Netherlands Double Tax Agreement - Layman Version

This document details the Convention between the Republic of South Africa and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital. This Convention, also known as a Double Taxation Agreement (DTA), helps clarify which country has the right to tax different types of income or capital when a person or company has financial ties to both South Africa and the Netherlands, thereby preventing the same income from being taxed twice.

 

The Convention was approved by the South African Parliament and entered into force on December 28, 2008. Its provisions apply to taxable years and periods beginning on or after January 1, 2009.

 

Here’s a breakdown of the key aspects of this Convention, simplified for a general understanding:

 

What is the Purpose of this Agreement?

• • The main purpose of this Convention is to prevent you from paying tax on the same income or capital in both South Africa and the Netherlands. It also aims to prevent tax evasion and promote economic relations between the two countries.
  • Who is Covered by this Agreement?
  • This Convention applies to persons who are residents of either South Africa or the Netherlands, or both.
    • A “person” can be an individual, a company, or any other group of persons.
    • “Contracting States” refers to the Kingdom of the Netherlands and the Republic of South Africa.

What Taxes are Covered?

• • The Convention covers taxes on income and capital imposed by either country, including those levied by their political subdivisions or local authorities, regardless of how they are collected. This includes taxes on:
    • • Total income
      • Total capital
      • Specific elements of income or capital
      • Gains from selling movable or immovable property
      • Total wages or salaries paid by businesses
      • Capital appreciation

Specifically, the existing taxes covered are:

• • In the Netherlands:
    • Income tax (inkomstenbelasting)
    • Wages tax (loonbelasting)
    • Company tax (vennootschapsbelasting), including the government’s share in profits from natural resource exploitation under certain mining acts
    • Dividend tax (dividendbelasting)
    • Capital tax (vermogensbelasting)
  • In South Africa:
    • The normal tax
    • The secondary tax on companies
    • The withholding tax on royalties
    • The Convention also applies to any identical or substantially similar taxes that either country introduces after the agreement was signed.

Determining Your Tax Residence (Article 4)

• • Being a “resident of a Contracting State” is crucial. Generally, it means any person liable to tax in that country because of their domicile, residence, place of management, or similar criteria. It also includes the State itself and its political subdivisions or local authorities.
  • However, it does not include someone who is only liable to tax in a State on income from sources within that State or capital located there. Pension funds that are recognized and tax-exempt in a Contracting State are also considered residents.
  • Special Rules for Individuals (Tie-Breaker Rules) if you’re a resident of both countries:
    • You are considered a resident only of the State where you have a permanent home. If you have a permanent home in both, you are a resident of the State where your personal and economic relations are closer (centre of vital interests).
    • If your sole residence cannot be determined by the above, you are a resident only of the State where you have an habitual abode.
    • If you have an habitual abode in both or neither, you are a resident only of the State of which you are a national.
    • If you are a national of both or neither, the tax authorities of both countries will work together to settle the question.
    • An individual living aboard a ship without a real domicile in either State is deemed a resident of the State where the ship has its home harbour.
    • For companies or other entities (not individuals) that are residents of both countries, they are considered residents solely of the State where their place of is located.

What is a “Permanent Establishment” (Article 5)?

• • A “permanent establishment” generally means a fixed place of business through which an enterprise carries on its business wholly or partly. It’s important because it determines when a business’s profits can be taxed in the other country.
  • Examples of what constitutes a “permanent establishment” include:
    • A place of management
    • A branch
    • An office
    • A factory
    • A workshop
    • A mine, oil or gas well, quarry, or any other place of natural resource extraction
    • A building site, construction, assembly, or installation project, or related supervisory activity, but only if it lasts more than twelve months.
    • However, certain activities are not considered a “permanent establishment,” even if they involve a fixed place of business. These are typically activities of a “preparatory or auxiliary character,” such as:
      • • Using facilities solely for storage, display, or delivery of goods
        • Maintaining a stock of goods solely for storage, display, or delivery, or for processing by another enterprise
        • Maintaining a fixed place of business solely for purchasing goods or collecting information
        • Maintaining a fixed place of business solely for any other activity of a preparatory or auxiliary character for the enterprise
        • A combination of these activities, provided the overall activity remains preparatory or auxiliary.
        • An enterprise generally does not have a permanent establishment in a State just because it carries on business through an independent agent (like a broker) acting in the ordinary course of their business.
    • How Different Types of Income are Taxed:
      • This section is particularly relevant for South Africans working abroad or receiving income from the Netherlands.

