Multilateral Instrument to change tax treaty between the Netherlands and Japan

As one of the global initiatives taken by governments and international organizations to restrict tax planning opportunities, on 7 June 2017, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument" or "MLI”) was signed by over 70 countries. Among the signatories are the Netherlands and Japan. This tax alert contains a summary of the expected consequences of the MLI for their mutual tax treaty.

Minimum standard and optional provisions

The MLI’s stated aim is to modify a large number of bilateral double tax treaties in a synchronized and efficient manner in order to accelerate the implementation of key BEPS measures. The MLI contains a “minimum standard” of steps that the participating countries have agreed to implement in their double tax treaty network. In addition, the MLI also contains a number of optional provisions for each country to adopt at their choosing. The OECD intends to monitor the implementation of the provisions of the MLI annually.

The MLI will only apply if the mutual tax treaty is a so-called ‘covered agreement’ and, with respect to the optional provisions, only if and insofar the two countries have chosen the same options on how the articles of the MLI should apply to all of their existing treaties.

Both the Netherlands and Japan have expressed that they wish their mutual tax treaty to be a covered agreement for the purposes of the MLI. Furthermore, both countries have indicated how the optional provisions in the MLI that they have chosen should affect the covered tax treaties. Neither parliaments of these signatories, however, has ratified the MLI yet, so the preliminary positions of both countries with respect to the MLI may change during the parliamentary review and ratification process.

What changes to expect

It is expected that the MLI will modify the bilateral tax treaty concluded between the Netherlands and Japan in a number of areas. For example, without being exhaustive and subject to change by parliamentary review, it is expected that the following articles of the MLI will become applicable:

• Article 4 regarding dual resident entities. The place of actual management is no longer decisive in determining the place of residence of a dual resident entity. Instead, the competent authorities of the Netherlands and Japan will determine the place of residence via a mutual agreement procedure.
• Article 7 concerning an anti-abuse measure in the form of a principle purposes test with respect to the dividend article in the tax treaty between the Netherlands and Japan. The dividend article currently does not contain a main purpose test. Therefore the implementation of the principle purposes test may have an impact in certain abusive situations. The counter-evidence rule mentioned in this article of the MLI will not be applicable.
• Article 9 concerning capital gains from alienation of shares deriving their value principally from immovable property. This article of the MLI will tighten the current capital gains article of the tax treaty between the Netherlands and Japan in the sense that the condition that 50% of the value of the shares is derived from immovable property has to be met continuously for 365 days preceding the alienation.
• Articles 10, 12, 13 and 15 concerning permanent establishments. These articles are amongst others aimed at combatting the artificial avoidance of permanent establishment status.
• Article 17 concerning corresponding transfer pricing adjustments due to the application of the ‘at arm’s length’ principle. This article will adjust the current article of the tax treaty between the Netherlands and Japan in a way which seems favorable for taxpayers as the old article provided for a conditional corresponding adjustment while the new article seems to provide for an unconditional corresponding adjustment.

Take away

Our view is that the impact on genuine business structures should generally be limited. Nonetheless, the world of international taxation is becoming more and more complex. In order to accurately determine the tax treatment of a cross-border operation several sources of law should be carefully analyzed:

• domestic tax law;
• (ii) existing double tax treaties;
• (iii) the MLI to the extent the approach of treaty partners coincides; and
• (iv) EU tax law (in some cases).

At this stage, we advise you to review your current business structure in order to assess if the MLI will impact your business and what steps you need to take to optimize your tax position.

We will keep you posted on further developments with respect to MLI ratification and implementation and the approach chosen for the tax treaty between the Netherlands and Japan.

If you have any questions or need advice on your tax and legal matters, please call us. We will be happy to assist.