With the signing of the Protocol, Germany and the Netherlands amended the Treaty in line with various provisions of the Multilateral Instrument (MLI).1 Additionally the Treaty has been amended for (short-term) social security benefits. It was envisaged to enter the Protocol into force as from January 1, 2022 onwards. However, to this day it is not yet known when the changes will actually take effect. During the negotiations Germany and the Netherlands discussed the possibility to amend the Treaty with a special rule for the working days at home in case of frontier workers; special rules that were laid down during the COVID 19 period, have already been lifted.

The Protocol: MLI compliant

The most significant amendments to the Treaty following from the Protocol can be specified as follows:

  • Permanent establishment specific activity exemptions. The specific activity exemptions to the general permanent establishment (PE) definition listed in article 5, paragraph 7 of the Treaty will be amended and only apply if the activities are of “preparatory or auxiliary” nature. This is in line with 13(3) of the MLI and with article 5, paragraph 4 of the 2017 OECD Income and Capital Model Convention (OECD Model). The Protocol does not provide for an anti-fragmentation clause as laid down in article 13(4) MLI and article 5, paragraph 4.1 of the OECD Model. This amendment may e.g. result in a warehouse activity to qualify as a PE in Germany or the Netherlands. As the PE definition in the Dutch (Corporate) Income Tax Act and the Dutch Wage Tax Act is linked to the PE definition in the Treaty, the amendment may directly impact Dutch PE-situations.
  • Holding period for reduced withholding tax rate on dividends. A minimum holding period of 365 days will apply, in addition to the already existing 10% ownership requirement, for the reduced withholding tax rate of 5% on dividend payments (article 10, paragraph 2, sub a of the Treaty). Changes in the ownership as a result of a corporate reorganization (e.g. merger or demerger) shall not be taken into account for purpose of the calculation of the holding period. This amendment is in line with article 8(1) of the MLI.
  • Real estate shares clause 365-day period. A 365-day testing period will be included in the already existing real estate shares clause (article 13, paragraph 2 of the Treaty). As a result, capital gains derived from the alienation of share interests in entities may be taxed in the source state if, at any time during 365 days preceding the alienation, these shares derived their value directly or indirectly for more than 75% from immovable property in that source state. This testing period is in line with article 9(4) of the MLI. The 75% real estate percentage was already included in article 13, paragraph 2 of the Treaty and is higher than the 50% MLI standard but will not be amended by the Protocol. As the Dutch non-resident tax rules doesn’t apply to or the Dutch participation exemption generally applies to such capital gains, the (changed) real estate shares clause seems to be more relevant for shareholders in German real estate entities (i.e. entities with real estate located in Germany).
  • Pension, Annuities, and social security payments. A new third paragraph will be included in article 17 of the Treaty as a result of which payments under the provisions of a social security system, not being a social security pension, may be taxed in the state from which it is received. By amending article 22, paragraph 1, sub b and paragraph 2 sub b of the Treaty the exemption method will apply to these payments. As a result of this amendment social security benefits paid out under the German social security system which are exempt from taxation in Germany (e.g. so called Krankengeld” and “Elterngeld”) will no longer be subject to Dutch income taxation.
  • Elimination of double taxation in the Netherlands: A provision will be added in the elimination of double taxation clause for the Netherlands (article 22, paragraph 2 under e of the Treaty). If a Dutch resident derives income covered by the Treaty and if Germany applies the provisions of the Treaty to exempt that income from taxation or if Germany applies the withholding tax rates of article 10, paragraph 2 of the Treaty (the Dividend article), the tax credit method instead of the exemption method of the Treaty applies (i.e. article 22, paragraph 2 sub c instead of article 22, paragraph 2 sub b of the Treaty). So far, this new provision is in line with article 5(2) of the MLI.
  • Anti-abuse rule for permanent establishments situated in third jurisdictions. In line with article 10 of the MLI an anti-abuse rule for permanent establishments situated in third jurisdictions will be included in article 23 paragraphs 3, 4 and 5 of the Treaty. If income derived from a contracting state is exempt from income in the other state because the other state attributes the income to a permanent establishment in a low taxed third jurisdiction2, the benefits of the Treaty do in principle not apply to that income. An exception applies in case the income is derived in connection with or is incidental to an active business carried on through a permanent establishment in the contracting state. Furthermore, upon request of a taxpayer, the relevant authorities may still decide to grant the Treaty benefits if they consider that justifiable.
  • Principle purpose test. In line with article 7(1) of the MLI a principle purpose test will be included in the Treaty (in article 23, paragraph 6 of the Treaty). If obtaining Treaty benefits was one of the principle purposes of the arrangement or transaction, these Treaty benefits shall no longer be granted. We note however that article 23, paragraph 1 of the Treaty already provided Germany and the Netherlands for the possibility to apply their domestic anti-abuse provisions. Article XV of the existing protocol to the Treaty, which amongst other prescribes that Germany shall apply its domestic anti-abuse rules taking into account the substance of the Dutch entities on a consolidated basis and which includes a provision that no abusive situation exists in case of Dutch personal holding situations, has not been amended by the Protocol.

The Protocol will enter into force once both Germany and the Netherlands have completed their ratification procedures and notified each other thereof. The amendments as included in the Protocol will enter into effect on book years starting on or after 1 January of the calendar year following the calendar year in which the Protocol has entered into force. For German tax purposes, in case of withholding taxes, the Protocol may already enter into effect on 1 January following the calendar year in which the Protocol has entered into force.

The Protocol: relevance for Dutch structures

The relevance of the Protocol for Dutch tax purposes differs per structure. Given the amendments of the 365-day (holding) period in the dividend article and in the real estate shares clause, the amendments may materially have retroactive effect. It is therefore advised to analyse the impact of the Protocol as soon as possible.

In case of any questions, please contact a member of our Region Team Germany, or your trusted Loyens & Loeff adviser.


1. Germany did not include the Treaty in its list of Covered Tax Agreements under Article 2(1)(a)(ii), and therefore it is not covered by the MLI. With signing the protocol, Germany and the Netherlands now aligned the Treaty with the minimum standards of the MLI.

2. I.e. less than 60% of the tax that would have been due in the other state, would that income have been taxed as part of permanent establishment in that other state.