The Netherlands–Switzerland Income Tax Treaty (2010) – An Analysis

The Netherlands–Switzerland Income Tax Treaty (2010) – An AnalysisThe authors, in this article, analyse the new Netherlands–Switzerland Income Tax Treaty (2010), compare it with the old Netherlands–Switzerland Income and Capital Tax Treaty (1951/1966) and the OECD Model (2008), and provide insights regarding Swiss tax law and related developments. Netherlands domestic tax implications are generally not considered.

1. Introduction and Background1

The Netherlands–Switzerland Income and Capital Tax Treaty (1951) (the “1951 Treaty”) was amongst the first tax treaties to be negotiated by Switzerland. The negotia-tions were initiated shortly after the end of World War II, as the Netherlands had at that time significantly increased its taxes and this affected Swiss investment in the Nether-lands. In February 1962, at the request of the Netherlands government, negotiations were started to revise the 1951 Treaty with regard to: (1) new Netherlands tax laws; and (2) the context of more Netherlands residents trying to evade Netherlands taxes by transferring their domicile to Switzerland. Consequently, a protocol was signed in 1966 and the revised Netherlands–Switzerland Income and Capital Tax Treaty (the “1966 Treaty”)2 entered into force in the same year.3

During the mid-1980s, both states initiated negotiations to revise the 1966 Treaty, but these were interrupted and only restarted in 2002. Both the Netherlands and Switzer-land thought that it was necessary to update the existing 1966 Treaty as a result of the many economic and tax developments since 1951 and 1966. The 1966 Treaty was also considered to be difficult to apply in practice, even for the tax authorities and specialists, due to its unusual and old-fashioned text. A final draft of a new tax treaty was initialled in November 2007, but had to be modified before entering into the parliamentary approval process. Specifically, due to the international context and follow-ing a decision of the Swiss Federal Council in March 2009, Switzerland wished to modify most of its existing tax trea-ties to adapt them, in particular, to the new standards on exchange of information.

During the consultation process on Swiss side, the ne-gotiation of a new tax treaty was generally well received. It should, however, be noted that, in November 2009, the Association of Swiss Bankers4 publicly advised the Swiss Federal Tax Administration (FTA) that they would support the adoption of the new tax treaty only if the ex-change of information clause (see section 2.27.) contained a requirement that any request made by the Netherlands should specify the name of the taxpayer and the bank, and provide a detailed description of the relevant facts.

The Association insisted on the name of the taxpayer as a sine qua non condition. However, in a public statement of February 2011, the Association took into account interna-tional developments and somewhat softened its position, but considered that, only in exceptional cases, excluding fishing expeditions and grouped requests, could exchange of information requests be accepted without the names and addresses of the taxpayer and the information holder. Following these negotiations and developments, the new Netherlands–Switzerland Income Tax Treaty (2010)5 (the “2010 Treaty”) was signed on 26 February 2010.

The authors’ approach is based on a two-step analysis of the 2010 Treaty. First, the 2010 Treaty is compared with the OECD Model (2008),6 on which the new tax treaty was based, and an article by article analysis of the 2010 and 1966 Treaties, highlighting the significant changes, is undertaken (see section 2.). Second, the authors consider the implication of the 2010 Treaty from the perspective of Swiss tax law and developments (see section 3.).

2. Analysis and Comparison of the 2010 Treaty with the 1966 Treaty and the OECD Model (2008)

2.1. Introductory remarks

As noted in section 1., the 2010 Treaty, as it was signed in February 2010, is based on the OECD Model (2008) and has not been updated to reflect the OECD Model (2010).7 The 2010 Treaty must be ratified by both the Netherlands and Swiss Parliaments. At the time of the writing of this article, the Second Chamber of the Netherlands Parlia-ment had still to approve the 2010 Treaty. With regard to

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* MAS in Business Law, Master in Swiss Law and Manager, Ernst & Young, Geneva. The author can be contacted at [email protected].

** MAS in French and International Tax Law and Assistant, Ernst & Young, Geneva. The author can be contacted at [email protected].

1. This article is based on the information available up to and including 17 June 2011.

2. Convention Between the Kingdom of the Netherlands and the Swiss Con-federation for the Avoidance of Double Taxation with respect to Taxes on Income and Capital [unofficial translation] (12 Nov. 1951) (as amended through 1966), Treaties IBFD.

3. The term “1966 Treaty” is used generically in this article to apply, inter alia, to the 1951 Treaty as amended in 1966.

4. See Swiss Banking, available at www.swissbanking.org.5. Convention Between the Kingdom of the Netherlands and the Swiss Con-

federation for the Avoidance of Double Taxation with respect to Taxes on Income (26 Feb. 2010), Treaties IBFD.

6. OECD Model Tax Convention on Income and on Capital (15 July 2008), Models IBFD.

7. OECD Model Tax Convention on Income and on Capital (22 July 2010), Models IBFD.

Eric Duvoisin* and Marie Moniez**Netherlands, Switzerland

The Netherlands–Switzerland Income Tax Treaty (2010) – An Analysis

445© IBFD BULLETIN FOR INTERNATIONAL TAXATION AUGUST 2011

provided that this does not result in double non-taxation, i.e. where the source state would deem a partnership to be transparent and the residence state would consider the partnership to be a corporation. Third, again according to the Protocol and in contrast to the 1966 Treaty which contained no such provision, pension funds and Swiss pension schemes recognized by Swiss law are considered to be resident. Fourth, yet again according to the Protocol and a new development compared to the 1966 Treaty which included no provisions on this issue, a person on a ship or a boat without a real domicile in either of the state is deemed to be a resident of the state of the home harbour of the ship or boat.

