Netherlands should follow German employer interpretation

Opinion A-G

Of importance in this case is, inter alia, the question of whether OECD commentary of a later date can be applied to an (already existing) article in a tax treaty. Both the Court as well as the Court of Appeal apply a so-called dynamic treaty interpretation. A-G Niessen indicates that new versions of the OECD commentary that provide clarification are indeed applicable to existing treaties. However, this could be different in his opinion, in case of a material change or amendment of the treaty text.  

In this previous article we discussed the viewpoint of the Court of Appeal. The Court of Appeal stated that the Netherlands does not have to follow the German qualification of ‘employer’, as this interpretation does not correspond with the approach of the Dutch Supreme Court, in which an autonomous interpretation of the concept of ‘employer’ by the state of residence can be followed. The Netherlands made a reservation to the OECD commentary, which indicates that in case of differences in interpretation, the qualification of the source country should be followed. 

A-G Niessen concludes that the Netherlands should indeed follow the interpretation of Germany in this specific case (despite the reservation to the OECD commentary), as otherwise a situation of double taxation would arise. The reservation made by the Netherlands would then come into conflict with the principle of effectiveness and the object and purpose of the treaty. The Netherlands should grant relief from double taxation. It should be noted however, that in certain situations an exception could apply and therefore the facts and circumstances of each individual case remain important.

Two other grounds were additionally brought forward in the appeal. These grounds concern the assessment of an economic employer in Germany from a Dutch perspective, in case the Supreme Court would be of the opinion that the Netherlands does not have to follow the interpretation of Germany as the source country. The A-G concludes that the Court of Appeal's ruling that, from a Dutch perspective, there is no material employer in Germany, cannot hold based on the current arguments.   

According to the A-G, the activities of the individual concerned form an integral part of the GmbH's business and the activities of the individual are also performed at the risk and expense of the GmbH. Furthermore, the A-G supports the argument that the presence or absence of the right to provide instructions is in this case not a good criteria to determine whether an authority relationship exists. In addition, the A-G does not follow the opinion of the Court of Appeal with regard to the service fee charged to the GmbH. On the basis of these points the A-G also deems these two grounds to be justified and advised referring the case to another Court of Appeal.

Background

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. 

The A-G is of the opinion that the Netherlands should follow the interpretation of source country Germany with regard to determining whether an economic employer is applicable. Therefore he advises to consider the grounds of the appeal to be justified.