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New Netherlands-UK Tax Treaty Exempts Dividend WHT Benefitting Taxpayers
In 2008, the Netherlands and the UK signed a new tax treaty ("New Treaty") and protocol. This New Treaty and protocol will substitute the current treaty, which was concluded in 1980 ("Old Treaty"). In the Netherlands, the New Treaty entered into force on 1 January 2011. In the UK, the New Treaty will enter into force on 1 April 2011 (for corporate tax purposes) and on 6 April 2011 (for personal tax purposes).
Some provisions of the New Treaty can be considered an improvement when comparing it with the Old Treaty (e.g., lower withholding tax rates). Nevertheless, some provisions need to be taken into account in cross-border transactions. Especially certain real estate and hybrid entity structures will be affected. Taxand Netherlands discusses the most significant corporate aspects of the New Treaty.
Dividend withholding tax
Under the New Treaty, dividend distributions that are paid to the ultimate beneficial owner are tax-exempt if: the beneficial owner controls at least 10% of the voting power of the distributor, constitutes a pension fund or if it's a charitable institution. Please note that the EU Parent-subsidiary Directive also provides for a 0% rate provided the conditions are met.
Under the New Treaty, the withholding tax rate for portfolio dividends will be reduced from 15% to 10%. The New Treaty explicitly confirms that proceeds from the liquidation of a company or share purchases will be qualified as dividends.
Interest and royalties withholding tax
Like the Old Treaty, the New Treaty exempts from WHT interest and royalties payments from one contract State to the other. Because the Netherlands does not levy taxes on outbound interest and royalty payments, this exemption is mainly important for UK outbound situations, as the UK domestic WHT rates amounts to 20% (both in the case of interest and royalties). Please note that the EU Interest and Royalty Directive may also provide for an exemption of withholding tax if certain conditions are met.
Main purpose test and other anti-abuse rules
The "main purpose" test has been included in the dividend, interest, royalty and other income articles (in addition to the beneficial owner requirement). The reduced rates are not applicable, if the main purpose of the party is to rely on the benefits of this treaty, while bona fide commercial reasons are absent.
The New Treaty furthermore includes specific rules for transparent entities and interest and royalty triangular cases which are generally aimed at current planning structures involving hybrid entities and permanent establishments of Dutch companies to which interest / royalty is attributed.
Changes to the tie-breaker rule and dual listed companies
The New Treaty does not contain a typical tie-breaker rule based on the place of effective management. Instead a mutual agreement procedure should be followed if an entity resides both in the UK and the Netherlands. The entity will not be entitled to most treaty benefits if no mutual agreement can be reached.
Dual listed companies (for example Reed Elsevier and Unilever) will only be considered a resident of the state under which laws it has been incorporated provided that it has its primary stock exchange listing in that state.
The new treaty exemption for dividend withholding tax does not apply to dividends paid by certain real estate investment vehicles (such as a UK REIT and a Dutch fiscal investment institution). A 15% dividend withholding tax rate applies to distributions by these real estate investment vehicles.
The capital gains article in the New Treaty provides that under certain conditions the source country rather than the home country of the shareholder has the right to tax gains on the sale of non-listed real estate shares.
The New Treaty is in general beneficial to taxpayers as it, for example, includes an exemption from dividend withholding tax. The New Treaty however also includes new measures which should be reviewed when setting up new structures and in current structures. Especially real estate investment structures and certain planning structures using hybrid entities and foreign permanent establishments need to be reviewed carefully.
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