2.6. Permanent establishment

Article 5 of the 2010 Treaty is standard. It should, how-ever, be noted that, in contrast to the 1966 Treaty, a build-ing site, construction or installation project is consid-ered to be a permanent establishment (PE) as soon as the 12-month period is exceeded. Under the 1966 Treaty, such activities were not considered to be PE if they had temporary characteristics. According to the transitional rule, the 2010 Treaty only applies to activities commenced after its entry into force.

2.7. Income from immovable property

Article 6 of the 2010 Treaty is standard. Compared to the 1966 Treaty, there are no changes, except for the fact that, whilst, under the 1966 Treaty, the debt claims of a resident secured by a real estate mortgage in the source state are taxable in the residence state, there is a limita-tion of taxation at source as under article 11 of the 2010 Treaty (see section 2.12.). Accordingly, the 2010 Treaty is more favourable than the 1966 Treaty and even more than the original 1951 Treaty to the residence state in respect of debt claims secured by a real estate mortgage in the other state.

2.8. Business profits

Article 7 of the 2010 Treaty is standard. This provision has no equivalent in the 1966 Treaty. The changes intro-duced into the OECD Model (2010) regarding article 7 have not (see section 2.1.) been implemented in the 2010 Treaty. In particular, the OECD Model (2010) provides a two-step approach that differs slightly from the less struc-tured approach in the OECD Model (2008), on which the 2010 Treaty is based. For information, a tax treaty based on the OECD Model (2010) would include the following:– a functional and factual analysis; and– an application of the arm’s length principle subject

to the following changes (compared to previous ver-sions of the OECD Model): (1) the replacement of the hierarchy of transfer pricing methods and adop-tion of the principle of “most appropriate method to the circumstances of the case” in the selection of the

8. OECD, The Application of the OECD Model Tax Convention to Partner-ships (1999), Intl. Orgs.’ Docn. IBFD.

the Swiss ratification process, the 2010 Treaty has been approved by both the Chambers of the Swiss Parliament with a mandatory referendum deadline (to allow the population and/or the cantons to request a popular vote if they so wish) of the end of September 2011. The date of the entry into force of the 2010 Treaty is, therefore, yet to be determined under the relevant provisions (see section 2.30.).

It should be noted that article 14 (Independent personal services), which had already been removed from the OECD Model (2008), is still included in the 2010 Treaty. This gives rise to certain differences between the 2010 Treaty and the OECD Model (2008), which are not ad-dressed in this article.

2.2. Persons covered

Article 1 of 2010 Treaty agrees (or is standard) with the OECD Model (2008). As this kind of article was absent from the 1966 Treaty, article 1 should assist in determin-ing the scope and extent of the application of the 2010 Treaty.

2.3. Taxes covered

Article 2 of the 2010 Treaty is standard, subject to the following comments. First, capital taxes are not covered by the 2010 Treaty, as opposed to the 1966 Treaty. This should, in principle, not result in any double taxation is-sues, as, whilst Switzerland still levies cantonal and com-munal capital taxes, the Netherlands net worth tax was abolished with effect from 1 January 2001. Second, the 2010 Treaty, as with the 1966 Treaty, does not apply to taxes withheld at source on lottery prizes. In this regard, it should be noted that a 35% withholding tax applies to prizes distributed by lotteries organized in Switzerland.

2.4. General definitions

Article 3 of the 2010 Treaty is standard, except for the fact that the new tax treaty also applies to the territorial sea and the additional area under Netherlands sovereignty within Europe. This is of particular relevance for conti-nental shelf activities (see section 2.24.).

2.5. Resident

Article 4 of the 2010 Treaty is standard and does not dif-fer from 1966 Treaty except in respect of the following. First, with regard to the double residence of companies, the place of management is deemed to be the place of residence (the tie-breaker rule) as opposed to the 1966 Treaty, where the place of registration of the legal seat was predominant. Second, according to the Protocol to the 2010 Treaty (the “Protocol”) and recommended OECD practice8 and in contrast to the 1966 Treaty which did not cover this issue, with regard to fiscally transparent entities in the source or a third state, classification as transpar-ent or non-transparent by the source state determines whether or not the 2010 Treaty applies to income sourced in a state and paid to such an entity with a partner resident in the other state. This is valid and the 2010 Treaty applies,

Eric Duvoisin and Marie Moniez


2.12. Interest

Article 11 of the 2010 Treaty is standard. Compared to the 1966 Treaty, there is, however, no withholding tax, i.e. the residence state has the exclusive right to tax, whilst, under the old tax treaty, the withholding tax was 5%, i.e. there was a non-exclusive right to tax for the residence state. It is intended that any disputes as to the exclusive right to tax in respect of the residence state should be settled by mutual agreement between the states. The form of such a mutual agreement had, at the time of the writing of this article, not been discussed by the contracting states.

2.13. Royalties

Article 12 of the 2010 Treaty is standard. Compared to the 1966 Treaty, the exclusive right to tax for the residence state has been retained, but this is now stated in a specific provision as opposed to the general provision in the old tax treaty.