Income from Immovable Property (Real Estate) (Article 6)

• • • Income you earn from immovable property (like real estate), including agricultural or forestry income, located in the other Contracting State may be taxed in that other State.
    • “Immovable property” includes property connected to land, livestock and equipment used in agriculture/forestry, rights related to land, and rights to payments for working natural resources. Ships, boats, and aircraft are NOT considered immovable property.
    • Exploration and exploitation rights of natural resources are considered immovable property located in the State where the seabed/subsoil they relate to is situated. These rights are also considered part of the property of a permanent establishment in that State.

Business Profits (Article 7)

• • Generally, the profits of an enterprise are only taxable in the State where the enterprise is a resident, UNLESS the business operates in the other State through a permanent establishment
  • If there is a permanent establishment, the other State can tax only the profits directly linked to that permanent establishment.
  • When determining the profits of a permanent establishment, expenses incurred for its purpose are deductible, including executive and general administrative expenses, whether incurred in that State or elsewhere.
  • Profits from specific contracts (e.g., for industrial equipment or public works) carried out through a permanent establishment are determined only on the basis of the part of the contract effectively carried out by the permanent establishment in that State. Profits from the part carried out by the head office are taxed only in the enterprise’s resident State.
  • Payments for technical services, studies, surveys, consultancy, or supervisory services are generally considered business profits under this Article.

Dividends (Article 10)

• • Dividends paid by a company resident in one State to a resident of the other State may be taxed in that other State.
  • However, the State where the company paying the dividends is resident can also tax these dividends, but the tax charged cannot exceed 15% of the gross dividend amount if the beneficial owner is a resident of the other State.
  • No tax on dividends shall be levied by the company’s resident State if the beneficial owner is a company resident in the other State that directly holds at least 10% of the capital of the company paying the dividends.
  • These rules do not apply if the beneficial owner of the dividends carries on business in the company’s resident State through a permanent establishment, and the shares are effectively connected to that permanent establishment. In such cases, business profits rules (Article 7) apply.
  • “Dividends” include income from shares, “jouissance” shares/rights, mining shares, founders’ shares, or other profit-participating rights, as well as income from debt-claims participating in profits, and other corporate rights treated similarly to share income for tax purposes.
  • Income from the (partial) liquidation of a company or a company buying its own shares is treated as income from shares (dividends), not as capital gains.
    • There’s a 3-year limit to apply for a refund if tax was levied at source in excess of the Convention’s limits.
    • Important Anti-Abuse Rule: The dividend provisions won’t apply if a main purpose of creating or assigning the shares was to take advantage of this Article.

Interest (Article 11)

• • Interest arising in one State and beneficially owned by a resident of the other State shall be taxable only in that other State.
  • “Interest” means income from debt-claims of every kind, including government securities, bonds, or debentures, but does not include payments carrying a right to participate in the debtor’s profits, nor penalty charges for late payment.
  • This “taxable only in the other State” rule does not apply if the beneficial owner carries on business in the State where the interest arises through a permanent establishment, and the debt-claim is effectively connected to that permanent establishment. In such cases, business profits rules (Article 7) apply.
  • Interest is generally considered to “arise” in the State where the payer is a resident. If the payer has a permanent establishment in a State and the debt was incurred for, and the interest is borne by, that permanent establishment, then the interest arises in the State where the permanent establishment is situated.
  • If a special relationship between the payer and beneficial owner leads to excessive interest payments, only the amount that would have been agreed upon between independent parties will be subject to the Convention’s rules. The excess part will be taxed under each State’s domestic laws.
  • There’s a 3-year limit to apply for a refund if tax was levied at source in excess of the Convention’s limits.

Royalties (Article 12)

• • Royalties arising in one State and beneficially owned by a resident of the other State shall be taxable only in that other State.
  • “Royalties” are payments for the use of, or the right to use, copyrights (including films for radio/TV), patents, trademarks, designs, plans, secret formulas or processes, or for information concerning industrial, commercial, or scientific experience.
  • This “taxable only in the other State” rule does not apply if the beneficial owner carries on business in the State where the royalties arise through a permanent establishment, and the right/property is effectively connected to that permanent establishment. In such cases, business profits rules (Article 7) apply.
  • Royalties are generally considered to “arise” in the State where the payer is a resident. If the payer has a permanent establishment in a State with which the right/property is effectively connected, and the royalties are borne by that permanent establishment, then the royalties arise in the State where the permanent establishment is situated.
  • Similar to interest, if a special relationship leads to excessive royalty payments, only the amount that would have been agreed upon between independent parties will be subject to the Convention’s rules. The excess part will be taxed under each State’s domestic laws.
  • There’s a 3-year limit to apply for a refund if tax was levied at source in excess of the Convention’s limits.

