Court of Appeal opts for dynamic interpretation of treaty, but deems no economic employer

27/01/21

The Court of Appeal of Den Bosch did not deem an economic employer to be present in a case brought by PwC. In its judgment of 31 December 2020, the Court reached a different conclusion than that of the Zeeland-West Brabant District Court earlier in these proceedings. However, the Court follows a dynamic interpretation of treaties to determine whether an economic employer is present.

Judgement by Court of Appeal

The Court of Appeal stated that there was no economic employer relationship between the employee in question and an entity in Germany. To determine whether this economic employer relationship exists, the Court weighed various criteria. One of those criteria is whether the employee's remuneration is charged individually by the formal employer to the company where the employee's services are performed. The Dutch Supreme Court has previously stated in a number of judgments that individualised charging of wage costs is a necessary condition for an economic employment. However, the Court of Appeal indicated, with reference to the commentary on the 2017 OECD Model Convention, that the individualised charging of wage costs is only one of the criteria by which the treaty concept of employer must be assessed. In other words, following the Court’s judgment, the individualised charging of wage costs is not decisive for the existence of an economic employer.

However, the Court rejected the approach of the Zeeland-West Brabant District Court that, based on the OECD Commentary, it should be examined whether on the basis of the ‘arm’s length principle' the costs should have been passed on. Furthermore, the opinion of the Court of Appeal holds that there is no economic employer, mainly because of the absence of a relationship of authority between the employee and the entity in Germany. It is interesting to note that the Court of Appeal (unlike the Zeeland-West Brabant District Court) does not test whether the activities of the employee formed an integral part of the business activity of the entity in Germany.

Despite the fact that in this case the Court of Appeal did not assign the tax levy to the working state, this case confirms the dynamic interpretation of tax treaties and sheds more light on the conditions concerning individualised charging of wage costs and the presence of an economic employer. This interpretation by the Court of Appeal stipulates that an economic employer can be present sooner than under the current policy. This can apply, for example, to postings where all criteria of economic employership are met, but where only the individual charging of wage costs is missing. That being said, in the approach by the Court of Appeal, the existence of an economic employer is not as quickly assumed as in the interpretation that followed from the earlier Court decision.

Background information

In 2014, the employee involved in this case lived in the Netherlands and worked under a formal employment contract with an entity in the United Kingdom (UK). He had an international management position and performed work for the UK entity as well as a German group company. The employee was taxed in the UK and Germany respectively on income related to his days physically worked in these countries. In the Netherlands, the employee applied for a double taxation relief for its working days in the UK and Germany.

The Dutch tax authorities refused to grant double taxation relief for the income relating to German working days because they did not consider an economic employer to be present in Germany. In their view, the existence of an economic employer required that wage costs be individually charged to the company where the employee's services were performed. This position was based on judgments of the Dutch Supreme Court from 2006.

The Zeeland-West Brabant District Court, however, followed the view of the employee and ruled that there was an economic employer in Germany.

According to this Court, based on the amended OECD Commentary, it should not be examined whether the wage costs have in fact been individually charged, but whether the wage costs have been borne by the entity in the State of employment. Since the work of the employee was an integral part of the business activity of the German group company and the wages of the interested party were charged to this company on the basis of the ‘at arm's length principle', the German entity was, according to the Court, the economic employer.

The Zeeland-West Brabant District Court ruled that for the interpretation of tax treaties the dynamic method should be applied. This means that clarifying amendments to the OECD Commentary also apply to treaties concluded before the relevant amendments to the OECD Commentary took place, such as the 1959 Netherlands - Germany tax treaty, which was still applicable in 2014.

However, the Court of Appeal has stated that there is no economic employer in Germany in this case. This judgment does not solely follow from the fact that wage costs have not been individually charged, but mainly because, according to the Court of Appeal, a relationship of authority is missing between the employee and the German entity. However, the Court of Appeal does confirm the dynamic interpretation of treaties.