On December 16, 2021 an interesting judgment of the Court of Appeal of The Hague was published on the website of the Dutch courts. The matter that was disputed is how the bonuses of a statutory director of a Dutch BV were to be taxed/whether or not based on DTAs the right to tax this income lay with third countries. Although this question in itself is a very interesting one, the matter that really attracted my attention were the arguments the taxpayer used in Court to defend its position and the indirect consequence they could have had for the Group. In this article I will therefore not focus on the outcome of the procedure but on the arguments tabled by the taxpayer and whether they might have adverse tax consequences for the Group.
(Simplified) Facts
From October 1, 2005 until September 30, 2010 the taxpayer was employed by the A-group.
The A-group was active in the international trading of grains and oilseeds. The A-group included the top holding company B BV and its Dutch subsidiary C BV.
From, October 27, 2005 until June 29, 2010 the taxpayer was statutory Director of B BV. And from May 1, 2008 until September 2010 the taxpayer was statutory director of C BV.
Furthermore the taxpayer was statutory director of the group entities D Ltd (which was a resident of Singapore), E SA (which was a resident of Spain) and F SA (which was a resident of Switzerland). For income related to these activities a so-called salary split was applied.
Furthermore the taxpayers acted (i) as president of the Board of Directors of C BV, (ii) CEO of the G (iii) and together with Mr. X ‘co-managing director’ of B BV. Mr. X was also director of H SA and CEO of the I.
The G regarded the trading activities the A-group undertook in Europe and Asia. And the I regarded the trading activities the A-group undertook in South America. The I activities were undertaken by J Ltda (a resident of Brazil) en H SA (a resident of Argentina). J Ltda and H SA were group entities that in which the shares were held by K SA, which in its turn is a Swiss resident subsidiary of B BV.
As statutory director of B BV was present during the meeting of the Board of Supervisory Directors that was held in Argentina on September 22-23, 2009. Furthermore he was in Argentina in March 2007, July 2007, July 2008 and May 2010.
As statutory director of B BV was present during the meeting of the Board of Supervisory Directors that was held in Brazil on March 18-19, 2010.
Furthermore the taxpayer participated (as president) in weekly held videoconferences with the senior management of the commercial team and the risk team of the South American trading activities.
With respect to the activities of the G and the I the taxpayer was granted significant bonusses (millions of euros). The taxpayer and the tax authorities are disputing whether these bonus should be fully taxed in the Netherlands or whether they should be allocated to Argentina, Brazil, Singapore, Spain and Switzerland. Like the District Court, the Court of Appeal comes to the conclusion that the bonusses are to be fully taxed in the Netherlands.
Once again although the matter of how the Court comes to the conclusion that the bonusses are to be fully taxed in The Netherlands, without the Netherlands having to grant an exemption is very interesting in itself, in this article we will focus on the arguments the taxpayer brought forward to defend its position that these bonuses should partly be allocated to Argentina, Brazil, Switzerland, Singapore and Spain. More specifically regarding the arguments brought forward by the taxpayer to defend its position that part of the bonusses should be allocated to Argentina and Brazil.
Arguments brought forward by the taxpayer to defend its position
The taxpayer argues that the Netherlands should exempt the full amount of the I-bonus. According to the taxpayer this exemption should be granted based on Articles 17 (Directors' fees) and 25 (Elimination of double taxation) of the DTA as concluded between the Netherlands and Argentina and Articles 16 (Directors' fees) and 23 (Elimination of double taxation) of the DTA as concluded between the Netherlands and Brazil.
In this respect the Dutch tax authorities take a very formal approach and apply the literal text of the articles 17 of the Dutch-Argentinian DTA and Article 16 of the Dutch-Brazilian DTA.
The text of Article 17 of the Dutch-Argentinian DTA
Directors' fees or other remuneration derived by a resident of a Contracting State in his capacity as a member of the board of directors or a similar organ, a “bestuurder” or a “commissaris” of a company which is a resident of the other Contracting State may be taxed in that other State.