Capital Gains (Article 13)

• • Gains from selling immovable property located in the other State may be taxed in that other State.
  • Gains from selling movable property that is part of a permanent establishment’s business property in the other State may be taxed in that other State.
  • Gains from selling ships or aircraft operated in international traffic, or movable property related to their operation, are taxable only in the State where the place of effective management of the enterprise is situated.
  • Gains from selling any other property (not covered above) are taxable only in the State where the seller (alienator) is a resident.
  • Special Rule for Shares (relevant for former residents): Despite the above, a State may tax gains from selling shares (or similar rights/debt-claims) in a company resident in that State, if the individual seller (alone or with spouse/relatives) directly or indirectly held at least 5% of a particular class of shares in that company. This applies only if the individual was a resident of the first-mentioned State at any time during the ten years preceding the sale and met the share ownership conditions when they became a resident of the other State.
  • If the gain taxed includes value accrued while the individual was NOT a resident of the first State, that State shall consider a portion of the tax as paid, calculated by a specific formula: (Period of non-residence / Total period of ownership) * Total tax on assessment.

Income from Employment (Salaries, Wages) (Article 14)

• • This is highly relevant for South Africans working abroad.
    • Generally, salaries, wages, and similar payments derived by a resident of one State in respect of employment are taxable only in that State, UNLESS the employment is exercised in the other Contracting State.
    • If the employment is exercised in the other State, that other State may tax the remuneration.
    • Exception (183-Day Rule): Remuneration derived by a resident of one State for employment exercised in the other State is taxable only in the first-mentioned State (the resident State) if ALL three conditions are met:
      • The recipient is present in the other State for a period or periods not exceeding 183 days in total within any twelve-month period starting or ending in the fiscal year concerned, AND
      • The remuneration is paid by, or on behalf of, an employer who is NOT a resident of the other State, AND
      • The remuneration is NOT borne by a permanent establishment which the employer has in the other State.
        • Remuneration for employment exercised aboard a ship or aircraft operated in international traffic is taxable only in the State where the employee is a resident.

Directors’ Fees (Article 15)

• • Directors’ fees or other remuneration derived by a resident of one State in their capacity as a member of the board of directors, a “bestuurder” (manager), or a “commissaris” (supervisor) of a company which is a resident of the other Contracting State, may be taxed in that other State.
  • For a Netherlands company, a “bestuurder” or “commissaris” refers to persons nominated by shareholders or a competent body, charged with general management or supervision respectively.

Entertainers and Sportspersons (Article 16)

• • Income earned by an entertainer (e.g., theatre, film, radio/TV artist, musician) or sportsperson who is a resident of one State, from their personal activities exercised in the other Contracting State, may be taxed in that other State.
  • If the income from such activities accrues not to the entertainer/sportsperson but to another person, that income may still be taxed in the State where the activities are exercised.
  • Exception: These rules generally do not apply if the visit to the other State is wholly or mainly supported by public funds of the resident’s State, or occurs under a cultural agreement between the two Governments. In such cases, the income is taxable only in the State of which the entertainer or sportsperson is a resident.

Pensions, Annuities, and Social Security Payments (Article 17)

• • Pensions, similar remuneration, and annuities arising in one Contracting State and paid to a resident of the other Contracting State, may be taxed in the first-mentioned State (where they arise).
  • Any pension or other payment under a social security system of one State paid to a resident of the other State may be taxed in the first-mentioned State (where the system is).
  • A pension/annuity is “derived” from a State if contributions/payments for it qualified for tax relief in that State.
  • Special Rule for South African Residents (transitional): If a person was a resident of South Africa when the Convention came into effect (Dec 28, 2008) and continues to receive a pension/annuity/social security payment, that income is taxable only in South Africa if the total gross amount paid in any calendar year does not exceed 10,000 Euro.
  • However, if the total gross amount exceeds 10,000 Euro, the Netherlands may also tax the amount exceeding 10,000 Euro. In this specific case, the Netherlands will include the total income in its tax basis but exempt the part taxable only in South Africa by providing a tax reduction.

Government Service (Article 18)

• • Salaries, wages, and other similar remuneration (excluding pensions) paid by a Contracting State, political subdivision, or local authority for services rendered to that State/subdivision/authority may be taxed in that State.
  • Exception: Such remuneration is taxable only in the other Contracting State if the services are rendered in that other State AND the individual is a resident of that other State who is either:
    • A national of that State, OR
    • Did not become a resident of that State solely for the purpose of rendering the services.
      • If the services are rendered in connection with a business carried on by a Contracting State, then the normal employment income (Article 14), directors’ fees (Article 15), or pensions (Article 17) rules apply instead.
      • Professors and Teachers (Article 19)
      • An individual visiting one State for up to two years to teach or do research at a recognized educational institution, and who was a resident of the other State immediately before the visit, shall be taxable only in that other (original resident) State for such remuneration for a period not exceeding two years from the first visit.
      • This exemption does not apply to income from research primarily for private benefit, rather than public interest.

Students (Article 20)

• • Students or business apprentices present in a Contracting State solely for their education or training, who are (or were immediately before) residents of the other Contracting State, shall be exempt from tax in the first-mentioned State on payments received from outside that State for their maintenance, education, or training.

Other Income (Article 21)

• • Items of income of a resident of a Contracting State not specifically dealt with in other Articles of this Convention shall be taxable only in that State.
  • However, this “taxable only in that State” rule does not apply if the recipient carries on business in the other State through a permanent establishment, and the right or property for which the income is paid is effectively connected with that permanent establishment. In such cases, business profits rules (Article 7) apply.

Capital (Article 22)

• • Capital represented by immovable property located in the other Contracting State may be taxed in that other State.
  • Capital represented by movable property that is part of a permanent establishment’s business property in the other Contracting State may be taxed in that other State.
  • Capital represented by ships and aircraft operated in international traffic, and movable property related to them, is taxable only in the Contracting State where the place of effective management of the enterprise is situated.
  • All other elements of capital of a resident of a Contracting State shall be taxable only in that State.

How is Double Taxation Eliminated? (Article 23)

• • Both countries have mechanisms to prevent you from being taxed twice on the same income or capital.
    • In the Netherlands:
      • When the Netherlands taxes its residents, it may include income or capital that can also be taxed in South Africa according to the Convention.
      • However, for certain types of income (e.g., business profits through a permanent establishment, income from immovable property, certain pensions), the Netherlands will exempt such income or capital by reducing its tax. This reduction is computed according to Netherlands law for avoiding double taxation.
      • For other types of income (e.g., certain dividends, capital gains on shares, directors’ fees, entertainers’ income), the Netherlands will allow a deduction from its tax equal to the tax paid in South Africa, but this deduction cannot exceed the amount that would be allowed if that income were the only exempt income under Netherlands law.
      • Special rules apply for certain business profits, dividends, interest, and royalties, where the Netherlands may allow a deduction for the South African tax paid, if its domestic law allows it.
      • For capital, when calculating the reduction, the value of immovable property is reduced by debts secured by mortgage on it, and permanent establishment property is reduced by debts pertaining to it.
    • In South Africa:
      • Subject to South African law regarding deductions for foreign tax, Netherlands tax paid by residents of South Africa on income taxable in the Netherlands (according to this Convention) shall be deducted from the taxes due in South Africa.
      • This deduction cannot exceed an amount proportional to the income concerned relative to the total income.

Special Provisions

Offshore Activities (Article 24)

• • This Article applies specifically to activities carried on offshore in connection with the exploration or exploitation of the seabed and its natural resources in a Contracting State.
  • An enterprise from one State carrying on offshore activities in the other State is deemed to have a permanent establishment in that other State if the activities last for more than 30 days in any 12-month period. This threshold also applies if associated enterprises continue the same project, combining their activity durations.
  • However, certain activities are excluded from being “offshore activities” for this purpose, such as:
    • Activities typically excluded from “permanent establishment” (e.g., storage, display, purchasing)
    • Towing or anchor handling by ships primarily designed for that purpose, and other activities performed by such ships
    • Transport of supplies or personnel by ships or aircraft in international traffic
    • A resident of one State performing independent professional services offshore in the other State is deemed to have a permanent establishment there if the activities last for a continuous period of 30 days or more.
    • Salaries, wages, and other remuneration from employment connected with offshore activities through a permanent establishment in the other State may be taxed in that other State to the extent the employment is exercised offshore there.
    • If tax is paid in South Africa on income related to these offshore activities, the Netherlands will provide a tax reduction similar to its general double taxation elimination rules.

