In this article we discuss position paper KG:040:2022:1 of April 21, 2022. In this position paper the Knowledge Group on international taxation, corporate income tax & the taxation of profits answers the question whether non-deductible interest expenses should also be deducted from the foreign income that qualifies for the second limit for the credit to be granted with respect to withholding taxes that have been withheld by a foreign jurisdiction.

The reason

A Dutch resident entity receives income from Germany over which German withholding tax has been withheld. The Dutch entity has incurred interest expenses in connection with this income. Pursuant to Article 10a of the Dutch Corporate Income Tax (DCIT) Act these interest expenses are not deductible for Dutch corporate income tax purposes.

Question

Do interest expenses that pursuant to Article 10a of the DCIT Act are not deductible for Dutch corporate income tax purposes have to be taken into account when determining the second limit for the credit of the of German withholding tax?

Answer

Interest expenses that are non-deductible under Article 10a DCIT Act, and that as a result do not decrease the taxable income, do not have to be taken into account when determining the second limit. Non-deductible interest expenses do not limit the scope of a credit.

From the consideration of the tax authorities

(ITP: The first limit is the amount of withholding tax that the foreign country, in this case Germany, has withheld over the payment.)

The starting point for the determination of the second limit is that no higher amount for the avoidance of double taxation will be granted than the amount of Dutch corporate income tax that is due over the net foreign income. For which net foreign income means: the foreign income is reduced by all costs incurred in relation to that income.

For the calculation of the second limit, the second sentence of Article 22, Paragraph 2, under c of the Dutch-German Treaty for the Avoidance of Double Taxation Convention explicitly refers to Dutch national law. Article 36 of the Decree for the Avoidance of Double Taxation 2001 (hereafter: the 2001 Decree) provides rules for the crediting of foreign withholding tax. Article 36, Paragraph 4 of the 2001 Decree stipulates that the costs incurred in relation to the relevant foreign income must be taken into account.

However, even when a treaty regulates the crediting of withholding tax autonomously and does not refer to the 2001 Decree, the relevant costs must be taken into account. This principle is mentioned in paragraphs 40 and 63 of the OECD Commentary on Articles 23A and 23B of the OECD Model Tax Convention. However, relevant costs that are not deductible for corporate income tax purposes do not reduce the corporate income tax to be paid, nor do they limit the scope for crediting.

The full Dutch text of the position paper can be found here.

Other position papers of the Knowledge Group on international taxation, corporate income tax & the taxation of profits of which we already made an English summary can be found here.

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