In this article we discuss the very interesting position paper KG:040:2023:3. In the position paper the Knowledge Group international taxation, corporate income tax and profits of the Dutch tax authorities answers the question whether the Netherlands should grant relief for double taxation for the withholding tax withheld by Germany over the interest paid on a mezzanine loan.

Facts of the underlying case

A Dutch resident company has granted a so-called mezzanine loan to an unaffiliated German resident company. The remuneration for this mezzanine loan is a certain percentage of the profit, which is capped/maximized at a certain percentage of the principal sum. German withholding tax was withheld over  the remuneration paid by the German company. For the German company the compensation is deductible for German tax purposes. The Dutch company does not have a permanent establishment in Germany.

Article 11, Paragraph 1 of the 2012 Dutch-German DTA (Hereafter: the DTA) interest income in only taxable in the country of residence. In this case the Netherlands.

However, in the underlying case it regards interest on a loan which interest rate is linked to the debtor's profit (a profit depending loan) and the interest is deductible for the debtor when determining the debtor's taxable profit. In that case, Germany as the source state may also tax the interest income (Article IX. ad Articles 10 and 11 of the Protocol to the DTA).

Germany has therefore rightly withheld withholding tax, whereby the aformentioned provision of the Protocol does not maximize the rate. As country of residence, the Netherlands may also tax the interest income. Now that this mezzanine loan for Dutch tax purposes qualifies as a liability/loan, as a result of which for Dutch corporate income tax purposes the compensation is included as interest income in the taxable profit of the Dutch company this right to tax is also exercised by the Netherlands.

However, Article 22 of the DTA, the avoidance article, contains no reference to the aforementioned provision of the Protocol. This means that the DTA does not provide for the avoidance of double taxation for situations as the one of the underlying case.

Question

Does the Netherlands pursuant to Article IX of the Protocol to the DTA have to grant a relief for double taxation for the withholding tax that was withheld by Germany?

Answer

In a situation in which not granting a relief for double taxation demonstrably leads to double taxation, a relief by the Netherlands may be appropriate. Pursuant to Article 25 of the DTA, in a case as the underlying one, the (Dutch) taxpayer can request the competent authority of the Netherlands to initiate a mutual agreement procedure with Germany.

The full Dutch text of the position paper (in the Dutch language) with considerations can be found here.

Other position papers on international taxation that we already discussed earlier can be found here.

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