Non-discrimination (Article 25)

• • Nationals of one State should not be subjected to taxation or related requirements in the other State that are more burdensome than those imposed on nationals of that other State in the same circumstances.
  • A permanent establishment of an enterprise from one State in the other State should not be taxed less favorably than enterprises of that other State carrying on the same activities.
  • Interest, royalties, and other payments by an enterprise of one State to a resident of the other State are deductible under the same conditions as if paid to a resident of the first State (with exceptions for special relationships). Similarly, debts to residents of the other State are deductible for capital tax purposes under the same conditions.
  • Companies of one State that are wholly or partly owned/controlled by residents of the other State should not face more burdensome taxation than similar companies in the first State.
  • Pension contributions made by a resident of one State to a pension plan recognized in the other State will be treated the same way for tax purposes as contributions to a plan recognized in the first State, provided the individual was contributing before becoming a resident, and the competent authority agrees the plan corresponds.
  • Important Note for South Africa: This Article does not prevent South Africa from imposing a tax on profits attributable to a permanent establishment of a Netherlands company in South Africa at a rate that does not exceed the normal company tax rate by more than five percentage points. This applies as long as permanent establishments of non-South African companies are not liable to the secondary tax on companies, and it will no longer apply if South Africa abolishes the secondary tax on companies or levies it on residents at less than five percentage points .

Mutual Agreement Procedure (Article 26)

• • If you believe the actions of one or both countries result in taxation not in accordance with the Convention, you can present your case to the competent authority of your resident State (or national State if it concerns non-discrimination) within three years from the first notification of the action.
  • The competent authorities will try to resolve the case by mutual agreement to avoid taxation not in accordance with the Convention. Any agreement reached will be implemented regardless of domestic time limits.
  • They can also consult to resolve difficulties or doubts about the Convention’s interpretation or application, or to eliminate double taxation in cases not explicitly covered.
  • If a difficulty regarding interpretation or application cannot be resolved within two years, the case may be submitted for arbitration at the request of either State, provided the taxpayer agrees in writing to be bound by the arbitration board’s decision. The arbitration decision is binding on both States and the taxpayers involved.

Exchange of Information (Article 27)

• • The tax authorities of both countries will exchange information necessary for carrying out the Convention’s provisions or their domestic tax laws, as long as it’s not contrary to the Convention.
  • Information received is treated as secret and can only be disclosed to persons or authorities involved in tax assessment, collection, enforcement, prosecution, or appeals. They can only use it for these purposes and may disclose it in public court proceedings or judicial decisions.
  • Information necessary for arbitration can be released to the arbitration board, subject to limitations.

Assistance in Recovery (Article 28)

• • Both countries agree to assist each other in collecting taxes owed by a taxpayer, provided the amount has been finally determined under the laws of the requesting State.
  • Taxes accepted for collection will be collected to the extent permitted by the collecting State’s domestic law.
  • The requesting State must provide a certificate that the taxes owed have been finally determined.
  • If a tax claim is not yet final (e.g., due to appeal), the requesting State can ask the other State to take interim measures for conservancy (like seizing assets) to protect its revenues, if allowed by the other State’s laws.
  • Requests for collection or interim measures are generally made only if sufficient property of the taxpayer is not available in the requesting State for recovery.
  • Recovered tax amounts will be remitted to the requesting State, minus extraordinary costs, which are borne by the requesting State. Ordinary costs are borne by the State providing assistance.

Limitations on Information Exchange and Assistance (Article 29)

• • The provisions for information exchange (Article 27) and assistance in recovery (Article 28) do not oblige a Contracting State to:
    • Carry out administrative measures contrary to its own laws or administrative practice, or those of the other State.
    • Supply information not obtainable under its own laws or normal administrative course, or those of the other State.
    • Supply information that would disclose trade, business, industrial, commercial, or professional secrets or trade processes, or information whose disclosure would be contrary to public policy (ordre public).

Final Provisions

• • The Convention can be extended to the Netherlands Antilles and Aruba if they impose similar taxes, subject to agreement.
  • The Convention remains in force until terminated by one of the Contracting States, which requires at least six months’ notice before the end of any calendar year, but only after five years from its entry into force.