Netherlands-Singapore Double Tax Treaty
The Avoidance of Double Taxation Agreement (DTA) between Singapore and the Netherlands came into force on September 3, 1971. The agreement has been amended twice, by protocols that became effective on January 1, 1994, and May 1, 2010. Further changes were made on March 29, 2019, after the two countries ratified the Multilateral Instrument.
Countries, like Singapore and the Netherlands, enter into bilateral tax agreements in order to prevent the double taxation of income, capital, and other taxable units. These agreements enable companies and individuals who operate in both countries to rationalize their tax payments such that they only have to pay taxes in one of the countries. This article will explain the benefits the Netherlands-Singapore confers on Singapore-based companies; the types of taxes the agreement covers; the principles of tax relief; and other provisions of the DTA that may be important to your business.
With the globalization of commerce, it has become common for a company or individual resident in one state to receive taxable income in another country. Usually this often meant paying taxes in both countries - the country of one’s residence and the country from where the income is received. Since this type of “double” taxation is inequitable, many nations have concluded bilateral double-taxation agreements to prevent it.
A typical DTA contains two basic mechanisms for resolving this situation: a) an agreement may specify that the tax must be paid in the country of residence and will be exempt in the jurisdiction where the income arises; b) in the remaining cases, the resident must pay tax to the country where the income is generated and the taxpayer receives a compensating foreign tax credit in the country of residence. The Singapore–Netherlands DTA adopts both these mechanisms.
Scope of the Agreement
The Netherlands–Singapore DTA is applicable to residents (legal entities and individuals) of the either signing states, i.e., Netherlands and Singapore.
Existing taxes covered by the agreement include:
When paid In the Netherlands:
- Income tax
- Wages tax
- Company tax
- Dividend tax
- Tax on fees of directors of companies
- Capital tax
When paid In Singapore:
- Income tax
Residency based Taxation
The main goal of a DTA is to determine in which state a person must pay taxes. The basic principle for this determination in the Netherlands–Singapore DTA is based on residency. Companies and individuals are taxable in the country where they reside. The question of whether a person is a resident of a state is settled by national laws. The Dutch and Singapore laws have similar approaches for residency status determination, thereby making the DTA simple to interpret.
Residency Determination for in the Netherlands and Singapore:
- Residency of a company is determined by where the business is controlled and managed. “Control and management” involves decision making on strategic matters, such as those on company policy and strategy. The location where control and management of a company is exercised can be objectively determined. Typically, the location of the company's Board of Directors meetings, during which strategic decisions are made, is a key factor in this determination.
- Foreign-owned investment holding companies, with purely passive sources of income or receiving only foreign-sourced income, are generally regarded as non-residents because these companies usually act on the instructions of their foreign owners or shareholders.
Residency Determination For individuals:
You will be regarded as a tax resident of Singapore if you:
- Stay or work in Singapore for at least 183 days in a calendar year, or continuously for three consecutive years; or
- Work in Singapore for a period straddling two calendar years and your total period of stay is at least 183 days.
In the Netherlands:
You are a tax resident of the Netherlands if your permanent residence is in that country. It is determined on the facts of each case. No minimal presence days’ threshold applies. The main factors in this determination are the following:
- You spend most of your time at a Dutch address;
- Your partner or family lives in the Netherlands;
- You work in the Netherlands;
- You have insurance in the Netherlands;
- Your (family) physician is resident in the Netherlands;
- You are a member of one or more clubs or societies in the Netherlands;
- Your kids receive an education in the Netherlands.
However there are situations where, under national laws, you may be considered to be a resident of both states. To avoid double taxation, the DTA establishes the following rules:
- The same basic principle is used i.e. a company is a resident of the state in which it is managed and controlled.
- A person is a resident of the state in which he or she has a permanent home. If such home is present in both states, he or she is a resident of the state where he or she has closer personal and economic relations;
- If the above cannot be determined, a person is a resident of the state where he or she has an habitual abode;
- If he or she has an habitual abode in both states or in neither of them, the tax authorities of two countries will settle the question by mutual agreement.
Thus, the residency is determined using the above rules and the entity or individual is only taxed in the state of residency. However, the DTA has additional rules for certain types of income and capital gains as explained below.
Income from Immovable Property
Income from immovable property is taxed in the state in which the property is situated.
Such property is defined in accordance with the laws of the state where it is situated. Singapore and the Netherlands have similar definitions: i.e., immovable property includes land, benefits to arise out of land and things attached to the earth, for example land, buildings, natural resources, etc.
