Corporate tiebreaker in Treaty between the Netherlands and Singapore explained by the Supreme Court | Deloitte Nederland

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Corporate tiebreaker in Treaty between the Netherlands and Singapore explained by the Supreme Court

The Supreme Court has ruled that the term “managed and controlled” in the Tax Treaty between the Netherlands and Singapore is not different from the term “effective management” in the OECD Model Tax Convention.

9 July 2021

Where a company is established for tax purposes is of great importance for the application of tax treaties and more specifically for the allocation of taxing rights. It often happens that an entity is considered a resident of both Contracting States, a so-called ‘dual resident entity’, in which case a dual resident provision determines of which state such an entity shall be deemed to be a resident for the purposes of that treaty. The Dutch Supreme Court recently ruled on this matter in the context of the tax treaty between the Netherlands and Singapore, in which it is determined that a dual resident corporation is deemed to be resident in the state in which it is “managed and controlled”.

Cross-border dividend payments after emigration

The interested party (“X BV”), a company incorporated under Dutch law with its registered office in the Netherlands, functions as the personal holding company of a Dutch resident individual who is the sole shareholder (“shareholder”). In 2006, the shareholder emigrated to Saint Martin. Prior to emigration, the shareholder resigned as director of X BV and (an employee of) a trust established in Singapore had been appointed as the new director. From that moment on, X BV changed its registered address to an address in Singapore and has been taxed as a resident of Singapore.

In 2010, X BV pays out three dividend payments with a total of EUR 34,5 million to the shareholder. The inspector took the position that X BV was not established in Singapore and therefore imposed additional dividend withholding tax assessments on X BV. Before the Court of Appeal it was disputed whether the Dutch levy of dividend withholding tax on the dividend distributions is limited by either the Tax Regulations for the Kingdom (“TRK”) that applies between the Netherlands and Saint Martin or the tax treaty between the Netherlands and Singapore (“the Treaty”).

Managed and controlled

As the TRK does not limit the Dutch levy of dividend withholding tax if an entity is fully subject to Dutch taxation, the Court of Appeal had to assess whether X BV should be regarded as a resident of Singapore for treaty purposes. According to the Court of Appeal, X BV qualified as a resident of both the Netherlands and Singapore, and for this reason it applied the so-called dual residency tie breaker of Article 3(4) of the Treaty, according to which a taxpayer is a resident of the State in which it is “managed and controlled”. The Court of Appeal ruled that X BV was primarily managed and controlled in the Netherlands, considering the influence of a Dutch tax firm and the shareholder’s son, who resided in the Netherlands, on the relevant key business decisions of X BV.

In cassation, X BV took the position that the Court of Appeal incorrectly interpreted the term “managed and controlled”. To this end, X BV argues that a tax advisor does not take business decisions with respect to a corporation belonging to his clientele. However, the Supreme Court dismissed the appeal in cassation as unfounded. It ruled that the term “managed and controlled” in Article 3(4) of the Treaty does not imply anything different from the term “effective management” in Article 4(3) of the OECD Model Tax Convention. Further, the Supreme Court notes that it cannot be assumed that a tax advisor never makes business decisions with respect to a corporation belonging to his clientele. Nor does the fact that the business decisions were taken in consultation with the shareholder inevitably lead to the conclusion that the shareholder is the director. Therefore, the Court of Appeals’ judgment does not show any error or law, nor is it incomprehensible or insufficiently substantiated.


Source: HR 2 July 2021, 20/01212, ECLI:NL:HR:2021:1044.

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