Article 1 of the USA Netherlands Tax Treaty defines the scope of the Convention. The said article originally consisted of two paragraphs; the third paragraph was added to the treaty through the protocol signed in March 2004.
Paragraph 1 of Article 1 of the USA Netherlands Tax Convention
Paragraph 1 of Article 1 of the USA Netherlands Tax Convention makes the Convention applies only to the USA and Netherlands residents only unless specifically said otherwise in the other Articles.
The above Convention uses the term ‘States’ rather than the Contracting States to define the Netherlands’ and the United States of America. Article 4 of the USA Netherlands Tax Convention defines the ‘resident’ for the treaty to be applicable.
According to Article 4, a person is treated as a resident of a Contracting State (USA/Netherlands) when he is liable to tax according to the law of the Contracting State because of:
- Domicile
- Residence
- Or other similar criteria,
- Subject to the limitations mentioned under Article 4.
In case the person is a resident of both the contracting states, then Article 4 provides the tiebreaker test to assign the tax residency to either one of the contracting states or none. Once the State of Residence is identified, the same is applicable throughout the Convention.
Certain provisions of the tax convention would not apply to the residents, for instance, Article 20 and Article 28.
Paragraph 2 of Article 1 of the USA Netherlands Tax Convention
Paragraph 2 of Article 1 describes the relationship between the Tax Convention and the Contracting States laws and other agreements between the contracting states.
The paragraph makes it explicitly clear that the treaty :
- will not interfere and restrict
- any exclusions, exemption, deduction credit, or other allowance
- which the taxpayer is provided as per the domestic laws of the contracting states, except as regards the Netherlands, concerning Article 25 (Methods of Elimination of Double Taxation) [Paragraph 2(a) of Article 1] and
- by other agreements entered into between the United States and the Netherlands.
For instance:
A deduction is allowed under the Internal Revenue Code in computing the resident of the Netherlands’ taxable income. The resident will continue to avail that deduction even under the Convention. The Convention will not increase the resident’s tax burden beyond what is permissible under the Contracting States law. Hence, the right to tax an income under the Convention cannot be exercised by the United States if the said income is not taxable under the Internal Revenue Code.
Taxpayers will always have the option to choose the domestic laws of the Contracting States of the Convention, whichever is favorable. However, the taxpayer cannot pick and choose the provisions among the domestic laws and the Convention in an inconsistent manner for avoiding or minimize the tax.
Illustration:
Mr. Cec is a resident of the Netherlands and has three separate businesses in the United States. One business is a profitable business that meets the permanent establishment criteria (say, profit is 100000$), and the other two do not qualify as the permanent establishment.
The profit/loss of the three business in the USA:
Business 1: Profit 100000$
Business 2: Loss 80000$
Business 3: Profit 20000$
As per the Internal revenue code, all the businesses are taxable in the USA, and as per the Convention, only the Permanent establishment’s income is taxable.
What are the options available with Mr. Cec?
Option 1: Opt for Internal Revenue Code, and all businesses will be taxable in the USA, and loss will be offset against the other two entities’ profit.
Option 2: Pay tax only on the income of the permanent establishment as per the Convention.
Please note that Mr. Cec cannot opt for Convention for Business 3 and Internal revenue code for Business 1 and 2 for reducing the tax impact.
Nothing in the Convention can prevent or remove the protection provided under other laws agreed between the United States and the Netherlands. But there is an exception for this general rule regarding the Netherlands, concerning Article 25(Methods of elimination of double taxation). Treaty relief from double taxation in the Netherlands differs from the statutory relief, and hence even if the statutory relief is more beneficial, the taxpayer cannot invoke it.
Paragraph 3 of Article 1 of the USA Netherlands Tax Convention
Paragraph 3 was brought in to the Convention by way of the protocol signed in the year 2004. Paragraph 3 starts with a non-obstante clause, which overrides the provisions of Paragraph 2(b) of Article 1 of the Convention.
Paragraph 3 specifically relates to the application of the Convention for dispute–resolution procedures under other agreements entered into by the United States and the Netherlands.
Article 1 (3)(a)(i) of the USA – Netherlands Tax Convention
The clause states that the notwithstanding any agreements entered into between USA and Netherlands, any dispute concerning the interpretation, application or applicability of the measures of the Convention shall be considered only by the competent authorities of the Contracting States and the procedures under Article 29 (Mutual Agreement Procedure) shall apply exclusively.
Article 1 (3)(a)(ii) of the USA – Netherlands Tax Convention
Article XVII of the General Agreement on Trade in Services covers the national treatment. Clause (ii) of Article 1 (3)(a) provides that the national treatment mentioned above will not be applicable to any ‘measures’ unless the competent authorities agree that such measure is not in the scope of the non-discrimination provisions stated under Article 28 of the Convention.
The provision does not limit the application of the most favored nation obligation of Article II of the General Agreement on Trade in Services. Because there is no most favored nation obligation in the Convention, there can be no conflict between the Convention and GATS’s most favored nation obligation.
The U.S. Model provision generally states that national treatment or MFN obligations undertaken by the Contracting States under any agreement other than the tax treaty and the General Agreement on Tariffs and Trade as applicable to trade in goods do not apply to a taxation measure unless the competent authorities otherwise agree.
Except as discussed above concerning GATS, subparagraph 2(b) of the Convention provides that if there were overlap between Article 28 of the Convention and the national treatment or MFN obligations of any agreement, benefits would be available under both the Convention and that agreement. In the event of such overlap, to the extent benefits are available under that agreement that is not available under Article 28 of the Convention, a resident of a Contracting State is entitled to the benefits provided under the overlapping agreement
Article 1 (3)(b) of the USA – Netherlands Tax Convention
For Paragraph 3 of Article 1, a ‘measure’ is a law, regulation, rule, procedure, decision, administrative action, or any similar provision or action.
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