On 12 April 2012, Germany and the Netherlands signed a new tax treaty and protocol. The new tax treaty avoids double taxation and prevents fiscal evasion with respect to taxes on the income of residents. Furthermore, it regulates and improves the position of frontier workers. The new tax treaty has not yet been ratified. It is anticipated that the new tax treaty will enter into effect on 1 January 2014. Following are highlights of the key features of the new tax treaty.
Dividend withholding tax is reduced to 5% if the beneficial owner is an body that holds at least 10% of all the shares in the entity that distributes the dividends. The dividend withholding tax is reduced to 10% if the beneficial owner of the dividends is a pension fund. In all other cases, the dividend withholding tax is reduced to 15%. However, the Parent/Subsidiary Directive provides for a 0% dividend withholding tax rate for qualifying European shareholders and pension funds. This provision in the new tax treaty may be beneficial for German and Dutch shareholders that do not qualify as European shareholders and pension funds under the Parent/Subsidiary Directive.
In principle, no interest withholding tax may be levied by the source state. Should the relationship between the beneficial owner and debtor result in a higher interest income in comparison to the interest income calculated between unrelated parties, the lower interest income should be taken into account.
In principle, no royalty withholding tax may be levied by the source state. Should the relationship between the beneficial owner and debtor result in a higher royalty income in comparison to royalty income calculated between unrelated parties, the lower royalty income should be taken into account.
Based on the new tax treaty, capital gains on the sale of shares are taxed in the source country. However, capital gains on real estate companies should, in principle, be taxed in the country where the real estate is located.
The new tax treaty provides for a compensation scheme for Dutch frontier workers who are employed in Germany. The new compensation scheme takes into account the Dutch tax allowance provisions, for example, Dutch frontier workers employed in Germany can deduct their mortgage interest. For residents of the Netherlands, it is therefore more beneficial to work in Germany. The new compensation scheme is therefore beneficial for the Dutch border regions.
In principle, other income is only taxable in the resident state of the beneficial owner of the income.
Various anti-abuse provisions to prevent inappropriate use of the new tax treaty are being introduced. Below we have summarised key changes in the anti-abuse provisions: (Note: the below mentioned list is not a complete overview.)
- Beneficial ownership is introduced as an explicit requirement to benefit from a reduced dividend, interest and royalty withholding tax rate
- Profit dependable loan receivables or profit dependable rights which reduce the taxable income of a German (debtor) entity should not benefit from a reduced dividend and/or interest withholding tax rate
- German or Dutch domestic law that prevents the avoidance or evasion of tax should not be hindered by the new tax treaty
- Specific rules with respect to the treatment of income from entities that are transparent for one jurisdiction and non-transparent for the other are being introduced
- Provisions for the exchange of information and assistance in taxes have been included.
Entry into force
The new tax treaty needs to be ratified in order to be enforced. It is anticipated that the new tax treaty will be effective on 1 January 2014. However, note that this depends on the ratification procedures in Germany and the Netherlands.
The new tax treaty is more in line with the OECD model treaty. The new tax treaty provides certainty and clarity with respect to investments between Germany and the Netherlands and prevents double taxation. Further clarity on certain terms and provisions should be provided in the Memorandum of Explanation of the German and Dutch governments, which should be issued in connection with the ratification of the new tax treaty.
We expect a minimal impact on existing legal structures, however, it is recommended that existing and proposed legal structures are reviewed to determine the potential impact of the new tax treaty.
For further information please contact
Mario van den Broek
T +31 23 5300 433
+31 23 5300 449