2.14. Capital gains

Article 13 of the 2010 Treaty is standard, subject to the following comments. Many of the differences compared to the OECD Model (2008) relate to the alienation of shares in a real estate company, which is defined as a com-pany whose assets consist, directly or indirectly, for more than 50% of immovable property. With regard to such an alienation, a non-exclusive right to tax is, in principle, granted to the real estate, i.e. not the residence state. The exceptions, which imply an exclusive right to tax for the residence state, are as follows. The first exception applies to shares quoted on a recognized stock exchange. The second exception is in respect of holdings of less than 5% in a real estate company. The third exception applies to gains derived in the course of a corporate reorganization, amalgamation, division or similar transaction. The fourth and final exception is in respect of immovable property used by a company for its own business. A further differ-ence compared to the 1966 Treaty and the OECD Model (2008) is the non-exclusive right to tax, granted to the Netherlands, in respect of the application of a “preserva-tive tax assessment” (see section 2.11.).

2.15. Independent personal services

Article 14 of the 2010 Treaty is no longer standard, as this kind of article was removed from OECD Model (2000).9 Compared to the 1966 Treaty, the following differences should be noted. First, the definition of professional ser-vices in the 2010 Treaty includes the same activities as in the 1966 Treaty, except that the activities of dentists and accountants (compared to only expert-accountants in old tax treaty) are added and those of tax advisors and of patent agents (both included in the old tax treaty) have been removed. However, this is mitigated by the fact that the definition of professional services in the 2010 Treaty is not comprehensive, but, rather, provides examples of

9. OECD Model Tax Convention on Income and on Capital (29 Apr. 2000), Models IBFD.

transfer pricing method; (2) a detailed discussion of the importance and requirements of a “comparability analysis”; and (3) the extension and refinement of the guidance provided for on the application of transac-tional profit methods, i.e. the transactional profit split and transactional net margin methods.

Article 7 of the 2010 Treaty may, therefore, leave a margin for the states to apply national methods regarding the international allocation of profits. The authors are, nev-ertheless, of the opinion that, despite the fact that article 7 of the OECD Model (2010) is not included in the 2010 Treaty, it is likely that Netherlands and Swiss tax authori-ties will use it as a reference in applying article 7 of the new tax treaty. The authors would also refer to section 3.3. on Swiss advance pricing agreements (APA), which could be of significant help to taxpayers in preventing double taxation. In contrast to the 1966 Treaty, which provided for specific rules in respect of business profits allocation for insurance companies, article 7 of the 2010 Treaty applies to companies in the insurance industry and in other industries.

2.9. Shipping, inland waterways and air transport

Article 8 of the 2010 Treaty is standard. Compared to the 1966 Treaty, the place of effective management is more detailed. Specifically, profits from a participation in a joint business or an international operating agency are now clearly subject to article 8.

2.10. Associated enterprises

Article 9 of the 2010 Treaty is standard, subject to the following. First, cost-sharing agreements are deemed to comply with the arm’s length principle. Second, corres-ponding adjustment in the second state are not auto-matic, but are, rather, subject to the approval of that state. Third, and as noted in section 2.8., the application of the arm’s length principle under the 2010 Treaty should, in principle, disregard the OECD Model (2010).

2.11. Dividends

Article 10 of the 2010 Treaty is standard. Compared to the 1966 Treaty, the following should, however, be noted. First, the holding threshold to benefit from 0% withholding tax rate on dividend is reduced from 25% to 10%. Second, the “arranged or maintained relationship” anti-abuse rule has been preserved, but it is now in the Protocol. Third, the statute of limitations within which to request a tax credit is now governed by domestic law. Consequently, for Switzerland, the deadline is now three years after the expiry of the civil year in which a divi-dend was received compared to two years under the 1966 Treaty. Fourth, pension funds and Swiss pension schemes (see section 2.5.) benefit from a 0% withholding tax rate, irrespective of any other requirements. Fifth and finally, the taxation rights allocated under article 10 do not pre-vent the Netherlands from applying a “preservative tax as-sessment” (“conserverende aanslag”) to individuals ceasing to be resident the Netherlands and holding investments at the time of their departure from the Netherlands.



such services. Second, artistes not covered by article 17 of the 2010 Treaty and, therefore, subject to article 14, are liable to an international profit allocation where activities are performed both in the residence and source states, i.e. where there is a fixed base, as opposed to the 1966 Treaty, under which the source state had the exclusive right to tax.

2.16. Dependent personal services

Article 15 of the 2010 Treaty is standard, subject to the following. The “183-day” general exception (paragraph 2) only relates to the fiscal year in question, as opposed to verification in “any 12-month period commencing or ending in the fiscal year concerned” under the OECD Model (2008). Accordingly, the 2010 Treaty may give rise to difficulties or opportunities where the fiscal years of the states do not coincide. Compared to the 1966 Treaty, there is now clarity regarding the duration test (a “183-day test” as opposed to a “temporary stay test”) and the test of remuneration not borne by employer’s PE in the source state is now a condition, whereas it was not re-quired under the 1966 Treaty. Consequently, except with regard to possible interpretations of the “temporary stay test”, the 2010 Treaty appears to be more favourable to the source state.

2.17. Directors’ fees

Article 16 of the 2010 Treaty is standard, subject to the following exceptions. First, in contrast to the OECD Model (2008), which grants a non-exclusive right to tax to the source state without exception, a Netherlands com-pany paying fixed remuneration and other payments to Swiss-resident “bestuurders”, i.e. those in charge of gen-eral management, is taxable at 50% in both the Nether-lands and Switzerland. Second, and also in contrast to the OECD Model (2008), which grants a non-exclusive right to tax to the source state without exception, a Netherlands company paying fixed remuneration and other payments to Swiss-resident “bestuurders” by reason of the exercise of activities in respect of a PE in Switzerland is taxed in Switzerland, i.e. In this case, there is a non-exclusive right to tax. This is the only difference with the 1966 Treaty.

2.18. Entertainers and sportspersons

Article 17 of the 2010 Treaty is standard, except for the following comments. First, the 2010 Treaty does not ap-ply where neither the entertainers or sportspersons nor related persons, whether or not residents of that state, participate, directly or indirectly, in the receipts or profits of another person in any way. Accordingly, the additional clause favours correctly structured “star” companies in third countries. Second, if entertainers or sportspersons are financed in respect of their activities by public funds or perform activities that take place under a cultural agreement between the states, an exclusive right to tax is granted to the residence state. Compared to the 1966 Treaty, the differences are that: (1) other interposed per-sons were not specifically addressed in the 1966 Treaty; (2) public financing and cultural agreements were not

dealt with; and (3) independent sportspersons were only taxed in the residence state.

2.19. Pensions, annuities and social security payments

Article 18 of the 2010 Treaty is not standard. First, an exclusive right to tax is granted to the residence state. Second, there is a non-exclusive right to tax for the source state if the following three cumulative conditions are met (in brief): (1) exemption, deduction or favourable tax treatment in the source state; (2) exemption or “below 90%” taxation in the residence state; and (3) the relevant income exceeds EUR 20,000. If Switzerland is the source state, the latter provision does not apply, as the pensions are taxed at the ordinary tax rate. Third, in respect of a single payment, i.e. either not periodic in nature or in lieu of multiple periodic payments, a non-exclusive right to tax is granted to the source state. Under Swiss internal law, Swiss income taxes at source are levied on Swiss-source pensions, annuities and social security payments made in favour of foreign residents. Fourth, pension capital transferred (not paid directly to the individual benefitting from the pension) from a source state to the pension capital of another state is taxable only in the resi-dence state.

Compared to the 1966 Treaty, the authors note that, on the one hand, periodic public pensions, annuities and so-cial security payments are, in the 2010 Treaty, exclusively taxed in the residence state, whereas such payments were only taxed in the source state under the 1966 Treaty. On the other hand, (1) private, non-periodic and (2) private lump-sum pensions, annuities and social security pay-ments, in both cases paid before the date of the beginning of the pension or annuity, are, under the 2010 Treaty, non-exclusively taxed in the source state, whereas such payments were only taxed in the residence state under the 1966 Treaty.

2.20. Government service

Article 19 of the 2010 Treaty is standard, except for the following. First, the situation in which a resident of the residence state provides government services for the ben-efit of the source state results in a non-exclusive right to tax for the source state, but subject to the exception in article 19(1)(b) of the 2010 Treaty. Second, pensions, an-nuities and social security payments are subject to article 18 of the 2010 Treaty (see section 2.19.) and not article 19 in contrast to the OECD Model (2008). Compared to the 1966 Treaty, under the 2010 Treaty, a person (1) residing in the residence state and (2) with the nationality of this state or who did not become a resident of that state only to provide government services, and (3) who works in that state and provides government services to the source state is exclusively taxable in the residence state. In this regard, the 1966 Treaty granted an exclusive right to tax to the source state.

2.21. Students

Article 20 of the 2010 Treaty is standard. Compared, however, to the 1966 Treaty, under the 2010 Treaty,



any payment for study purposes sourced from any state other than the study state, i.e. the source or a source third party state, is not taxed in the study state. Under the 1966 Treaty, only payments from the source state could benefit from the exclusive right to tax. In practice, it appears that one of the main differences and where the 2010 Treaty helps to avoid double taxation could be if a paying entity resident in the source state with a PE in a third state finan-cially supports a visiting student via a PE.

2.22. Other income

Article 21 of the 2010 Treaty is standard and similar to provisions in 1966 Treaty.

2.23. Elimination of double taxation

Article 22 of the 2010 Treaty is standard, subject to the following comments. First, the 2010 Treaty authorizes the Netherlands and Switzerland to compute the tax rate, but not the taxable basis, of their residents on all income whether or not they could be, exclusively or not exclu-sively, taxed in the source state. Second, the Netherlands reserves its right to apply the tax credit method to deemed passive income as defined by Netherlands law. Third, (1) with regard to capital gains realized by a Swiss resident on the alienation of shares in a Netherlands real estate com-pany and (2) entertainers and sportspersons with per-sonal activities in the Netherlands, Switzerland eliminates double taxation by exemption only after the taxation of such gains and income in the Netherlands has been dem-onstrated. This could, for example, disadvantage a Swiss resident taxpayer if Netherlands tax authorities only is-sue a tax assessment after the statute of limitation for the Swiss tax authorities to issue a tax assessment has elapsed. Fourth, with regard to non-periodic pension payments and dividends with a non-exclusive right to tax in the Netherlands as the source state, Switzerland eliminates double taxation using the following three methods: (1) a tax credit; (2) lump-sum reduction in respect of Swiss taxes; and (3) exemption, at discretion of the Swiss tax authorities. Taxpayers now, therefore, have an increased awareness of the methods for eliminating double taxa-tion, whereas, under the 1966 Treaty, such matters were governed only by internal laws.

2.24. Continental shelf activities

Article 23 of the 2010 Treaty is a specific provision and does not have any counterpart in the OECD Model (2008). It applies only to Swiss resident companies carry-ing on activities in the Netherlands, which corresponds to current Netherlands treaty policy. The main condition for the application of the article, and, therefore, for the recognition of a PE in the Netherlands, is a 30-day test. There was no such provision in the 1966 Treaty.

