Netherlands: The Impact on Tax Treaties of a Legal Fiction Included in National Tax Law (the 'Customary Wage Rule')

Legal fictions have been included in various tax laws in many countries. In respect of tax treaties, they may give rise to various questions, such as: • Does the inclusion of a legal fiction in a national tax law after the conclusion of a tax treaty constitute tax treaty override? • Does the inclusion of a legal fiction in a national tax law before the conclusion of a tax treaty constitute tax treaty override? The latter question is also the subject of this chapter. In 1997, the Netherlands introduced what is known as the customary wage rule. The question is whether the inclusion of this rule constitutes a tax treaty override in respect of tax treaties concluded after 1997. Since quite a number of countries have included legal fictions in their national laws, the answer to this question may not only be relevant for the Netherlands, but may have a wider impact. Therefore, the answer provided by the Dutch Supreme Court (in Dutch: Hoge Raad (HR)) may, both from an academic and practical point of view, contribute to the learning processes in other states. In this context, this chapter discusses a recent ruling of the Dutch Supreme Court: HR, 18 November 2016, no. 15/004977, BNB 2017/34. The most important question in this case was whether the inclusion in 1997 of the customary wage rule had to be considered an act of tax treaty override in the context of the Netherlands-Portugal Income and Capital Tax Treaty (1999). Firstly, the facts of the case are briefly described. Secondly, the decision of the Dutch Supreme Court is presented. Subsequently, the decision is analysed. The author develops a benchmark in order to assess the Supreme Court’s decision and to come up with suggestions for improvement if necessary. The benchmark consists of three main components. The author explains that a tax treaty should be consistent with the principles of international tax neutrality, of origin, and of good faith. In this context, the author also addresses what impact the decision may have on the tax treaty negotiation process and tax treaties themselves if a contracting state wants to give effect under tax treaties to legal fictions included in its national tax laws. The author closes with some main conclusions.