the country where the entity is resident, regardless of the activities performed, unless the remuneration relates to activities for a permanent establishment that is located in the director’s state of residence.
Pensions
The different tax treatment of pensions accrued in the context of public employment and those accrued in private employment will be eliminated, in order to reduce administrative burdens.
In principle, pensions will only be taxable in the state of residence. However, the situations in which pensions will be allowed to be taxed by the other state will be expanded. The new treaty also contains explicit prescriptions with regard to the deductibility of pension contributions paid to a qualifying pension plan in the other country.
Mutual agreement procedure
The new treaty enables arbitration proceedings to be instituted at the taxpayer’s request. Briefly summarized, arbitration will result in a binding decision concerning the levying of tax if one treaty country levies tax in a specific case in breach of the treaty, and the mutual agreement procedure between the tax authorities of both countries has not resulted in a solution within a period of two years.
Exchange of information
The provisions on the exchange of information and international assistance in the collection of tax debts have been modernized in line with OECD standards.
Miscellaneous
The new treaty contains various amendments that could be relevant for a wide variety of situations, such as treaty entitlement of hybrid entities and persons claiming British non-domiciled resident status, as well as amendments designed to prevent misuse of the treaty.