2.25. Non-discrimination

Article 24 of the 2010 Treaty is standard, subject to the following. First, the provision of the OECD Model (2008) regarding stateless persons is not reproduced in the 2010 Treaty. Second, a new paragraph has been added with re-

gard to pension schemes for employed and self-employed persons. This last provision was not included in the 1966 Treaty.

2.26. Mutual agreement procedure

Article 25 of the 2010 Treaty is standard, subject to the following comments. First, the method of communica-tion between states for the purpose of reaching an agree-ment is not specified. Second, the deadline before the ar-bitration procedure commences is three years rather than the OECD standard of two years. Third, the procedures regarding communication to the arbitration board and related confidentiality are included in the article. Com-pared to the 1966 Treaty, the filing upfront of a claim or an appeal under the mutual agreement procedure against a disputed tax decision is not required. The three-year deadline is also a significant improvement, as the 1966 Treaty did not provide for any time limit in which to reach an agreement. However, compared to other tax treaties negotiated recently by Switzerland, the 2010 Treaty does not include a provision on assistance in the collection of taxes.

2.27. Exchange of information

Article 26 of the 2010 Treaty is standard, subject to the following. First, information received by a state may be used for any additional tax purposes other than assess-ment, collection, enforcement and prosecution, and the determination of appeals. Such purposes must be admis-sible under the law of both states and also require that the information-providing state gives its consent. This provision should, in particular, prevent the use of sto-len Swiss bank data. Second, the 2010 Treaty extends the procedural rights of the tax authorities of the requested state to be provided with any means necessary to obtain information held by a bank, other financial institution, nominee or person acting in an agency or fiduciary capac-ity or ownership information. Third, under the Protocol to the 2010 Treaty, which was modified after signature by Switzerland and subject to approval by the Nether-lands Parliament, the requested state, in principle, only exchanges information if the information request con-tains the names and addresses of the taxpayer and of the information holder. However, names and addresses are not required if the following cumulative conditions are satisfied: (1) the information is not available to the re-questing state; (2) other sufficient information regarding the taxpayer can be provided; (3) the request is not a “fish-ing expedition”; and (4) the legal principles of propor-tionality and practicability are respected in relation to the exchange of information request and without providing any details on the information holder.

Fourth, only the exchange on request is mandatory for the states. The automatic and spontaneous exchanges of information are, therefore, at the states’ discretion. Fifth, the requesting state should have pursued all the means available to it to obtain information. Finally, there was no exchange of information provision in the 1966 Treaty. However, further to a 1970 Swiss Supreme Federal Court



3. Swiss Tax Law and Developments

3.1. Exchange of information and peer review

On 6 April 2011, the Federal Council sought authorisa-tion from the Swiss Parliament to amend the 2010 Treaty in line with internationally applicable standards on the exchange of information. Subject to certain reservations, Switzerland has accepted the concept of a “level playing field”. With this decision and its submission for approval to Parliament, the Federal Council was implementing the amendments to the requirements for administrative as-sistance requests decided on 13 February 2011. With the proposed modifications, Switzerland was also eliminating an obstacle to the effective exchange of information in tax matters, thereby reducing the threat of failure in the peer review process of the Global Forum on Transparency and Exchange of Information for Tax Purposes. Due to these and other actions, on 1 June 2011, Switzerland suc-cessfully passed Phase 1, i.e. an assessment of the quality of Switzerland’s legal and regulatory framework for the purposes of the exchange of information, of the peer re-view process.11 The positive outcome of the peer review process is subject to certain recommendations and is also obviously subject to the approval by the Swiss Parliament of the modification to the articles 26 of the various rene-gotiated tax treaties (see section 2.27. for article 26 of the 2010 Treaty).

Based on a Swiss law, which has been adopted by the Swiss Parliament, together with the ratification of the 2010 Treaty, the Federal Council will declare publicly to the Netherlands government that: (1) Switzerland will not respond to an exchange information request that, under Swiss law, is based on illegally obtained data; and (2) Swit-zerland will seek international judicial co-operation to prosecute any person who has committed or participated in the illegal procurement or transmission of information.

3.2. Swiss anti-abuse rules

3.2.1 Where Switzerland is the residence state

3.2.1.1. Opening remarks

It should be noted that, in 2010, Switzerland significantly amended its internal rules regarding its anti-avoidance rules, i.e. the strict rules and their relaxation (see sections 3.2.1.2. and 3.2.1.3., respectively). With regard to both the 1966 and the 2010 Treaties, these rules only apply to the Netherlands-source income received by a Swiss resident at the latest by 31 July 2010. Since 1 August 2010, the rules no longer apply to Netherlands-source income.

10. CH: BG, 20 Nov. 1970, i.S. X. gegen Eidg. Finanz- und Zolldepartement, BGE 96 (1970) I 733, Tax Treaty Case L. IBFD.

11. OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes, Peer Review Report: Phase 1: Legal and Regulatory Framework - Switzerland (2011), available at www.keepeek.com/Digital-Asset-Management/oecd/taxation/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-peer-reviews-switzerland-2011_9789264114661-en.

decision,10 Switzerland, in practice, exchanged with the Netherlands on request any information deemed neces-sary, but only under strict application of the 1966 Treaty. This Swiss practice was not granted in respect of only Netherlands internal tax purposes, i.e. if there was no double taxation, or in respect of bank data (with regard to tax evasion under the now outdated Swiss view).

2.28. Members of diplomatic missions and consular posts

Article 27 of the 2010 Treaty is standard, subject to the following. First, the 2010 Treaty restrictively defines who is considered to be a member of a diplomatic mis-sion and/or consular post. The criterion is that such an individual is subject to the ordinary tax obligations of the resident state. Second, the benefits of the 2010 Treaty are denied to such individuals of a third state who are also not treated as a resident of the state in terms of income tax (and who work in the other state according to the authors’ understanding of the article). The provision in the 1966 Treaty is substantially similar to that in the 2010 Treaty, except for the second exception, which did not exist in the old tax treaty.

