This is contribution number four from KPMG Meijburg & Co regarding the most recent development with respect to the discretionary benefit provision in the 1992 Netherlands-US tax treaty.
This article is most likely to be relevant for investments by European companies through The Netherlands into the US.
Under the 1992 tax treaty between the Netherlands and the United States, residents of either state must meet one of the specific tests (generally referred as the Limitation of Benefit clause, or LOB clause) in order to qualify for treaty protection. If none of the specific tests can be met, discretionary benefit can be applied for under article 26(7).
We have learned from an IRS official that recently several discretionary requests have been approved. Although no written policy has been issued by the IRS concerning UK mixer companies established in the Netherlands, some useful information was revealed during last week's Annual Conference of the American Tax Institute in Cannes.
Treatment Of UK Mixer Companies
On 15 november 1995 Ms. Christine Halpherin (Assistant IRS Commissoner) was quoted as having made the following comments with regard to UK mixer companies and discretioinary benefits under the US-Netherlands Treaty:
1)The IRS has recently made a (favourable) policy decision regarding UK mixer companies. In general, although each case will be examined independently, a "typical" UK mixer company should be granted discretionary benefits.
2)In order for a UK mixer company to be favourably considered for discretionary benefits, there should be a valid business purpose for establishing the Dutch BV. The US courts have previously recognised that reduction of foreign tax is a valid business purpose. Of course, other business purposes would be helpful. In addition, the UK parent company should be a resident of the UK not only under the principles of the US-UK Treaty, but also under the principles of Article 26 of the US-Netherlands Treaty.
3)The primary consideration in deciding to grant discretionary benefits is the fact that the withholding tax rates between the US and the UK are identical to the US and the Netherlands. Ms. Christine Halpherin indicated that the IRS is "moving toward" a derivative benefits approach. Therefore, it would appear that favourable treatment may also be given to Dutch holding companies with, for example, German parents.
Given these favourable announcements by the IRS, you may wish to review your particular situation to determine if a request for discretionary benefits is warranted. KPMG Meijburg & Co can assist you in making such requests, if needed.
22 November 1994, KPMG Meijburg & Co
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Further information can be obtained from Mr Alfred GM Groenen, MCL, KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247
