On November 24, 2023 on the website of the Dutch tax authorities a position paper form the Knowledge Group international tax law, corporate income tax and profits of the Dutch tax authorities was published (KG:040:2023:8). In this position paper the Knowledge Group answers the question whether the Netherlands must grant a credit for foreign withholding taxes withheld over rental payments received for the renting out of forklift tractors, trucks, containers and pallets to customers located in Poland, the Czech Republic, Italy and Portugal.
The reason why we decided to write an article about this position paper is that the subject discussed in the paper shows the importance of always having a closer look at the texts of EU-Directives, tax conventions and the commentary to the OECD Model Treaty. Why? Because even with the years of experience that Alain has in international taxation, if without being allowed to have a look at the texts of the respective tax conventions he had to answer to the question whether the aforementioned countries would be allowed to withhold withholding taxes over such payments he most likely would have given the wrong answer.
The facts
X BV is a resident of the Netherlands. X BV rents out forklift tractors, trucks, containers and pallets to customers located in respectively Poland, the Czech Republic, Italy and Portugal. For this X BV receives rental payments. The relevant foreign tax authorities have withheld withholding taxes over these rental payments. The customers are not associated with X BV as meant in the EU Interest & Royalties Directive (2003/49/EC).
Question
Do the rental payments under the tax treaties with Poland, the Czech Republic, Italy and Portugal qualify as considerations over which these jurisdictions may withhold withholding taxes?
(Remark ITP: In other words the question that is raised is whether under these treaties the rental payments qualify as a royalty payment? Without reading further what is your opinion)
Answer
Yes, under the tax conventions the Netherlands concluded with Poland, the Czech Republic, Italy and Portugal, rental payments for forklift tractors, trucks, containers and pallets must be considered to constitute a royalty for the use of industrial equipment and therefore withholding tax may be withheld over such payment. This withholding tax is eligible for a credit in the Netherlands.
From the assessment of the Knowledge Groupp
The customers residing in Poland, the Czech Republic, Italy and Portugal are not 'associated with/related to’ X BV within the meaning of Article 3, Paragraph b of Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States. Therefore the rental payments received by X BV for the forklift tractors, trucks, containers and pallets are not exempt from withholding tax under the Interest & Royalties Directive.
(Remark ITP: Article 3, Paragraph b of the Interest & Royalties Directive reads as follows:
"a company is an ‘associated company’ of a second company if, at least:
(i) the first company has a direct minimum holding of 25 % in the capital of the second company, or
(ii) the second company has a direct minimum holding of 25 % in the capital of the first company, or
(iii) a third company has a direct minimum holding of 25 % both in the capital of the first company and in the capital of the second company.
Holdings must involve only companies resident in Community territory.
However, Member States shall have the option of replacing the criterion of a minimum holding in the capital with that of a minimum holding of voting rights;")
The subsequent question is whether under the respective bilateral tax conventions these countries may withhold withholding tax over rental payments.
Since the 1977 OECD Model Convention, considerations for the use of industrial equipment are no longer included in the royalty article, but in the provisions regarding business profits.
See thus note 9 of the OECD commentary on article 12 of the OECD Model Convention, which reads as follows:
“9. Whilst the definition of the term “royalties” in the 1963 Draft Convention and the 1977 Model Convention included payments “for the use of, or the right to use, industrial, commercial or scientific equipment”, the reference to these payments was subsequently deleted from the definition. Given the nature of income from the leasing of industrial, commercial or scientific equipment, including the leasing of containers, the Committee on Fiscal Affairs decided to exclude income from such leasing from the definition of royalties and, consequently, to remove it from the application of Article 12 in order to make sure that it would fall under the rules for the taxation of business profits, as defined in Articles 5 and 7.”
A large number of countries, including Italy, Poland, the Czech Republic and Portugal, have made reservations with respect this provision.
Italy makes the reservation for:
"...income derived from the leasing of industrial, commercial or scientific equipment and of containers....“ (reservations 41).
Poland does the same for:
“...income derived from from the use of, or the right to use, industrial, commercial or scientific equipment and containers.” (reservations 41.1).
Het Czech reservation regards:
“…the right to add the words “for the use of, or the right to use, industrial, commercial or scientific equipment” to paragraph 2…” (reservation 40).
Portugal finally:
“…reserves the right to tax at source as royalties income from the leasing of industrial, commercial or scientific equipment and of containers, as well as income arising from technical assistance in connection with the use of, or the right to use, such equipment and containers….” (reservation 43.1).
The treaties that the Netherlands concluded with each of these countries contain a provision that is consistent with that reservation.
Article 12, Paragraph 4 of the Dutch-Polish Treaty for example reads as follows:
“The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use any industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.”
In as far as relevant Article 12, Paragraph 3 of the Dutch-Italian Treaty (1990), Article 12, Paragraph 4 of the Dutch-Czech Treaty (1974) and Article 12, Paragraph 4 of the Dutch-Portugues Treaty (1999) are identical.
Under these provisions, the consideration “for the use of (…) industrial equipment” may be taxed in the source country. However, the aforementioned treaties lack a definition of the term “industrial equipment”.
The OECD commentary on Article 12 also lacks further interpretation of this term (“industrial equipment”) (both the current commentary as well as the 1977 commentary).
In the OECD report “The taxation of income derived from the leasing of industrial, commercial or scientific equipment”, as adopted by the OECD Council on September 13, 1983, the term “industrial equipment” has been further defined. This report also includes containers “industrial equipment” (note 10):
“Operating leases are typically leases of equipment which can easily be moved from one lessee to another. The major categories involved are office equipment, motor cars, containers, computers and plant.”
The report “The taxation derived from the leasing of containers”, which was also adopted by the OECD Council on September 13, 1983, clarifies that the leasing of containers must be considered to constitute a leasing of industrial equipment (note 13):
“Income derived from the leasing of containers, being income from the leasing of industrial equipment, falls in the first instance under Article 12 (…)”
From the foregoing it follows that motor vehicles, such as forklift tractors and trucks, fall under the concept of “industrial equipment”. The same applies to containers.
Although not explicitly stated in the OECD reports, it must be assumed that pallets also qualify as “industrial equipment”, because pallets are comparable to containers. Just like containers, pallets are used to move and store goods.
The present payments for the renting of forklift tractors, trucks, containers and pallets therefore qualify as compensation for the use of industrial equipment as referred to in all the aforementioned treaty provisions.
Therefore based on the applicable paragraphs of Article 12 of the Treaties as concluded with Poland, Italy, Portugal and the Czech Republic, each of these countries may therefore withhold a (withholding) tax. Based on the respective treaty provisions for the avoidance of double taxation, up to a maximum of the agreed treaty rate, that tax withheld is eligible for a credit.
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