Exemption method does not require effective taxation in the Netherlands

On 25 January 2018, the Supreme Court (Hof van Cassatie/Cour de Cassation) rendered decision (Case No. F.16.0060.N/1) on the competence to tax athlete income under the application of articles 17 and 23 (1) a, of the Belgium – Netherlands Income Tax and Capital Tax Treat 2001 (as amended through 2009) (the Treaty).

(a) Facts. The taxpayer was a professional cyclist who was employed by two Belgian cycling teams during the years 2007-2009. He participated in many cycling races outside Belgium (Netherlands, Italy, Australia, France, Luxembourg and Spain) and in his income tax return he requested a proportional exemption of his salary based on the days of participation in the cycling races and the applicable treaty provisions (articles 17 and 23(A) of the OECD-Model convention).

A dispute arose as to the allocation key used by the taxpayer. The court of first instance and appeal ruled in favour of the taxpayer stating that an allocation based solely on the races performed (excluding training days) is a suitable allocation key in the case at hand. After all, the employer rewarded the taxpayer mainly for taking part in cycling races.

The Belgian tax administration disagreed and in respect of the salary which corresponds to the Dutch cycling races, the Belgian tax administration was also of the opinion that effective taxation in the Netherlands under article 23 (1) a of the Treaty was required in order to be able to benefit from an exemption.

The Belgian tax administration filed an appeal before the Court of Cassation.

(b) Legal background. Article 23 (1) a of the Treaty states that “Where a resident of Belgium derives income, other than the dividends, interest or royalties referred to in paragraph 5 of Article 12, or owns items of capital which are taxed in the Netherlands in accordance with the provisions of this Convention, Belgium shall exempt such income or these items of capital from taxation but may, in calculating the amount of tax on the remaining income or capital of that resident, apply the rate of tax which would have been applicable if such income or items of capital had not been exempted.”

The Belgian tax administration referred to the joint memorandum of understanding on article 21 (other income) of the Treaty to uphold the position that the concept of “which are taxed” used in article 23 (1) a, of the Treaty requires effective taxation in the Netherlands. The joint memorandum of understanding states that an items of income is regarded to be taxed if it is included in the taxable base.

(c) Decision. The Supreme Court and the advocate general categorically reject the arguments of the Belgian tax administration.

An allocation key based on the days of participation in cycling races is not contrary to the law. Also, effective taxation under the allocation rule of article 17 of the Treaty (and thus logically also various other allocation rules such as articles 15 and 16) is not required.

The opinion of the advocate-general clarifies that an Argumentum a contrario is not allowed. In other words, it is not allowed to re-allocate the competence to tax on the basis of article 23, (1) a, of the Treaty. If Belgium wished to tax items of income, for which the competence to tax is allocated to the other contracting state, when those items are e.g. exempt or not taxed in the other contracting state, it should have included a credit system in the Treaty.

Applying article 21 of the Treaty by analogy to the other allocation rules is contrary to the provision of article 21 of the Treaty. Belgium and the Netherlands clearly limited the requirement of effective taxation in order to be able to claim an exemption to items of income not governed by the other allocation provisions of the Treaty.

Note. The statement of the Court of Cassation is revolutionary and clearly against the position of the Belgian tax administration in various similar cases. It seems moreover that, according to the Court, there is no room for a “subject-to-tax clause” under the exemption method.

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