Global

Details

  • Service: Tax, International Corporate Tax, Global Compliance Management Services
  • Type: Regulatory update
  • Date: 7/24/2012

The Netherlands - Less double-tax relief for foreign PE allocations 

July 24:   The Dutch Supreme Court (Hoge Raad der Nederlanden) held that a pro rata part of the small and medium-sized enterprises (SME) exemption must be allocated to the profit that a business realizes abroad through a permanent establishment (PE).

The effect of the decision is less relief from double taxation.

Summary

A Dutch business realized part of its profit through a permanent establishment in the United Kingdom.


The UK permanent establishment’s profit was exempted from tax in the Netherlands to avoid double taxation.


The tax relief fraction used to calculate the exemption relates to that portion of the individual (personal) income tax in box 1 that is allocated to the permanent establishment and is therefore exempted.


  • The numerator of the tax relief fraction is the profit that can be allocated to the foreign permanent establishment.
  • The denominator is the total worldwide business profit and any other box 1 income; double taxation relief for personal income tax purposes is calculated per the box.

Since 2007, the SME exemption can be deducted from business profits. For 2012, this deduction item is 12% of the business profits—resulting in an effective box 1 top rate for business profits of 45.8%.


In the case before the Supreme Court, the taxpayer wanted to deduct the SME exemption in full from its Dutch taxable business profits. However, the Supreme Court held that a pro rata part of the SME exemption must be deducted from the profit allocable to the foreign permanent establishment—thus, resulting in less relief from double taxation.


Read a July 2012 report prepared by the KPMG member firm in the Netherlands: SME exemption partially allocable to permanent establishment resident abroad: less double taxation relief



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