2.29. Territorial extension

Article 28 of the 2010 Treaty is standard, but includes a clause in relation to the territory of the Netherlands. Specifically, the 2010 Treaty may be extended to the territories of the Netherlands in the Caribbean, i.e. Bo-naire, Saint Eustatius and Saba, Aruba, Curaçao, and Sint Maarten.

2.30. Entry into force

Article 29 of the 2010 Treaty provides for the following rules. The 2010 Treaty will enter into force 30 days after the date of the receipt of the last notification regarding full compliance of all internal constitutional formalities. The provisions of the 2010 Treaty will apply to fiscal years beginning on or after the first day of January following its entry into force. The exchange information provision and the related provisions in the Protocol will only apply to requests made on or after the entry into force of the 2010 Treaty, which relate to fiscal years beginning on or after the first day of March following the date of signature of tax treaty. As the 2010 Treaty was signed on 26 February 2010, this date is 1 March 2010. The 1966 Treaty will terminate on the day before the entry into force of the 2010 Treaty, but will continue to apply to fiscal years not covered by the 2010 Treaty. This provision, therefore, ter-minates the 1966 Treaty as described here and not under the provisions of article 15 of that tax treaty.

2.31. Termination

Article 30 of the 2010 Treaty is standard.



(2) the direct stock exchange test;(3) the indirect stock exchange test, i.e. where one or

more companies that meet the direct stock exchange test are the direct shareholders of a predominant in-terest (over 50% of the voting rights and nominal value) in a subsidiary; and

(4) the pure holding company test.

3.2.2. Where Switzerland is the source state

3.2.2.1. Opening remarks

The most important provisions in Swiss law, case law and the practice of the tax authorities with regard to tax trea-ties are considered in sections 3.2.2.2. to 3.2.2.6.12

3.2.2.2. General anti-avoidance

There is no general anti-avoidance provision in Swiss tax law. However, in a tax case decided in 1933, the Federal Supreme Court13 adopted the following criteria in respect of general anti-avoidance:14

Under this general anti-avoidance doctrine, the following three requirements must be met [in order for Swiss authorities to ap-ply anti-avoidance measures]: [(i)] the legal form chosen by the taxpayer is apparently unwarranted, inappropriate or unusual and, in all cases, completely inappropriate to the economic facts (the objective element); [(ii)] the choice was made merely with the intention of saving tax (the subjective element); and [(iii)] the method chosen would effectively lead to a substantial reduction in tax (the factual element).

3.2.2.3. Specific anti-avoidance in respect of withholding tax

Under Swiss withholding tax law, the refund of Swiss withholding tax is refused where this would permit eva-sion of Swiss tax, for example, on the basis of fictitious facts. The FTA has expressly stated that it would apply this provision in an international context.15

3.2.2.4. Beneficial ownership

The OECD states that “[t]he term of ‘beneficial owner’... should be understood in its context and in light of the ob-ject and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance”.16 However, the concept of beneficial owner-ship is not completely autonomous and is often defined by the contracting states in their law and/or case law. As a result of Swiss case law and the interpretation of such court decisions by most authors, the Swiss concept of beneficial ownership has the following characteristics: (1) subjectively, the person in the residence state should be

12. In this respect, the debate on Swiss case law and practice is not considered in this article.

13. CH: BG, 1 Dec. 1933, Société pour l’industrie de l’aluminium contre Canton du Valais, BGE 59 I 284.

14. M. Jung, Branch Reports: Switzerland, in Tax treaties and tax avoidance: ap-plication of anti-avoidance provisions, IFA Cahier de droit fiscal nternational sec. 1.1.1. (Sdu Uitgevers 2010), Online Bks. IBFD.

15. M. Bauer-Balmelli, H.P. Hochreutner & M. Kuepfer eds., Die Praxis der Bundessteuern, II. Teil: Stempelabgaben und Verrechnungssteuer, Band 2 – Geltendes Recht (Verrechnungssteuer) , VStG Art. 21, Abs. 2, nr. 32.

16. OECD Model Tax Convention on Income and on Capital: Commentary on Article 11, para. 9. (15 July 2008), Models IBFD.

3.2.1.2. Strict rules

Tax relief, for example, under the 2010 Treaty, is claimed abusively by an individual, a legal entity or a partner-ship resident in Switzerland if, by way such a claim, a substantial part of the tax relief would benefit, directly or indirectly, persons not entitled to benefit from the tax treaty. Tax relief is considered to be abusive in the four following alternative situations:

(1) There is an abusive transfer of income to non-qual-ifying persons where a substantial part of treaty-fa-voured income earned is used, directly or indirectly, to satisfy the rights or claims of persons not entitled to benefit from a tax treaty. The purpose of this pro-vision is to counter conduit companies. No abusive transfer of income is deemed to occur if the following two conditions are satisfied: (i) no more than 50% of the income in respect of which tax relief is requested on the basis of the tax treaty is used to satisfy the contractual rights or claims of persons not entitled to benefit from the tax treaty; and (ii) only the adminis-trative costs and taxes relating to the treaty-protected income remaining, after satisfying the claims of per-sons not entitled to treaty relief, are deducted.

(2) A further example of abuse relates to the situation where a Swiss resident company, in which persons not entitled to benefit from a tax treaty hold an es-sential part of the interest, does not make appropriate profit distributions. Under this anti-abuse rule, the following two cumulative conditions must be satis-fied to avoid being considered to be an inappropriate profit distribution: (i) where a company accumulates income rather than making appropriate dividend dis-tributions and there is a risk that the income may be distributed to non-qualifying persons at a later date, a foreign-controlled (and not a Swiss-controlled) Swiss company must distribute a minimum of 25% of the gross treaty-protected income every business year; and (ii) where a Swiss company that is heavily in-debted to foreign creditors can transfer a significant part of its treaty-favoured income to non-qualifying beneficiaries in the form of interest, the maximum related party debt financing should respect the thin capitalization rules, i.e. the debt:equity ratios, as im-plemented by the FTA.

(3) The allocation of income that, as a result of a fiduciary relationship, benefits a person not entitled to benefit from the tax treaty is considered to be abusive.

(4) The allocation of income received by Swiss resident family foundations or partnerships not carrying on business in Switzerland is abusive if persons not en-titled to benefit from the tax treaty hold an essential part of the interest.

3.2.1.3. Relaxation of the strict rules

Under more generous rules in Swiss federal practice, a company qualifies for treaty relief if it satisfies one of the following four “relaxation” tests:(1) the active trade or business test;



3.4. Swiss finance branches

A Swiss finance branch is a Swiss-foreign tax scheme, whereby the Swiss branch of a foreign-based head of-fice primarily exercises financing activities in respect of a group of companies. Such scheme can benefit from fa-vourable corporate income tax treatment in Switzerland. Briefly, the main federal conditions, which are similar to the cantonal ones, to benefit from this regime are that:– the branch’s assets should be at least CHF 100 million;– the branch’s activity should primarily be that of group

financing, with three-quarters of the gross profits de-rived from financing activities and three-quarters of its assets invested in financing activities; and

– loans or advances granted by the branch to any Swiss subsidiary cannot exceed 10% of the total assets of the branch at any time.

In order to be effective from an international tax perspec-tive, a Swiss finance branch must be established with a head office state that:20

– adopts the exemption method with regard to the branch’s profit under the relevant tax treaty;

– undertakes no or the low allocation of profit, as, usu-ally, the head office does not perform any activity in respect of the Swiss finance branch;

– has a comprehensive treaty network to be able to re-cover foreign taxes at source on financial income;

– can distribute the branch’s profits as dividends to its own parent company with low to no withholding tax; and

– does not apply detrimental (treaty and/or internal) anti-abuse rules.

The Swiss finance branch should also not be negated by anti-abuse regulations in the state of source of the finan-cial income.

According to Widmar and Blom (2000), “[f]rom the out-set, the Netherlands has generally been chosen as the head office country. However, a change in the Netherlands do-mestic treatment of passive income (such as financial in-come) earned by a foreign branch, effective in 1998, made the Netherlands unsuitable as a head office location”.21 As noted in section 2.23., the 1966 Treaty did not prevent the application of this 1998 Netherlands tax rule. How-ever, under the article 22 of the 2010 Treaty, it appears that the exemption method could be helpful in reviving a Swiss finance branch with regard to the Netherlands and Switzerland. Nevertheless, article 22(4) of the 2010 Treaty, which reserves the application of the Netherlands legislation regarding passive income, could prevent the use of such a scheme.

17. R. Danon, Le concept de bénéficiaire effectif dans le cadre du MC OCDE - Réflexions et analyse de la jurisprudence récente, IFF Forum für Steuerrecht (2007).

18. Jung, supra n. 14, at sec. 1.3.4.19. OECD, Transfer Pricing Country Profile, available at www.oecd.org/datao-

ecd/21/51/42572950.pdf.20. S. Widmar & M Blom, Reviving the Swiss Branch Concept, 11 Intl. Tax Rev.

49 (2000).21. Id, at p. 49.

able to control the use of the income when this falls due (comparable to an “agent test”, under which, if a resident is deemed to be an agent of another person, the resident is not the beneficial owner); and (2) objectively, only the property rights of the resident person are relevant (and not other aspects, such as a “subject to tax test” and “substance test”).17 It should, however, be noted that, in practice, the FTA often questions international structures using a substance test in addition to the beneficial owner-ship test and the other tests described section 3.2.2.

3.2.2.5. Thin capitalization and interest rate rules

According to Jung (2010), “[t]hin capitalization and arm’s length interest rate rules are specific domestic anti-avoidance measures that are also applied to the cross-border context and thus, have international effect in the tax treaty context”.18

3.2.2.6. Additional withholding tax provision

Under Swiss withholding tax law, guarantees may be re-quested from a Swiss company to secure potential with-holding tax that may be in jeopardy. On the basis of the law and its ordinance, withholding tax is considered to be in jeopardy if the following conditions are satisfied:– a Swiss company is, directly or indirectly, held by

foreign tax residents for at least 80%;– more than 50% of the assets of the Swiss company are

located abroad; and– the Swiss company does not pay appropriate annual

profit distributions, i.e. amounting to at least 6% of equity.

Whilst this provision is clearly not an anti-avoidance measure, it must be considered in connection with anti-avoidance for the following reasons. First, the provision could permit the FTA to examine the benefit of a tax treaty significantly before any dividend payment to share-holders in the residence is decided on and paid. Second, according to the verbally confirmed practice of the FTA, if the benefit of a tax treaty can be obtained, only the resid-ual treaty withholding tax must be secured by a guarantee.

