GT Alert

United States and The Netherlands Sign Protocol to Income Tax Treaty

March 2004
By the Amsterdam Tax Department

  View or download the PDF version of this Alert here.

1. Introduction

On March 8, 2004, the United States and The Netherlands signed a Protocol to the existing 1992 income tax treaty. This Protocol further improves the environment for cross-border trade and investment by bringing down certain tax barriers and lightening the administrative burden.

The Netherlands, European point of entry for many importers and exporters, is the third largest investor in the United States, whereas the United States is by far the largest investor in The Netherlands. At the end of 2002 the Dutch had invested over $155 billion in the U.S. At the same time, U.S investments in The Netherlands amounted to over $145 billion.

The Protocol contains various elements that serve to stimulate the long-standing economic relationship between the two countries. The most significant changes are the following:

• elimination of withholding taxes on certain inter-company dividends;
• elimination of branch tax under certain conditions;
• modernization of “limitation on benefits” provisions; and
• facilitation of contributions to exempted pension trusts.

2. Elimination of Dividend Withholding Tax

The Protocol provides for a full elimination of withholding taxes on certain dividends. Dividends are not subject to withholding tax if the beneficial owner of the dividends has owned directly shares representing at least 80% of the voting power in the company paying the dividends for a 12-month period ending on the date the dividend is declared and the beneficial owner:

1. owned, directly or indirectly, shares representing at least 80% of the voting power in the company paying the dividends prior to October 1, 1998; or
2. is a “qualified person” under the “limitation on benefits” provisions in the treaty; or
3. is not a “qualified person” but meets certain other requirements that are laid down in the “limitation on benefits” provisions; or
4. does not pass the “limitation on benefits” test but is nevertheless granted the benefits of the treaty by the competent authority of the state in which the income arises.

3. Elimination of branch profits tax

Under the income tax treaty between the U.S. and The Netherlands, the branch profits tax rate is reduced to 5%. The Protocol now provides for a full elimination of branch profits tax if certain conditions are met, which conditions largely correspond with those attached to the elimination of dividend withholding tax as mentioned above.

4. Modernization of “limitation on benefits” provisions

To prevent inappropriate exploitation of the income tax treaty, the treaty contains “limitation on benefits” provisions. The Protocol provides for simpler, clearer, and more effective provisions. As a result, more persons are allowed access to the income tax treaty, the administrative burden for persons that claim treaty benefits is substantially relieved, and the provisions are more effective in denying treaty benefits to those not entitled to them.

5. Facilitation of contributions to exempted pension trusts

A new provision will be included in the treaty on the basis of which employees who are temporarily employed in one of the states can continue their pension schemes in the other state without any adverse tax consequences. Contributions paid by or on behalf of such employees to the exempted pension trust during the period of their temporary employment or self-employment in the other state are deductible (or excludible) in computing the employee’s taxable income. As a result, the fiscal and administrative barriers for overseas employment are significantly reduced.

6. Entry into force

The Protocol will enter into force after ratification and notification thereof by both countries. The provisions shall have effect:

• in respect of taxes withheld at source, for amounts paid or credited on or after the first day of the second month next following the date on which the Protocol enters into force; and
• in respect of other taxes, for taxable periods beginning on or after the first day of January in the year following the date of entry into force of the Protocol.

7. Conclusion

The most eye-catching element in the Protocol is the full elimination of withholding taxes on certain inter-company dividends. Combined with the Dutch participation exemption, under which all dividends and capital gains arising from a qualifying shareholding are tax-exempt, The Netherlands’ comprehensive tax treaty network and its membership of the European Union, the Protocol enhances the appeal of The Netherlands as a gateway to Europe and the rest of the world for U.S. investors.

© 2004 Greenberg Traurig

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