Add a bookmark to get started

17 May 20217 minute read

Reflections on the recently signed amendment protocol to the Dutch – German tax treaty

On 4 April 2021 the Dutch government published the amendment protocol of the Dutch – German tax treaty. The amendment protocol currently is signed by both countries, but it still must be ratified by the respective parliaments. Upon ratification of the protocol and exchange of the ratification deeds the amendments will enter into force as provided for in the protocol.

The protocol mainly consists of the following amendments of the tax treaty:

Implementation of a principle purpose test (PPT), article 23 para. 6 of the tax treaty:

The PPT is implemented to meet the minimum standards of BEPS action 6. Although the Netherlands and Germany have both ratified the multilateral instrument (MLI), Germany has not designated the Dutch - German tax treaty as a covered agreement for the MLI. As a result, bilateral amendments are necessary to meet the minimum standards.

By implementing the PPT, treaty benefits are denied in case of treaty abuse. Treaty abuse must be proven by a subjective and objective element. The subjective element must prove that the arrangement or transaction has the main goal or one of the main goals to obtain a tax benefit (i.e., a tax reduction) and the objective element must prove that granting the tax benefit is against the objective and purpose of the provisions in the tax treaty.

Restriction of the defined term of permanent establishments, article 5 para. 7 of the tax treaty

The qualification of the (total) activity as a preparatory or auxiliary activity, which previously applied only to Art. 5 para. 7 lit. (f), is now extended to all letters of Art. 5 para. 7 lit. (a) to (f) of the tax treaty. Consequently, the treaty qualification as a permanent establishment may be lost according to the protocol in case only auxiliary activities are performed by entities within the meaning of Art. 5 para. 7 lit. (a) to (e). This must be reviewed as of the entry into force of the protocol. The consequence of this new restrictive rule is that it may unexpectedly lead to a creation of taxing rights in the Netherlands or in Germany. Alternatively, in case of a loss of taxing rights, Germany as well as the Netherlands may apply exit taxation rules.


For example, a warehouse in the sense of article Art. 5 para. 7 lit. (a) DTA is currently not considered to be a permanent establishment irrespective of preparatory or auxiliary activities This may mean that in case of a legal structure as depicted above, where a Dutch B.V. has a warehouse in Germany, as soon as the protocol will enter into force the German warehouse will now be considered a permanent establishment in Germany in case it performs more than just preparatory or auxiliary activities. Thus, the taxing rights in the Netherlands will be limited. In the Netherlands this can trigger the application of Dutch exit tax rules.

It is observed thereto that the Netherlands it is not common that exit taxation rules shall apply as a result of a legislative change. This is due to transitional regulations which are usually put in place to mitigate the impacts of exit tax being triggered by a situation (i.e., legislative amendment) beyond the control of the taxpayer. However, in the context of the amendment protocol to the Dutch-German tax treaty no transitional rules have been published yet.


The same shall apply in the reverse situation where a German GmbH will create a permanent establishment in the Netherlands if the warehouse maintained in the Netherlands does not just perform preparatory or auxiliary functions. Germany will apply exit taxation rules in such a case to the extent a German taxing right is lost.

Extension of taxation of gains from the disposal of assets, article 13 para. 2 of the tax treaty

In case of structures as depicted below, Germany has a right to tax a gain from the sale of the 60% participation that the Dutch individual holds in BV-1 pursuant to Section 49 para. 1 no. 2 lit. e) double lit. cc) of the German Income Tax Act. This provision requires that more than 50% of the value of the shares sold is based, directly or indirectly, on domestic real estate property at any time during the 365 days preceding the sale.

Generally, the DTA between Germany and the Netherlands does not curtail Germany’s right to tax if the value of the shares is based on more than 75% of German real estate at the point of time of sale of the shares. In the example depicted below Germany’s right to tax would be curtailed under the currently applicable DTA.

Under the Art. 13 para. 2 of the Protocol, the German right to tax will generally not be curtailed if the threshold of 75% was exceeded at any time 365 days prior to the sale of the shares in the company holding German real estate directly or indirectly.


In the simplified example above, Germany’s right to tax the gain from the sale at the level of the Dutch tax resident would not be curtailed anymore. Double taxation could arise as the Netherlands may tax the capital gains on the sale of the shares in BV-1 as well since the individual holds a so-called substantial interest (i.e. more than 5% of the share capital of the Dutch B.V.). Consequently, the capital gains are considered income from substantial shareholdings (i.e. box 2 income) and are subject to Dutch income tax.

Double taxation relief should be granted pursuant to article 22 of the tax treaty.

Implementation of minimum holding period for dividends, article 10 para. 2 lit. a) of the tax treaty:

Article 10 para. 2 of the tax treaty limits the withholding tax on dividend income for Netherlands and Germany with effect for domestic law. As a result of the MLI, a minimum holding period of 365 days must be observed in order to grant the intercompany privilege under Art. 10 para. 2 lit. a) of the tax treaty. According to Art. 8 para. 1 MLI, the reduced withholding tax rights in the Contracting State in which the company paying the dividends is resident only apply if the beneficial owner resident in the other Contracting State has held an interest in the capital of the company paying the dividends for a period of at least 365 days. Until now, the intercompany privilege under treaty law had the advantage over the Parent-Subsidiary Directive (MTR) that it did not provide for a minimum holding period. This advantage will disappear with the introduction of the MLI standards through the Protocol. Thus, Art. 10 para. 2 lit. a) of the tax treaty will lose importance in its practical application, since the beneficial owner can rely on the full withholding tax reduction under the Parent-Subsidiary Directive as enacted in local law.

After implementation of the MTR in German and Dutch law, the withholding tax limitation for intercompany dividends under Art. 10 para. 2 lit. a) of the tax treaty may still have significance if the application of the MTR (Section 43b of the German Income Tax Act) fails due to the anti-abuse provision of Section 50d para. 3 of the German Income Tax Act or Section 4 para. 3 of the Dutch Dividend Withholding Tax Act.

Taxation of social security allowances

The protocol states that social security allowances will only be taxed in the country that grants the allowance.

Finally, the accompanying press release informing about the amendment protocol announced that the Dutch and German governments are still discussing a regulation for frontier workers that (occasionally) work from home. Currently, there is a temporary measure for frontier workers in place due to the pandemic which might be extended.

Taxpayers involved, in particular, in structures as described above are advised to review their structures and evaluate how the amendment protocol to the Dutch-German tax treaty, when entered into force, could impact their tax position. To discuss these potential ramifications, please contact the authors or your usual DLA Piper advisors.