3.3. APAs: the Swiss perspective

According to the OECD, “[n]o formal procedure for Advanced Pricing Arrangements [(thereafter APA)] ex-ists in Switzerland. However, bilateral Advance Pricing Agreements are conducted under the corresponding Mu-tual Agreement provision in the applicable double tax treaty”.19 Consequently, an APA is a mutual agreement that is negotiated and concluded between the contract-ing states in advance of, as opposed to after, a tax as-sessment. Under the 2010 Treaty, Swiss taxpayers can initiate an APA procedure to agree transfer prices where transactions are between group companies or between a head office and its PE, and the Netherlands and Swiss tax treatments of certain transactions. This is a significant improvement on the 1966 Treaty, where this was only an option that was unlikely to be agreed on given the absence of a time limit in which the contracting states had to reach an agreement (see section 2.26.).



4. Conclusions

In the authors’ opinion, the 2010 Treaty is a welcome legislative evolution in Netherlands-Swiss commercial and economic developments. Due to the standardised and up-to-date text, the 2010 Treaty has increased predictability and should result in greater legal certainty for the taxpayers. In particular, the arbitration clause should help to prevent double taxation.

However, in certain respects, the benefits of the 2010 Treaty can be regarded as limited. For example, no substantial changes to tax treatment in general should result from the 2010 Treaty. Accordingly, the authors do not envisage that it will contribute much to improving commercial relations between the Netherlands and Switzerland.

Finally, it can be questioned as to how adversely the exchange information clause will affect the Swiss banking (and finance) industry. It is common preconception that the Swiss banking (and finance) industry would be detrimentally affected in an international context by the exchange of information. Such a negative effect could, however, be mitigated by the facts that: (1) almost every banking and finance location worldwide should hopefully soon be subject to the same exchange of information rules (a level playing field); and (2) the “Rubik” proposals made by Switzerland to Germany and the United Kingdom and currently under negotiation could serve as an example for a more pragmatic and less detrimental approach, as opposed to the over-extended use of exchange of information.

Cumulative Index

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MERCOSURCarlos Forcada:The Economic Effect of Taxation on the Flow of Software Copyright Royalties in MERCOSUR – available online at http://online.ibfd.org/kbase

NetherlandsH.T.P.M. van den Hurk:The Common Consolidated Corporate Tax Base: A Desirable Alternative to a Flat EU Corporate Income Tax? 260

Sarig Shalhav:Netherlands Tax Aspects of (Private) Class Action Antitrust Lawsuits 390

New ZealandSybrand A. van Schalkwyk:Tax Harmonization in Australia and New Zealand: Lessons from the European Union – available online at http://online.ibfd.org/kbase

NigeriaAbiola Sanni:Recent Developments in Company Income Taxation in Nigeria – available online at http://online.ibfd.org/kbase

Onuora R. Ugwoke:Capital Allowances: A Fiscal Policy Instrument for Industrial Development in Nigeria – available online at http://online.ibfd.org/kbase

OECDTony Anamourlis and Les Nethercott:The EU-US (“Brussels”) Agreement on European Banking Secrecy and the Effect on Tax Information Exchange Agreements – available online at http://online.ibfd.org/kbase

ParaguayCarlos Forcada:The Economic Effect of Taxation on the Flow of Software Copyright Royalties in

MERCOSUR – available online at http://online.ibfd.org/kbase

RussiaElena Variychuk:In Search of Effective Regulation: Draft Bill on Transfer Pricing 107

SingaporeLee Fook Hong:Singapore’s 2011 Budget: Focusing on Strengthening the Economy and Society for the Future 408

South AfricaErnest Mazansky:New Headquarter Company Regime 166

Annet Wanyana Oguttu and Christian Schulze:The Role of Tax Havens in the Global Financial Crisis: A Critique of International Initiatives and Measures to Curb the Resultant Fiscal Challenges and the Example of South Africa – available online at http://online.ibfd.org/kbase

SwitzerlandMarkus Frank Huber and Eric Duvoisin:Federal Supreme Court on Treatment of Exchange Differences and Environment for Internal Group Financing Improved 113

Jessica Salom:The Attribution of Income in Swiss and International Tax Law 394

United StatesTony Anamourlis and Les Nethercott:The EU-US (“Brussels”) Agreement on European Banking Secrecy and the Effect on Tax Information Exchange Agreements – available online at http://online.ibfd.org/kbase

Aleksandra Bal:Taxation of Virtual Wealth 147

Viva Hammer:US Update 333

UruguayCarlos Forcada:The Economic Effect of Taxation on the Flow of Software Copyright Royalties in MERCOSUR – available online at http://online.ibfd.org/kbase

ZambiaKennedy Munyandi:Mining Taxation in Zambia: An Evaluation of the Variable Profit Tax – available online at http://online.ibfd.org/kbase

IFA Congress Articles

FrancePierre-Yves Bourtourault and Marc Bénard:French Tax Aspects of Cross-Border Restructurings 179

Christian Comolet-Tirman:French Treaty Policy 199

Bruno Gouthière:– Beneficial Ownership and Tax Treaties:

A French View 217– Key Practical Issues in Eliminating the

Double Taxation of Business Income 188

Philippe Martin:Interaction between Tax Treaties and Domestic Law 205

Julien Saïac:Non-Cooperative Jurisdiction Tax Reform in France 211

InternationalPierre-Yves Bourtourault and Marc Bénard:French Tax Aspects of Cross-Border Restructurings 179

Bruno Gouthière:Key Practical Issues in Eliminating the Double Taxation of Business Income 188

[continued on page 480]

Documents

The Netherlands–Switzerland Income Tax Treaty (2010) – An Analysis