The new income and capital tax treaty between Ireland and the Netherlands was signed on 13 June 2019. Once in force and effective, it will replace the 1969 tax treaty between the two countries. It is expected that the new treaty will become effective on taxable events from 1 January 2021. In light of this new treaty, it is advisable to review any existing structures throughout 2020. Companies are already acting upon this, and it may be one of the reasons Alphabet, (Google’s parent company) abolished it’s so called “Double Irish Dutch Sandwich” structure as from 1 January 2020. 1969 tax treaty between the Netherlands and Ireland The 1969 tax treaty entered into force on 12 May 1970, when Ireland was not yet part of the European Union. The 1969 treaty is based on the 1963 OECD Model Tax Convention. In those days, the purposes of a tax treaty were to attribute taxation rights and to avoid double taxation. The 1969 tax treaty does not include a general anti-abuse clause. Furthermore, the amount of specific anti-abuse clauses is very limited. For example, the article regarding dividend withholding tax does not even include a beneficial ownership condition. The national rate of dividend withholding tax in the Netherlands is 15%. Interposing an Irish holding company (without real substance) in a structure was a simple solution to avoid the levy of Dutch dividend withholding tax (so called treaty shopping). Under the tax treaty, the Netherlands was not allowed to levy withholding tax on dividends paid to a shareholder in Ireland. Developments in international taxation On the one hand, anti-abuse measures were introduced in Dutch national legislation and EU Directives. More recently, as part of the Base Erosion and Profit Shifting Project (BEPS), the OECD issued the Multilateral Instrument (MLI) allowing governments to implement minimum standards in existing tax treaties to counter treaty abuse. The 1969 tax treaty between the Netherlands and Ireland is not a “covered tax agreement” under the MLI-project, because the Netherlands and Ireland were already negotiating on a completely new tax treaty for several years. On the other hand, the Netherlands decided to no longer levy withholding tax in genuine structures whereby the corporate shareholder carries on an enterprise and is a resident of an EU/EER member state or a resident of a country which has closed a tax treaty with the Netherlands. Dutch dividend withholding tax is now – in line with EU legislation and case law – only due in non-genuine structures which are used to avoid the levy of taxation by the Netherlands. 2019 tax treaty between the Netherlands and Ireland The new tax treaty has now entered force and will became effective on taxable events as from 1 January 2021. The new tax treaty includes several anti-abuse measures which are also part of the MLI-project, such as:
- The preamble mentions that the purpose of the tax treaty is not only to avoid double taxation, but also to avoid tax evasion and tax avoidance;
- Mutual agreement procedure for dual resident companies, whereby the place of effective management may no longer be decisive;
- Provisions to counter artificial avoidance of permanent establishments in the source country;
- Beneficial ownership conditions for exemption from dividend, interest and royalty withholding tax;
- Holding period of 365 days for exemption of dividend withholding tax;
- General anti-abuse clause in the form of a principal purpose test. This means that the tax treaty will not apply if obtaining a treaty benefit is one of the principal purposes of an arrangement or transaction, unless the desired outcome is in line with the object and purpose of the relevant provision of the tax treaty.
As previously mentioned, it is advisable to review any existing structures throughout 2020 because it may still be possible to restructure without incurring any adverse tax consequences. By Rob Huisman and Pascal Scheerder, HLB The NetherlandsClick here to learn more.