The Netherlands did not have to grant relief for work performed in Germany | Deloitte Netherlands

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The Netherlands did not have to grant relief for work performed in Germany

The Supreme Court has ruled on whether a group company qualifies as an effective employer for the purposes of the 1959 Netherlands-Germany tax treaty.

26 October 2022

Introduction

X lives in the Netherlands and has a managerial position. The holding company of the group (A Inc.) for which he works is established in the United States. X reports to the CEO of this holding company. X is employed by the UK based group company B Ltd., but also works for the German subsidiary C GmbH. B Ltd. charges management fees to C GmbH. The amount of those fees depends on the turnover of C GmbH. Parties dispute whether X is entitled to double tax relief for the work performed in Germany for C GmbH. In this context, the question is whether C GmbH is the effective employer of X as referred to in the 1959 Netherlands-Germany tax treaty.

Judgment of the Court of Appeal

The Court of Appeal of ‘s-Hertogenbosch did not uphold X’s argument that the Netherlands, as the State of residence, must follow the interpretation of the concept of ‘employer’ by the source State, Germany. The Court of Appeal ruled that the requirement of charging wage costs on an individual basis cannot be regarded as a ‘conditio sine qua non’ for qualification as employer as referred to in the treaty, but only as one of the relevant criteria for doing so. With this, the Court deviated from previous Supreme Court guidelines. Because X does not make it plausible that he works under the authority of C GmbH, C GmbH does not qualify as X’s employer for the purposes of the Netherlands-Germany tax treaty. Therefore, X was not entitled to double tax relief for the work performed in Germany for C GmbH. X lodged an appeal in cassation against this judgment, but the Supreme Court declared it to be unfounded, on 14 October 2022.

Supreme Court guideline

As early as 1 December 2006, the Supreme Court rendered a number of judgments on the interpretation of the concept of ‘employer’ as referred to in the tax treaty. According to these judgments, an employer can be said to exist as referred to in a treaty, and in accordance with the OECD Model Tax Convention (‘OECD MTC), if:

(a) a relationship of authority exists between the employee and the company in the State of employment; and

(b) the work is performed for the account and risk of that company.


If a legal employer established outside the State of employment pays the wages, an additional requirement is that the legal employer must charge on the wage costs on an individual basis, to the company for which the work is performed.

Amendments to the OECD Commentary

In 2010, the OECD Commentary was subsequently amended with respect to the criteria applicable to the qualification of an entity as an employer under the tax treaties. In this commentary, the primary condition is that the work forms an ‘integral part of the business’ of the company for which the work is performed. If that is the case, the OECD Commentary also lists a number of supporting criteria for concluding whether a particular entity can effectively be regarded as an employer for the purposes of the treaty. In addition, the OECD commentary recommends that in case of a conflict of qualifications, in situations of abuse, the approach of the source State should prevail.

A-G opinion

A-G Niessen opined that the commentary on Article 15 OECD MTC of 2010 is relevant when applying the 1959 Netherlands-Germany treaty (dynamic interpretation). He further opined that the interpretation by the source State of the concept of ‘employer’ is decisive in the application of the tax treaty. The AG therefore disagreed with the Court. If Germany considers C GmbH to be X’s employer, the Netherlands would have to follow suit. The Netherlands did make a reservation in the commentary on Article 23A and 23B OECD MTC, in which the State of residence is instructed to follow the source State in the event of a conflict of qualifications. But that reservation was explicitly not made in the commentary on article 15 OECD MTC. If the Netherlands were not to grant relief, while source State Germany does levy, there would be double taxation. This would be contrary to the purpose of the treaty (principle of effectiveness).

Supreme Court judgment

However, in its judgment of 14 October 2022, the Supreme Court ruled that the Netherlands does not have to grant relief for wages relating to time worked in Germany. The Supreme Court argues that the OECD commentary is of great importance when interpreting a treaty, especially if it predates the conclusion of the treaty (anterior commentary). If the commentary dates from after the conclusion of the treaty (posterior commentary), though, it is only relevant if it specifies or clarifies the relevant provision of the OECD MTC or a treaty-anterior commentary. In this case, the commentary dates from after the conclusion of the 1959 Netherlands-Germany treaty, and it does not involve any specification or clarification either. The Supreme Court therefore ruled that in this case, the Netherlands need not follow the State of employment Germany in interpreting the term ‘employer’ in the treaty. The Supreme Court interprets the term employer based on its own guidelines of 1 December 2006. Since this now no longer involves charging on X’s wage costs from B Ltd to C GmbH on an individual basis, C GmbH is not considered an employer as referred to in the treaty. Hence, X is not granted double tax relief for the wages relating to the time worked in Germany.

Deloitte analysis

Although in this case the stakeholder loses his proceedings, the 2010 OECD Commentary does have great importance for interpreting the term ‘employer’ in tax treaties concluded after 2010, including the current Netherlands-Germany treaty. When applying post-2010 treaties, a ‘nature of services test’ should be carried out, with which it is important to check whether the work is an ‘integral part of the business’ of the company for which it is performed. The OECD Commentary argues that the criterion of directly charging the salary is just one of the factors to be taken into account when applying post-2010 treaties. Given the Supreme Court’s considerations the Netherlands will, even when interpreting the term ‘employer’ in new treaties, still not necessarily have to follow the State of employment’s interpretation of that term. This is due to the Netherlands’ reservation to the OECD commentary on Articles 23A and 23B of the model convention.


Source: HR 14 October 2022, 21/00747, ECLI:NL:HR:2022:1436

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