News Flash Japan-Netherlands tax treaty

The Dutch Ministry of Finance recently confirmed that as a result of completion of the mutual ratification procedure, the new tax treaty between Japan and the Netherlands will be effective as from 1 January 2012.

The tax treaty makes it more interesting for Japanese companies to invest in the Netherlands and to structure via the Netherlands. It strengthens even further the position of the Netherlands as the ‘gateway to Europe' for Japanese companies. According to the Ministry, the low source taxation in the tax treaty will result in tax obstacles to be decreased even further and the tax treaty will benefit Japan and the Netherlands for many years to come.

The most notable new features:

• 0% withholding tax rate on dividend distribution to qualifying companies (including payments from liquidation of a company;
• 0% withholding tax on royalty payments (compared to 10%-rate in the 1970 Treaty);
• Limitation on benefits clause, an anti-abuse rule with conditions strictly defined in the text of the treaty, providing in more legal certainty;
• Introduction of source taxation on capital gains from alienation of shares in companies holding real estate;
• Explicit rules for granting treaty benefits to partnerships;
• Mutual agreement and arbitration procedures, resolving issues caused by differences in application of the treaty by the two contracting states (e.g. transfer pricing issues).

For further explanation on the details of the new treaty we kindly refer to the newsflash we sent out in January 2011.

Combined with the Netherlands' extensive tax treaty network, the EU directives on interest, dividends and royalties as well as the favorable tax treatment on the basis of domestic Dutch tax legislation (e.g. the participation exemption, the absence of withholding tax on interest and royalty payments and the reduced tax rate on profits attributable to R&D activities), the new treaty provides ample opportunities and underlines the importance of the Netherlands as a key jurisdiction in international business relations.

Concluding remarks
As the provisions of the tax treaty will become effective as from 1 January 2012, it is advisable to timely verify that the current structures or investments can be maintained or optimized under the new tax treaty, as in a number of cases adjustments may be required or advisable. Once certain requirements are met, the tax treaty may provide in a more favorable treatment than the current tax treaty.