Tax Lawyers / Fiscalisten

Wednesday, 28 December 2016

Dutch deemed salary rule under the application of double tax treaties

The Dutch Supreme Court has recently decided that the Netherlands could not apply the domestic deemed salary rule under the application of the tax treaty between the Netherlands and Portugal. The Supreme Court clarifies that the deemed salary rule can only be applied when the other Contracting state has specifically accepted the application of this rule.


An individual was tax resident of Portugal in the period from 1998 to 2001. The taxpayer owned a substantial shareholding (i.e. shareholding of 5% or more) in a Dutch company. As from 1997, directors-substantial shareholders are deemed to receive a certain deemed minimum salary. In the Netherlands this “deemed” minimum salary was taken into account at the level of the Portuguese tax resident. The tax treaty between the Netherlands and Portugal was concluded in 1999 and effective as from 1 January 2001.


The question was whether the Netherlands is allowed to tax this deemed salary (in 2011) under the applicable treaty.

Court of Appeal

The Court of Appeal decided that the Netherlands is not limited under the double tax treaty to tax this deemed salary based on the fact that the concept of a deemed minimum income already existed when the treaty was signed. In view of the Court of Appeal, the application of the deemed salary rule cannot be regarded as a posterior unilateral change of the double tax treaty.

Supreme court

The Dutch Supreme Court ruled that a domestic fiction can only result in a shift of the taxing powers if this was accepted by the other treaty partner. The acceptance could for example be included in the parliamentary history of the tax treaty. The mere fact that the domestic fiction was already existing upon concluding the tax treaty is not sufficient to presume that the other tax treaty partner has accepted the effect of such a provision under the double tax treaty. The acceptance should be based on a clear source, which was not available in this case. As a result the Dutch Supreme Court decided that the domestic tax rule could not be applied since the application of the rule was not formally accepted by Portugal.

To conclude

Based on this decision, the conclusion can be drawn that the fictional salary rule can only be applied in treaty cases if this has been explicitly accepted by the treaty partners. This is only the case in respect to Belgium since this acceptance follows from common Explanatory Memorandum to this treaty. We anticipate that the Netherlands will take this into account in future treaty negotiations.



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