The European Commission has requested that the Netherlands amend the limitation of benefits clause in its double taxation treaty (DTT) with Japan. Article 21 of the DTT limits key treaty benefits (exemption from source state taxation) in respect of certain classes of income paid to “qualified persons. Residence in the Netherlands is crucial to derive the benefits of the DTT.
The Commission is challenging the differential treatment which Japan will apply to specific items of income and paid to persons who do not satisfy the limitation of benefits test and, in particular, the Dutch residence requirement. The Commission drew from previous authorities (Open Skies C-466/98 and Gottardo C-55/00) where the ECJ held that EU law forbids Member States from entering into an agreement with a third state which permitted that third State to discriminate, to the benefit of residents of that Member State, against persons who are resident in other Member States.
Many will observe the development of this matter especially as the Limitation of Benefits clause was one of the recommendations of the OECD BEPS Action Plan 6. While double taxation treaties have been the subject of several ECJ decisions, the authorities cited by the Commission did not involve taxation. In the new BEPS era where the EU institutions have awoken to the threat of “industrial-scale tax avoidance”, it is left to be seen if the principles enunciated in Open Skies and Gottardo will be successful.
This article appears in the JHA December 2015 Tax Newsletter, which also features:
