OECD’s physical presence method is determinative!
The Hague: 14-07-2017. The Dutch Supreme Court declares the appeal in the cassation of the Secretary of State to be justified. As days of presence in the state of activity do not count only the days actually worked in that state. All other days that the taxpayer was present in that state and who had any connection with the work executed there, do also count for this matter.
Taxpayer B is a resident of Belgium. He is a director and sole shareholder of X BVBA, a company established in Belgium, active in architectural project management. In 2009 B worked for X BVBA for a total of 181 days in the Netherlands on behalf of a contract concluded between X BVBA and the Dutch (ultimate) service recipient. B traveled on his working days from his home in Belgium to the workplace in the Netherlands. B received a salary of € 57,600 from X BVBA in 2009. The inspector is of the opinion that the Dutch fictional wage scheme applies and therefore increases the wage of B to a fixed percentage (80%) of the (net) annual result of X BVBA over 2009.
In dispute is whether the Netherlands is entitled to tax the remuneration of X on the basis of the double tax treaty concluded between the Netherlands and Belgium and, if so, whether the attributed Dutch income of X can be taxed under the rules of the Dutch fictional wage scheme of Article 12a of the Dutch Wage Withholding Tax Act 1964.
According to the courts the Netherlands was not entitled to tax B on this deemed income because the 183 days rule was simply not met. B stayed in the Netherlands for only 181 days in connection with his work. According to the court, a reasonable explanation of the treaty implies that days spend in the Netherlands for private purposes should not count under the 183 days rule.
The Dutch State Secretary went into cassation. The Supreme Court ruled that the court has applied an incorrect test in it’s assessment of the number of days B stayed in the Netherlands. As days present in the state of activity do not count only the days actually worked in that state. All other days spent by B in the work state connected to his work, such as Saturdays, Sundays, National Holidays, Vacations and days off, before, during or after termination of the work or short breaks, do also count in this respect.
The Supreme Court referred the case back to the lower court for a further investigation into the number of days that B was present in the Netherlands. If the referral court judges that B stayed in the Netherlands for more than 183 days, the question arises whether the fictional wage scheme may then be applied. According to the Supreme Council, this is the case since B held a substantial interest in X BVBA, in spite of the fact that X BVBA is established in Belgium. The Dutch fictional wage scheme can be applied irrespective of whether the company is a resident of the Netherlands or not.
An important conclusion is therefore that in the absence of a Dutch wage withholding agent (”inhoudingsplichtige”), a remuneration derived from an employment carried out in the Netherlands, depending on the applicable tax treaty, may still be subject to Dutch personal income tax in the hands of a foreign national not residing in the Netherlands.
Substantial shareholders of foreign entities with a working presence in the Netherlands be careful! There are however a few proven ways to circumvent this outcome!
Supreme Court, July 14, 2017, ECLI:NL:HR:2017:1326