Tax treaties: preventing double taxation in international growth

Doing business in other countries often has tax implications. You will often also have to deal with the tax legislation of another country. Sometimes multiple countries may wish to levy taxes on your income or assets simultaneously. The Netherlands has concluded a large number of tax treaties to prevent double taxation wherever possible. These treaties specify which of the two countries may actually levy taxes, and to what extent.

Tax treaties are important for all businesses with ties to other countries. This especially applies when you do business abroad but also, for instance, if you have foreign shareholders, loans from other countries or employees abroad.

➔    Read more about how tax treaties can prevent you having to pay double taxes in this article.

What is determined in tax treaties?

Agreements between two countries on situations in which double taxation may occur are often laid down in a tax treaty. The treaty may, for example, specify which country may withhold source taxes and whether a reduced maximum rate applies to this. A tie-breaker is often agreed for those cases in which both countries are of the opinion, based on their own laws, that a person or company is a resident of their country. In many cases, tax treaties contain arrangements on the exchange of information between the two countries. Moreover, the treaty describes the methodology for preventing double taxation. For example, how the Netherlands grants an exemption for foreign business profits or how foreign withholding tax can be credited in the Netherlands.

Many tax treaties are based on the OECD Model Tax Convention (an international guide for drawing up tax treaties) but the details often vary. The introduction of the Multilateral Instrument (MLI) has also led to further amendments to the treaties to which it applies.

When does a tax treaty apply?

Tax treaties usually only play a role in cross-border situations in which two different countries wish to levy tax. This might involve companies but also partnerships or private individuals. It is often said that national law determines whether a tax authority can levy taxes. The tax treaty then determines whether that tax authority may indeed levy taxes.

Access to the tax treaty is a precondition here. In certain cases, access to the treaty can be denied; in such cases the taxpayer may not make use of exemptions or reduced tax rates.

Example: double place of residence

A person or legal entity is sometimes classed as a resident under the national law of two countries. In this case there is a double place of residence. It is essential to determine the place of residence because otherwise the treaty cannot be applied. This could then lead to double taxation of the same income. The relevant tax treaty determines in which of the two countries the place of residence lies. Criteria other than those under national law may in this case be the deciding factor, such as the place of effective management of an entity or the centre of vital interests of an individual. If the two countries are unable to agree on the facts or on the application of the treaty, a mutual agreement procedure involving both countries is often initiated to seek a solution.

International agreements

A great many changes have taken place in international taxation in recent years. More and more information is being shared and international businesses are having to deal with new regulations. This includes the minimum taxation of Pillar 2, transfer pricing obligations and developments in European case law. The recent introduction of the MLI is also making the interpretation of treaties increasingly complex.

A trusted advisor is therefore indispensable to staying alert to all the rights and obligations relating to doing business abroad.

➔    Our experts monitor developments closely and explain both the tax implications and the opportunities to you clearly.

➔    Together with local experts from our Baker Tilly International network, we ensure you receive a quick answer to your questions.

If you would like to find out more about important points of attention when doing business abroad and the application of tax treaties, our tax advisors would be happy to discuss how we can be of service.

The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.