Offsetting WHT Only in Developing Countries EU-compliant

22/03/24

The Dutch Supreme Court has ruled that Article 36 of the 2001 Unilateral Decree for the Avoidance of Double Taxation (the Decree) is not contrary to the free movement of capital. According to Article 36 of the Decree, a credit against Dutch corporate income tax is provided for dividend, interest, royalty income paid from a payer resident in a developing country and subject to tax there, whether or not at the source.

The developing countries designated in Article 6 of the Unilateral Decree are countries with which no double taxation treaty has been concluded with the Netherlands (i.e., non-treaty countries).

For royalties received from countries that are (i) not designated as developing, and (ii) with which no tax treaty exists, the Decree provides that taxes withheld on such income are not creditable against other taxes, but instead constitute a deductible expense.

What does this mean for your organisation?

If your organisation receives dividend, interest or royalties from a company residing in a non-tax treaty and designated developing country, and taxes are imposed there, you're eligible to claim (under conditions) a credit against the Dutch corporate income tax for taxes paid abroad.A distinction is therefore made between developing countries and those that are not. The Supreme Court has established that this difference does not conflict with EU law.

The designated developing countries for 2023 are Afghanistan, Angola, Belize, Benin, Bhutan, Bolivia, Burkina Faso, Burundi, Cameroon, Cambodia, Cape Verde, the Central African Republic, Chad, Colombia, the Comoros, Congo, Congo (Dem. Rep.), Djibouti, El Salvador, Eritrea, Eswatani (formerly Swaziland), Gambia, Guatemala, Guinea, Guinea-Bissau, Haiti, Honduras, Iran, Iraq, Ivory Coast, Kenya, Kiribati, Korea (Dem. People's Rep.), Kosovo, Kyrgyzstan, Laos, Lebanon, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Micronesia, Mongolia, Mozambique, Myanmar, Nepal, Nicaragua, Niger, the Palestinian Autonomous Areas, Papua New Guinea, Peru, Rwanda, Samoa, São Tomé and Principe, Senegal, Sierra Leone, the Solomon Islands, Somalia, South Sudan, Sudan, Syria, Tajikistan, Tanzania, Timor-Leste, Togo, Tokelau, Tuvalu, Vanuatu and Yemen.

The 2023 list is identical to the list for 2022.

Facts

In 2015, a Dutch-based BV provided crane and trailer rentals and technical support services to its subsidiary located in Uruguay (referred to as the subsidiary). The subsidiary paid the company for these services (referred to as royalties), withholding 12% Uruguayan withholding tax, amounting to EUR 149,850, which was remitted to Uruguay. The company declared a loss in its corporate tax return for 2015, including the EUR 149,850 Uruguayan withholding tax as deductible expenses. The tax return was formalised by the Dutch tax authorities accordingly. The company proceeded to contest this in a tax appeal, arguing that the Uruguayan withholding tax - instead of deducted as an expense - should be credited as foreign tax against its corporate tax under Article 36 of the 2001 Unilateral Decree for the Avoidance of Double Taxation. In consultation with the company the tax authorities interpreted the appeal as a request for a subsequent tax assessment and adjustment by the tax authority. The tax authorities accordingly proceeded and assessed the corporate tax liability at a decreased amount. The tax authorities also issued a decision assessing any creditable source tax carry forward at an amount of nil. This opened the procedural route for litigating the matter of source tax credibility eligibility through the Dutch court system.

Dutch Supreme Court: difference in treatment that does not relate to objectively comparable situations

The Dutch Supreme Court initially noted that for tax purposes in 2015, Uruguay should be considered a non-treaty country, while not being classified among the designated developing countries.

According to the Court, EU law does not mandate EU Member States to compensate for a disadvantage endured, such as juridical double taxation, resulting from two states simultaneously applying their tax rules. However, the Court stated that when an EU Member State opts to provide for such a compensation, it must do so in accordance with EU law. This is the case with the Decree, as it permits, in specific cases involving payments from developing countries, the offset of the foreign-paid source tax.

Following this, the Court noted that Article 36 of the Decree introduces a difference in treatment concerning royalties paid by a company tax resident in a non-treaty country, depending on whether this country is designated as a developing country. In this context, the Court observed that the Decree dissuades a company based in the Netherlands from providing technical services in non-treaty countries not designated as developing countries. This is because offsetting the withholding tax is not feasible in such a scenario, unlike in cases where the non-treaty country is designated as a developing one. In essence, we observe that the rules give rise to a horizontal discrimination as two cross-border situations are mutually treated differently.

A difference in treatment is not permissible if it pertains to objectively comparable situations or cannot be justified by an imperative reason in the public interest. In this regard, the Court determined that the difference in treatment introduced by the Decree does not concern objectively comparable situations. According to the Court, given the objective of the Decree, which is to remove fiscal barriers to investments in developing countries, investors in such countries are neither factually nor legally in an objectively comparable situation with investors in countries that are not considered developing ones, like Uruguay.