The new Double Tax Treaty between Germany and the Netherlands
On 12 April 2012, the new Double Tax Treaty (“DTT”) was signed between Germany and the Netherlands. The DTT, expected to take effect from 1 January 2016, replaces the present treaty of 16 June 1959. The main changes relevant, in particular, for international investors are highlighted below.
The new DTT relies for residence of a person on the domicile or the place of residence for individuals and the place of management or the place of incorporation of a person other than individuals. In addition, according to the DTT, the person must also be liable to tax in one of the contracting states. For that condition to be satisfied, it is, in principle, adequate that the person is subject to tax and need not actually be liable to pay tax. Existing tax exemptions (e.g. in the case of a fiscale beleggininstelling or a vrijgestelde beleggininstelling) are generally not detrimental to the application of the DTT.
If an individual is resident in both contracting states, that person is deemed to be resident in the contracting state where he/she has his/her permanent home. If the individual has a permanent home in both contracting states the “tie-breaker” looks to the person’s centre of vital interests, his habitual abode and citizenship to determine residence. In cases other than individuals, in the event of dual residence, the place of actual management is to be relied on.
Profits of a permanent establishment
The provisions on apportionment of profits between the headquarters and the permanent establishment (PE) are revised by the inclusion of the “functionally separate entity approach” principle (Authorized OECD Approach). Accordingly, for purposes of the profit allocation, it is assumed that the PE is legally independent. In order to calculate the profits attributable to the PE, one first allocates the functions, chances, risks, assets and equity between the headquarters and the PE. The profit of the PE is then ascertained by applying the OECD transfer pricing guidelines.
The DTT defines dividends as income from shares and similar rights and extents the definition, among others, by income from German funds (Investmentvermögen). The state of residence of the recipient of the dividends continues to have the right to tax the dividends while the source state has the right to levy withholding tax. The DTT provides a reduction in the domestic rate of withholding tax (current rate in Germany is 26.375% and in the Netherlands 15%) to 5% if the beneficial owner of the dividends directly holds at least 10% of the capital of the distributing company. This is an improvement from the old treaty where the reduction to 10% applied if an interest of at least 25% was held. In all other cases, as before, a reduction to 15% is applicable.
The contracting state in which the beneficiary of the interest/royalties is resident continues to have the right to tax such income.
Under the DTT income from hybrid instruments, which is tax deductible at the level of the debtor, is exclusively taxable by the source state. The term hybrid instruments comprises rights or receivables from profit participations, income from silent partnerships or profit-sharing loans or profit obligations. Ultimately, this means that income from hybrid instruments from German sources is subject to withholding tax at the rate of 26.375% (potential reduction to 15.825% for non-resident corporations under the limitations of the German anti-treaty-shopping provisions). Hence, income from profit-participating loans which was, under the old treaty, treated as interest income will now be subject to withholding tax. However, income from typical silent partnerships or profit obligations was already treated under the old treaty as dividend income. Existing structures should be reviewed to assess whether steps should be taken in light of these new provisions.
The taxation of capital gains on the sale of shares in real estate companies has been amended under the DTT. In general, such capital gains will be taxed in the state in which the real estate is located, if more than 75% of the assets of the company consist of immovable property. Capital gains resulting from the sale of shares in Dutch PropCos which hold German real estate, remain unaffected, as Germany only has the right to tax such gains under national law if the Dutch PropCo has its place of management in Germany. Since Dutch PropCos usually do not have their place of management in Germany because of trade tax considerations, Germany must not tax gains from the sale of the PropCos.
Elimination of double-taxation
In principle, Germany continues to apply the exemption method (Freistellungsmethode) for the elimination of double taxation. However, the exemption method only applies if the Dutch income is actually taxed in the Netherlands (“subject to tax clause”). In addition, dividend income is only exempted in Germany if the recipient holds directly at least 10% of the shares in the Dutch company and the dividend is not deducted for tax purposes in the Netherlands (“correspondence principle”). This is intended to prevent certain hybrid structures in which a tax deduction is achieved in the Netherlands and the income is tax-exempt in Germany. In addition, the exemption method only applies to business profits and dividends if the German recipient furnishes evidence that the Dutch PE/distributing company generates income almost exclusively from active trade (“activity test”). If these conditions are not met, double taxation in Germany can only be avoided by the credit method (Anrechungsmethode). In the Netherlands, the elimination of double taxation is achieved by applying a combination of exemption and credit method.
Mutual agreement procedures/Exchange of information
The DTT provides for the right to initiate mutual agreement procedures in cases where double taxation has not been eliminated. Further, the DTT authorizes the contracting states to exchange information significant for the administration and enforcement of tax.
The DTT leads to a modernisation of the attribution of the taxation rights between Germany and the Netherlands. Apart from lots of formal changes, from a German point of view the new provisions on the residence and the method article (subject to tax clause, correspondence principle and activity test) are particularly relevant.
Any questions? Please contact: Katrin Gänsler
Practice Group: Tax & Private Clients