The profits of an enterprise are taxable only in the state in which such enterprise is resident. However, the DTA has additional rules for taxation of income of a permanent establishment as explained below.
If an enterprise carries on a business abroad as a permanent establishment (PE), its profits
are taxed in that state, but only in the amount attributable to that PE. The PE is considered to be a separate entity for tax purposes.
PE means a fixed place of business situated abroad in which the activities of the enterprise are wholly or partly carried on. The PE is considered to be abroad if any of the following are abroad:
- A place of management;
- A branch;
- An office;
- A factory;
- A workshop;
- A farm or plantation;
- A mine, oil well, quarry or other place of extraction of natural resources; or
- A building site or construction or assembly project which exists for more than 6 months.
However, your business will not be considered as a PE if you:
- Use facilities only for storage, display or delivery of goods belonging to your enterprise;
- Maintain a stock of such goods only for storage, display or delivery;
- Maintain a stock of such goods or only for processing by another enterprise;
- Maintain a fixed place of business only for purchasing goods, for collecting or supply of information, advertising or for similar activities.
Shipping and Air Transport
Companies carrying on a ship or aircraft transport business are taxable, like other companies, in the country of their residency.
However, if some passengers are boarded or goods loaded in the other state, the carrier may be taxed in that other state, but only on profits derived from such activities in that other state. The rate in such cases must be reduced by 50 per cent of the national rate of that state. For example, if a Dutch airline derives profits in Singapore, the Singapore corporate income tax rate of 17% would be reduced twice, and such income would be taxed at 8,5% in Singapore.
The concept of an Associated Enterprise comes into play when:
- A company of one state participates in the management, control or capital of an enterprise abroad, or
- The same persons participate in the management, control or capital of companies of two states,
- The commercial relations of such companies are different than the relations of independent ones. In other words, the companies do not transact business at an arm’s length.
In such a case, any profits that would, but, by reason of the above conditions, have not been accrued to one of the associated companies, may be included in the profits of that enterprise and taxed accordingly.
Dividends are traditionally taxed in the country of a recipient's residency. However, they may be taxed also in the country of residency of the company that is paying the dividends.
The DTA provides limits on such taxation in the country where the company paying the dividends resides.
- Dividends paid by a company that is a resident of the Netherlands to a resident of Singapore are subject to the dividends withholding tax of 15% in the Netherlands. But if the recipient of the dividends is a Singapore company that holds at least 25 per cent of the capital of the company paying the dividends, the Netherlands does not levy this tax.
- Dividends paid by a company that is a resident of Singapore to a resident of the Netherlands are not taxed in Singapore.
The general principles for avoiding double taxation when paying interest are similar to those applied to dividends. Interest is taxed in the state where the recipient resides.
However, such interest may be taxed in the state in which it arises, according to the law of that state. Without the treaty, the withholding tax rate in Singapore for any interest paid to non-residents is 15%, whereas the Netherlands does not levy an interest withholding tax. Under the DTA, the withholding tax on interest in Singapore is 10%.
Royalties refer to payments to an owner for the use of copyright for any patent, trademark, design or model, plan, secret formula, etc.
Without the treaty, the withholding tax rate in Singapore for any royalties paid to non-residents is 10%, whereas the Netherlands does not impose such a tax. Under the DTA, royalties are taxed only in the country of the recipient's residency. When the rights entitling a person to the royalties are sold i.e. a sale of IP rights, such income is taxable also only in the country of the person’s residency.
The general rule is that gains from selling property are taxed in the state where the seller is resident. However, there are certain exemptions:
- Gains from selling immovable property are taxed in the state in which such property is situated.
- Gains from selling movable property of the PE or the PE itself that resides in one state are taxed in the other state.
- Gains from selling ships and aircraft operated in international traffic, and movable property for the operation of such ships and aircraft, are taxable only in the state of which the person carrying on the enterprise is a resident.
Salaries, wages and other similar payments, as well as income from independent activities, are taxed in the worker’s state of residency.
The only exception is where a worker who is a resident of state A performs his or her activities abroad in state B. The rule is that the income is taxed in state A, if:
- The recipient is present in state B for a total period of less than 183 days during the year; and
- The income is paid by a person who is not a resident of state B; and
- The person does not receive the income from a permanent establishment he or she has in state B usually used for the purpose of carrying out the activities.
