Tax Treaty between Netherlands and China unexpectedly delayed

On 31 May 2013, the new tax treaty between the Netherlands and China was signed. The new treaty will enter into force for the Netherlands upon approval by Dutch parliament. Currently, the entry into force of this treaty is being delayed, as Dutch parliament is still discussing the draft treaty with the Dutch State Secretary of the Ministry of Finance.

Two types of anti-abuse

The questions addressed in parliament concern amongst others the avoidance of tax treaty abuse. Generally, two types of anti-abuse tax treaty provisions can be distinguished: motive tests and limitation on benefits (LOB) clauses. The first category of anti-abuse provisions apply if a taxpayer’s main intention for an international group structure is solely to make use of the tax treaty. The second category of anti-abuse provisions apply, subject to on the profile of a taxpayer. Depending on a number of criteria, the LOB clause distinguishes between qualifying and non-qualifying persons. China wanted to include both main purpose clauses as well as its own Chinese domestic anti-abuse provisions. This was due to the fact that China anticipated problems with the application of the LOB clause, due to the limited experience of the Chinese tax authorities with these kinds of provisions. 

Policy deviates from OECD Guidelines

Furthermore, Dutch parliament has noted that China’s transfer pricing policy deviates from the OECD Transfer Pricing Guidelines. In their capacity as a source state, China allocates more taxable basis to its jurisdiction in this respect. Any transfer pricing disputes can be solved under the treaty solely by means of the mutual agreement procedure. Dutch parliament has asked why no arbitrage procedure has been included in the treaty. The State Secretary has responded by stating that no arbitrage possibility has been included, since for China such a procedure was unacceptable. 

Although theoretically Dutch parliament could request the Dutch treaty negotiators to go back to the drawing table with the Chinese negotiators and amend the wording of the draft treaty, this is unlikely to happen. Most likely, these discussions in Dutch parliament are just for clarifying purposes, and when matters are clear the treaty will be ratified by Dutch parliament and enter into force.

Want to know more?

Are you active in China? Then this new tax treaty may provide new opportunities for you. For more detailed informatio, please contact your international tax partner.