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New OECD Commentary and Short-Term Assignments


A Decree published on January 12, 2010 gave the Dutch State Secretary of Finance's view on the Dutch interpretation of the concept of employment. The Decree states that for the concept of employer under the Treaty, the decisive factor is: who has the power of authority in the employment relationship and who bears the remuneration. In addition, a so-called "60-day"rule was introduced for short-term assignments. For assignments of less than 60 days in a 12-month period, the employer in the work state is deemed to have no authority and not to bear any risks that may result from the employees' employment activity. Taxand Netherlands examines the compliance regulations behind this decree relative to the latest OECD commentary and its impact on the Dutch interpretation of the concept of employment.

The newly-released OECD commentary has been broadened with respect to who is deemed to be an employer under Article 15, and to bring Article 15, paragraph 2 (PE) in line with the amendments made to Article 7 (Profit Allocation to PE's).

This raises the question as to what impact the new OECD commentary will have on the Dutch Decree of January 12, 2010.

Taxand Netherlands first deals with the situation in which a foreign company has no presence in the Netherlands through a legal entity, demonstrating that the presence of a PE for corporate income tax purposes is, in certain cases, not relevant for wage tax withholding obligations. Secondly, Taxand Netherlands focuses on the intra-group assignments with legal presence in the Netherlands.

Corporate income tax - PE
In the Netherlands, there is no legal definition for the concept of a PE. From a Dutch perspective, the OECD definition is used in addition to the domestic case law definitions. In general, a PE is deemed to be a fixed place of business that acts as an independent undertaking, e.g. a branch or factory etc. In particular, with respect to activities such as maintenance, development / software development, implementation, construction, services or project management, the activities should be double-checked to determine whether they may lead to a PE. For such activities, the duration of a project or contract could be the decisive factor in the PE analysis.

In addition, an employee acting as a permanent representative could trigger corporate income tax. To determine whether there is a permanent representative, one needs to establish whether the employee has the authority to conclude contracts on behalf of the company.

It is therefore possible that the assignment of employee(s) to the Netherlands for activities may lead to a taxable presence in the country for corporate income tax purposes and, in this case, compliance requirements would have to be met.

Wage tax / Income tax - PE
Foreign entities with a PE in the Netherlands must withhold wage tax on remuneration paid to their employees working in the Netherlands. Should the employee spend less than 183 days in the Netherlands, the question then arises whether such remuneration is borne by the Dutch PE. In general, the Netherlands interpretation of this question is in line with the OECD interpretation, which states that the actual allocation / deduction of the remuneration to the PE is not relevant, but the fact that these costs belong to the PE is determinative. However, the new OECD commentary includes an exception that so-called notional charges are not determinative of whether the remuneration is borne by the PE.

As stated above, Dutch wage tax law does not include a framework to determine the presence of a PE. However, national law deems certain activities to have been undertaken by a PE for wage tax purposes. For example, hiring out personnel to third parties in the Netherlands is deemed to have been undertaken by a PE. This includes the secondment of personnel by employment agents and foreign companies to a third party in the Netherlands. Such situations often lead to investigations and tax claims. Foreign companies should register with the Dutch Tax Authorities to obtain a Dutch wage tax number so as to fulfill their wage tax withholding obligations.

Wage tax / Income tax - Intra-group
The Decree of January 12, 2010 emphasises that the power of authority of the employer and who bears the employment costs are decisive when determining who is an employer under Article 15. Although the new OECD commentary actually recognises a formal and an economic approach, it puts more weight on the economic approach. Under the economic approach, the activities of the employee should actually form part of the business of the enterprise where the activities take place, and the risks of the activities should be for the account of this employer. This shows that the interpretation of employment may differ in various countries, which may lead to double taxation.

Based on the new OECD commentary, the economic approach to the concept of employment is, in principle, more balanced than the Dutch interpretation as presented in the Decree. In addition, the Dutch authorities presented the practical "60-day rule" for intra-group secondments. As the OECD commentary recognises the fact that short-term assignments should not immediately lead to taxation, we feel that the State Secretary should approve the applicability of the "60-day rule" in PE-situations. How this rule will be dealt with, whether the economic approach will be brought in line with the new OECD-commentary and whether the "60-day Rule" in PE situations will apply will depend on the policy of the State Secretary.

Taxand's Take

The secondment of employees by a foreign company to the Netherlands is likely to give rise to tax compliance requirements. Tax issues may arise with respect to corporate income tax. However, from a wage tax perspective, the presence of employees in the Netherlands may already lead to a wage tax liability irrespective of whether or not there is a PE for corporate income tax purposes.

The Dutch approach to the economic employment seems only partly in line with the OECD-commentary. We recommend prior verification of how a state deals with cross-border employee activities to ensure compliance with local requirements.

Your Taxand contact for further queries is:
Chris van Wijngaarden
T. +31 20 757 09 40

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