On May 1, 2015 the Deputy Minister of Finance published a policy statement on termination payments covered by tax treaties. In it he explains how the revised OECD Commentary should be reconciled with Supreme Court case law. To this end, he states that:
- Supreme Court judgments will continue to apply to termination payments made before July 15, 2014;
- the revised OECD Commentary will apply to termination payments made as from July 15, 2014;
- the policy statement does not currently apply to the relationship with Germany, as the Netherlands and Germany have concluded a supplemental bilateral treaty on the allocation of the power to impose tax on termination payments in cross-border situations.
Allocation of the power to impose tax on termination payments
The OECD Commentary has enormous significance for the Netherlands in respect of the interpretation of tax treaties that are based on the OECD Model Convention. The OECD Commentary had not previously referred to termination payments. This meant that in practice many countries had devised their own guidelines; a situation which could lead to double taxation or non-taxation. That is why in the past the Supreme Court developed a guideline for termination payments in international situations. The guideline allocated the power to tax, in principle, to the country where the employee worked during the year in which their employment was terminated and the four preceding years, unless special circumstances justified a different allocation.
OECD Commentary revised as of July 15, 2014
On July 25, 2014 the proposed changes to the OECD Commentary in respect of the tax treatment of termination payments took effect. The general rule based on the revised OECD Commentary is that the country where the employee worked during the last twelve months prior to the termination of their employment can tax the termination payment. Unlike the judgments rendered by the Supreme Court, the OECD Commentary does not address the recharging of severance pay. With regard to other termination-related payments such as ‘garden leave’ or non-competition payments, separate guidelines apply to the allocation of the power to tax.
Policy Statement dated May 1, 2015
The revised OECD Commentary and Dutch case law are not in line with one another. It was unclear how the Netherlands would deal with this after July 15, 2014. The Deputy Minister of Finance has now published a policy statement in which he states that Supreme Court case law will continue to apply to termination payments made before July 15, 2014, with the OECD Commentary applying to termination payments made as from July 15, 2014. The Deputy Minister states that he does not believe that the allocation question is affected by whether or not the severance pay is recharged. What he does however consider crucial is the extent to which countries that should be allocated the right to tax termination payments were actually entitled to tax the regular salary in the twelve months preceding the termination.
Termination payments in practice
In the case of termination payments involving cross-border employment, it is essential to first establish whether they are covered by a treaty based on the OECD Model Convention. In that case, the revised OECD Commentary applies according to the Deputy Minister, unless the termination payments were made before July 15, 2014. We recommend that you also check to see how the termination payments are treated for tax purposes in the other country so that double taxation is avoided. We will gladly provide assistance if required.
Revised OECD Commentary on sportspersons and entertainers
The OECD Model Convention has a specific article on sportspersons and entertainers that states which country can tax their remuneration. This article applies if the remuneration is for ‘personal activities as such’. According to case law, personal activities must be interpreted as including public performances. Under the revised OECD Commentary, remuneration for the preparation of the activities, such as rehearsals and training, is also regarded as ‘personal activities as such’. Remuneration for participation in a pre-season training camp is covered by the article on sportspersons and entertainers, for example. In so doing, the OECD Commentary provides a broader definition of the expression ‘personal activities as such’ than that used by the Dutch tax authorities to date. The Deputy Minister indicates in the policy statement that this policy applies to tax assessments that were not yet irrevocable on July 15, 2014.