Netherlands Double Taxation Treaty – Taxation

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Cyprus: Netherlands Double Taxation Agreement

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On June 1, 2021, the Kingdom of the Netherlands and Cyprus signed the Double Taxation Agreement for the Avoidance of Double Taxation (the “Treaty”), which was published in the Official Gazette on June 4, 2021, the date of ratification by Cyprus .

The treaty follows the Organization for Economic Co-operation and Development (OECD) model treaty containing standard provisions for the avoidance of double taxation of income and capital, which are briefly described below:

Dividends:

The withholding tax on dividends paid to the other Contracting State is 15%, except in the following two cases for which no withholding tax (WHT) is levied if:

  • the usufructuary (BO) is a company which directly holds at least 5% of the capital of the company which pays the dividends, for a period of 365 days which includes the day of the payment of the dividend;
  • dividends paid are paid to a recognized pension fund which is generally exempt under Cypriot corporate tax law.

The interest:

There is no withholding tax on interest, as long as the beneficiary of the interest is the beneficial owner of the income.

Royalty fee:

There is no withholding tax provided that the beneficiary of the royalties is the beneficial owner of the income.

Capital gains:

  1. Cyprus retains exclusive tax rights on capital gains resulting from the sale of shares made by Cypriot tax residents, except in the following cases:
    1. Sale of unlisted shares or comparable interests which derive more than 50% of their value directly or indirectly from real estate located in the Netherlands, and
    2. Sale of shares coming directly or indirectly at more than 50% of their value: production of energy from water, sun and wind; – technical equipment or other similar goods located in the Netherlands and directly used in offshore activities. The convention includes a specific article (Article 26) limiting the right to benefits under the convention. Specifically, tax authorities have the right to deny the application of treaty benefits if obtaining such a benefit was one of the main objectives of the relevant agreement / transaction, unless the granting of this advantage is consistent with the object and purpose of the treaty.
  2. Gains from the disposal of real estate are taxable in the country where the property is located
  3. Gains from the alienation of movable property forming part of the ownership of a permanent establishment are taxable in the country where the permanent establishment is located.
  4. Gains from the disposal of ships and aircraft used in international aviation are taxable in the country where the actual headquarters of the owner company is located.

In order to implement the Base Erosion and Profit Shifting (BEPS) measures in dispute resolution and combating tax evasion, the Treaty contains a Mutual Agreement Procedure (MAP) to resolve disputes (including dual tax residency of entities) and introduced a principal object test (PPT), which allows tax authorities to deny the application of treaty benefits if the application of those benefits was one the main objectives of an agreement or transaction.

The treaty, although signed by the two countries, has not entered into force, as the legislation will have to be formally adopted by the Dutch parliament. It is suggested that the treaty could enter into force in 2022, provided that the ratification and notification procedures are finalized by both countries before 1st of December.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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