On November 9, 2011, the tax treaty between the Netherlands and Switzerland, that was signed in February 2010, entered into force. It will apply to tax years and tax periods that commence on or after January 1, 2012. Until then, the provisions in the old treaty will still apply. However, the treaty will have retroactive effect from March 1, 2010, in respect of the exchange of information. Some important aspects of the new treaty are summarized below.
Exchange of information
As a result of international pressure, Switzerland amended its treaty policy on the exchange of information. Consequently, Switzerland agreed to exchange information in tax matters if so requested; a stance that also applies to its relations with the Netherlands. This exchange of information not only relates to the application of the tax treaty, but also to requests for information regarding the tax levied on the taxpayer. Switzerland may no longer use banking secrecy as a ground for refusal once the treaty enters into force. “Fishing expeditions” are not permitted, and the treaty countries are also not required to automatically or spontaneously exchange information. The new provision for the exchange of information will apply to requests made on or after November 9, 2011. These requests must concern information relating to facts arising after February 28, 2010.
To this end, the Netherlands and the Swiss authorities signed an additional agreement at the end of October 2011. To receive information, the Dutch Revenue does not necessarily have to know the name of the party or bank in question. Other data, for example a bank account number, are sufficient for a request for information to be made. The additional agreement also applies as of November 9, 2011.
Dividends
Under the old treaty, participation dividends were subject to a refund of dividend withholding tax for shareholdings of at least 25%. Under the new treaty, an exemption will apply to shareholdings of at least 10%. However, the exemption will not apply if the relationship between the parent company and the subsidiary was primarily created, and is maintained, in order to benefit from this dividend provision. In addition, a dividend withholding tax exemption will apply to dividends paid to pension funds, regardless of the size of the shareholding. Under current Dutch treaty policy, such entities can also claim treaty benefits. The treaty further entitles the Netherlands to tax emigrants on whom a protective assessment has been imposed in respect of a substantial shareholding in an entity. Should Switzerland also tax this dividend, the Netherlands will refund up to 10% of the amount of dividend (the source state credit).
The dividend withholding tax rate remains 15% for dividends distributed to individuals and companies with a shareholding of less than 10%.
Interest and royalties
Under the new treaty, the source country can no longer tax interest; under the old treaty this tax was set at a maximum of 5%. The current withholding tax exemption for royalties will continue to apply.
Capital gains
The new treaty provides for the possibility to have the capital gains on shares or other company rights in certain real estate companies taxed in the state where the real estate is located. It is currently not possible to exercise this right under Dutch domestic tax law. The Netherlands will also have considerably more opportunity to tax the disposal of shares by a substantial interest holder who was previously resident in the Netherlands, if a protective assessment that had been imposed on this individual is still wholly or partially outstanding.
Pensions
The new treaty removes the distinction between pensions accrued in public employment and pensions accrued in private employment. In principle, pensions will still only be taxable in the state of residence. However, there will be more situations where pensions may be taxed in the other state. The new treaty also explicitly provides for the deductibility of pension contributions paid to a qualifying pension scheme in the other country.
Directors’ remuneration
Under the new treaty, the salary paid by a Dutch resident company to a director who is a Swiss resident, will continue to be subject to tax in the Netherlands and in Switzerland on a 50/50 basis. However, a new provision in the treaty allows directors’ remuneration to be taxed in Switzerland if it was paid by the Swiss permanent establishment of a Dutch resident company and relates to directors’ activities performed on behalf of the permanent establishment.
Joint consultation procedure
The new treaty allows the taxpayer to request arbitration. In summary, arbitration results in a binding decision on the tax levy if, in the case in question, the tax authorities regard the tax as not being in accordance with the treaty, or if joint consultation between the tax authorities fails to solve the issue within three years.
Place of residence
The provision on a company’s double residency has been replaced in the new treaty by a provision in which the place of residence is no longer determined by the location of the registered office, but by the place of effective management. As of January 1, 2012, this can have a number of important consequences for those situations where the place of residence of a company incorporated under Dutch law was, in the past, relocated to Switzerland.
Miscellaneous
The new treaty contains various amendments that could be relevant to a variety of situations. In addition, the treaty contains amendments concerning whether hybrid entities can claim treaty protection. The allocation of profit to a permanent establishment based on the principle of praecipuum has also been withdrawn, as has the premium-fraction method that was mandatory under the old treaty when determining the profit of an insurance company’s permanent establishment.