Application Of The 1992 US-Netherlands Tax Treaty

This is contribution number seven by KPMG Meijburg & Co regarding the application of the 1992 US-Netherlands tax treaty.

This article is most likely to be relevant for investments by Dutch companies in the United States.

On May 10, 1994, the Netherlands Ministry of Finance issued procedures under which Netherlands taxpayers can request a Netherlands tax inspector to issue a declaration that the taxpayer is entitled to benefits under the 1992 U.S. - Netherlands Treaty. The procedures are implemented by a Resolution of the Ministry of Finance dated May 4, 1994.

According to the Ministry, the procedures have been issued after consultation with the U.S. tax authorities. The procedures will allow a Netherlands taxpayer to request the competent Netherlands tax inspector to issue a declaration ("IB 93 USA") that, in the inspector's opinion, the taxpayer is entitled to the benefits of the Treaty. The declaration may be issued to the effect that one of the tests under Article 26 of the Treaty (Limitation on Benefits) have been met, or that the taxpayer is not subject to the higher (15 percent) U.S. withholding tax in "triangular cases" involving interest and royalties.

It should be noted that only the U.S. competent authority can grant discretionary benefits to Netherlands taxpayers under Article 26(7). Therefore, if Netherlands taxpayers wish to request discretionary benefits, they must first apply to the U.S. competent authority. If such benefits are granted, the taxpayer may then request a declaration from the competent Netherlands tax inspector. In practice, however, it would appear that such a declaration would not be necessary, since the taxpayer would already be in possession of a statement from the U.S. authorities.

Under the procedures, the Netherlands tax inspector will be required to review detailed information from the Netherlands taxpayer in respect of the group structure, projected income, etc. It should be noted that this information may ultimately be available to the U.S. tax authorities. The Resolution contains detailed "flow charts" which are intended to be used by the tax inspector in evaluating the case for treaty benefits. If the inspector determines that treaty benefits are available, or that the lower withholding rates in triangular cases are applicable, he may issue a declaration to this effect. The declaration can then be provided by the taxpayer to the U.S. withholding agent.

The declarations issued under these procedures are not binding on the U.S. tax authorities, nor do they relieve the taxpayer from providing the U.S. withholding agent with the required U.S. forms (e.g. Form 1001). Nevertheless, if a declaration is issued, such declaration may create a presumption that a taxpayer is entitled to the benefits of the Treaty. The declaration may also provide additional protection to U.S. withholding agents under the "reason to know" standard for assessing penalties for failure to withhold tax. In addition, it should be noted that the Netherlands tax inspectors are required by the procedures to issue their determination within eight weeks of a request. The declaration is valid for a period of one year and may be extended for an additional two years if there has been no material change in the facts and circumstances since the original request. Therefore, the procedures may provide a relatively quick and simple means to obtain additional assurance that the benefits of the U.S. - Netherlands Treaty will be available to Netherlands taxpayers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

Further information can be obtained from Mr Alfred GM Groenen, MCL, KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247

Business briefing Publishing Ltd, 1997 Tel +44 171 820 7733.