The text of Article 16 of the Dutch-Brazilian DTA
Directors' fees and other regular payments derived by a resident of a Contracting State in his capacity as a member of the board of directors or of any council of a company which is a resident of the other Contracting State may be taxed in that other State.
Position of the Dutch tax authorities
The Dutch tax authorities take a formal approach and take the position that article 17 of the Dutch-Argentinian and Article 16 of the Dutch-Brazilian DTA do not apply since both Articles require that the taxpayer is formal member of the Board of Directors or a similar organ/any council of respectively the Argentinian or Brazilian entity. And since the taxpayer in the underlying case does not have such a formal position in either of these companies both the Articles 17 of the Dutch-Argentinian and Article 16 of the Dutch-Brazilian DTA do not apply.
Argument brought forward by the taxpayer
The taxpayer argues that although he was not a statutory director he had the highest responsibility for the Argentinian and Brazilian resident group entities (H SA and J Ltda). According to the taxpayer, within the A-group's Anglo-Saxon management model, he actually acted as director of both these companies. Furthermore in 2006 the taxpayer became commercially responsible for the South American trading activities of the A-group.
The taxpayer argues that he was regularly in Argentina (March 2007, July 2007, July 2008, September 22-23, 2009 and May 2010 and Brazil (March 18-19, 2010) to perform his management role.
Furthermore, the taxpayer argues that he directly managed the local people during video meetings that took place several times per week. Therefore in his opinion the I-bonus should have been charged on to H SA and J Ltda, which in his view is enough for the director’s fees articles of both DTAs to apply.
In the underlying case, like the District Court, the Court of Appeal followed the position of the tax authorities.
My concerns
It is the latter argument of the taxpayer that raises my concerns.
Although the text of the court case does not really go into what exactly was discussed or decided during these video meetings that according to the taxpayer were held several times a week, I see a risk arising that the Dutch tax authorities may take the position that H SA and J Ltda were actually effectively managed from the Netherlands. Therefore for Dutch tax purposes they would become residents of the Netherlands. And subsequently based on the tie-breaker rules of the Dutch-Argentinian and Dutch-Brazilian DTAs they are also considered Dutch residents for the purposes of those DTAs.
In the underlying case it is in the interest of the taxpayer to make himself a bit more important with respect to his position regarding the managing of the Argentinian and Brazilian entities/activities. This however, might have adverse consequences for the group. The Dutch tax authorities might raise questions regarding the place of effective management of the Argentinian and Brazilian entities. And before you know it the group and the tax authorities are involved in a long lasting discussion/procedure regarding whether or not these subsidiaries are effectively managed from the Netherlands.
This made me think whether it wouldn’t be wise for international operating groups to have some sort of arrangement in place with their management/directors that arranges that such managers/directors cannot take positions in their personal income tax returns, or in procedures against tax authorities, that are too aggressive and therewith might undermine the group's tax position. And perhaps even better to have some some sort of provision in place that obliges the managers/directors to have their personal income tax returns reviewed by a tax specialist that is appointed by the group (or jointly by the group and the employee) before they are allowed to file them with the tax authorities. Again this to avoid that such managers/directors take too aggressive positions in their personal income tax returns and therewith unintentionally undermining the group's tax position. The same procedure would then have to be followed if the managers/directors want to file a contest against a personal income tax assessments that has been issued or if they want to appeal against a decision by a lower court.
Please let me emphasize that in no way I do mean to state that such provision/arrangement should lead to the group asking its manager/director to lie about the facts. My intention would just be to avoid that a director/manager gets so carried away in his personal tax affairs that he makes his influence on the management of a foreign subsidiary a bit bigger with as a result that the position he takes unintentionally backfires to the group.
Now advising on employment contracts of group managers/directors has never been my core business, so I do not no whether such arrangements are already normally in place (or not). If not, I think they are certainly worth considering.
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