On 27 January 2011, the Dutch Ministry of Finance published a Decree providing the Dutch preferences with respect to the recently amended Article 7 of the OECD Model Convention (2010 OMC) on the attribution of profits to permanent establishments. By following these preferences, taxpayers may reduce the risk of disputes with the Dutch tax authorities on the attribution of profits between head office and permanent establishments. The Decree also indicates that taxpayers are free to take positions that deviate from the Dutch preferences, provided that these positions are in conformity with Article 7 2010 OMC, i.e. one of the Authorised OECD Approaches (AOAs), and the end result is at arm’s length.

The OECD Model Convention is, among others, used by the Netherlands as one of the standards for negotiations on tax treaties with other countries. In summary, Article 7 2010 OMC deals with the attribution of profits of a taxpayer that operates in two (or more) different states. In the past, contracting states often expressed different views on the attribution of profits. This resulted in either double taxation or non taxation of business profits. In 1995, the OECD started a project to unify the interpretation of Article 7. This project resulted in the Report on the Attribution of Profits to Permanent Establishments of 18 July 2008, with a minor amendment taking place in July 2010 (the Report) and the amendment of Article 7 in 2010.

The Report and Article 7 2010 OMC confirm the “functionally separate entity approach”. This approach considers head offices and permanent establishments as independent entities, which are subject to general transfer pricing regulations. Although Article 7 2010 OMC is formulated more clearly than its predecessor and the OECD Commentary has been extended significantly, taxpayers still need to make several choices to determine an arm’s length attribution of profits between head offices and permanent establishments. The goal of this Decree is to make the Dutch preferences public, which should result in fewer disputes with the Dutch tax authorities.

The most important Dutch preferences are mentioned hereunder:

• The Netherlands generally applies the dynamic approach to the interpretation of treaties and changes of the OECD Commentary. The Report is treated as a clarification of existing policies and therefore its outcome will be applied to all existing treaties.
  
• The Netherlands will in principle attribute profits in accordance with Article 7 2010 OMC, even if an existing tax treaty is not drawn up in accordance with Article 7 2010 OMC, or in cases where no treaty is applicable. 
  
• The Decree prefers one of the two AOAs for the attribution of a minimum equity of a permanent establishment, i.e. the “capital allocation approach”. Two examples on the application of this method are included in the Annex to the Decree.
  
• In principle, the Netherlands does not allow charging an internal interest between head office and permanent establishments. The only exception is where there is a treasury function, in which case internal interest can be used to determine the arm’s length remuneration for this function. 
  
• The Netherlands will in principle not attribute separate profits to a dependent agency permanent establishment of a principal when the agent receives an at arm’s length remuneration.

For further information with respect to the above, please contact your regular contact person within Loyens & Loeff.