Income received from employment aboard a ship or aircraft in international traffic is taxable only in the state where the worker is resident.
Directors' fees and similar payments received by a resident of state A as a member of the Board of Directors of a company that is a resident of state B are taxed in state B.
Artists and Athletes
Income of public artists working in television, theatre, radio, musical performances, professional sports, etc., from personal activities is taxed in the state where these activities are performed.
Pensions and other payments made with respect to past employment, injuries, or annuities are taxed in the state where the person who receives them is resident.
Payments for Governmental Functions
Income, including pensions, paid by a state for governmental services rendered to that state is taxed in that country.
However, if services are provided by a resident of the state A to the state B and the person is not a citizen or national of the state B, his or her income is taxed in the state A.
Students, researchers, scientists, and similar individuals are taxed on their income in the state where they reside. However, they may be taxed in the state of education, if their situation does not meet certain exemptions.
Students are exempt from tax in the state of their education for:
- All money received abroad for the purposes of maintenance, education or training; and
- Any payments for personal services in the state of education up to SGD $3,000 or equivalent during a year.
Researchers or scientists who are recipients of a grant or award for a period up to three years are exempt from tax in the state of their scientific activity on:
- The amount of such grant; and
- Payments for personal services performed in the state of scientific activity in connection with the study, research or training up to SGD $3,000 or equivalent for a year.
A person who is a resident of state A and is present in state B for up to 1 year as an employee of state A for acquiring technical, professional or business experience is exempt from tax in state B on:
- All payments from state A for the purpose of his or her maintenance, education or training; and
- Any payments for personal services in connection with his or her study performed in state B up to SGD $12,500 or equivalent for a year.
Note that the above does not apply if the business experience is from a company which is 50% or more owned by state A.
Sale of Capital represented by immovable property is taxed in the state where it is situated.
Movable property forming part of the business of a PE is taxed in the state where the PE is situated.
Sale of ships and aircraft operated in international traffic, as well as appropriate movable property, are taxable only in the state where the person carrying on the enterprise is resident.
All other elements of capital are taxable only in the state where the owner is resident.
DTA – At A Glance
The DTA specifically states where different types of income of a resident of either Singapore or the Netherlands will be subject to tax. The following table states the type of income or payments made and the state where the income is taxed. This is important, since the place of taxation will determine the rate of tax applicable to that type of income under the DTA.
|Types of income or payments||Where is the income taxed?|
Income from immovable property
|Taxed in the state where the property is situated.|
|Business profits||Taxed in the state where a company is
managed and controlled — typically, the country of the company's Board of Directors meetings.
|Permanent Establishment profits||Taxed in the state where it carries on business activities, but only in the amount attributable to that PE.|
Profits from shipping and air transport
|Taxed in the state where a company is
managed and controlled. If some passengers are boarded or goods loaded in the other state, it may be taxed in that other state, but only upon profits derived there.
|Dividends||Taxed in the state where the recipient resides.|
|Interest||Taxed in the state where the recipient resides.|
|Taxed in the state where the recipient resides.|
|Taxed in the state of residency of the seller.|
|Taxed in the worker’s state of residency.|
|Taxed in the state where the company (paying the directors’ fees) resides.|
Income of artists and sportspersons
|Taxed in the state where activities are performed.|
Pension and Annuity
|Taxed in the state where the recipient resides.|
|Government Payments||Taxed in the state where the government functions are carried out. If a resident of the other state, not being a citizen or national of the first state, carries out governmental functions, the remuneration is taxed in the state where the recipient resides.|
Payment to students, researchers, scientists
|Taxed in the state where they reside. May be taxed in the state of education if the payment does not fall under exemptions.|
Taxed in the state where the owner resides.
Immovable property is taxed in the state where it is situated.
Movable property, being part of the PE business, is taxed in the state where the PE is situated.
Ships and aircraft in international traffic, and appropriate movable property, are taxable only in the state where the enterprise is a resident.
The Netherlands–Singapore DTA establishes the rules by which taxes are levied on companies and individuals who reside in one country but receive income from the other. The main goal of this document is to reduce the overall tax burden. Pursuant to the signing of the agreement, any income taxable in both countries will be taxable only in one country. This tax reduction is designed to encourage cross-border trade and other business activities between the two countries.
CorporateServices.com can help you with tax advice or tax planning issues for your business if you operate in Singapore and the Netherlands — and ensure that your company stays in compliance with Singapore’s tax regulations.
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