The Netherlands–Switzerland Income Tax Treaty (2010) – An Analysis

Eric Duvoisin*
Netherlands, Switzerland and Marie Moniez**

The Netherlands–Switzerland Income Tax
Treaty (2010) – An Analysis
The authors, in this article, analyse the new The Association insisted on the name of the taxpayer as a
Netherlands–Switzerland Income Tax Treaty sine qua non condition. However, in a public statement of
(2010), compare it with the old Netherlands– February 2011, the Association took into account interna-
Switzerland Income and Capital Tax Treaty tional developments and somewhat softened its position,
(1951/1966) and the OECD Model (2008), and but considered that, only in exceptional cases, excluding
provide insights regarding Swiss tax law and fishing expeditions and grouped requests, could exchange
related developments. Netherlands domestic of information requests be accepted without the names
tax implications are generally not considered. and addresses of the taxpayer and the information holder.
Following these negotiations and developments, the new
1. Introduction and Background1 Netherlands–Switzerland Income Tax Treaty (2010)5 (the
“2010 Treaty”) was signed on 26 February 2010.
The Netherlands–Switzerland Income and Capital Tax
Treaty (1951) (the “1951 Treaty”) was amongst the first The authors’ approach is based on a two-step analysis of
tax treaties to be negotiated by Switzerland. The negotia- the 2010 Treaty. First, the 2010 Treaty is compared with
tions were initiated shortly after the end of World War II, the OECD Model (2008),6 on which the new tax treaty
as the Netherlands had at that time significantly increased was based, and an article by article analysis of the 2010
its taxes and this affected Swiss investment in the Nether- and 1966 Treaties, highlighting the significant changes, is
lands. In February 1962, at the request of the Netherlands undertaken (see section 2.). Second, the authors consider
government, negotiations were started to revise the 1951 the implication of the 2010 Treaty from the perspective of
Treaty with regard to: (1) new Netherlands tax laws; and Swiss tax law and developments (see section 3.).
(2) the context of more Netherlands residents trying to
evade Netherlands taxes by transferring their domicile 2. Analysis and Comparison of the 2010 Treaty
to Switzerland. Consequently, a protocol was signed in with the 1966 Treaty and the OECD Model
1966 and the revised Netherlands–Switzerland Income (2008)
and Capital Tax Treaty (the “1966 Treaty”)2 entered into
2.1. Introductory remarks
force in the same year.3
As noted in section 1., the 2010 Treaty, as it was signed in
During the mid-1980s, both states initiated negotiations
February 2010, is based on the OECD Model (2008) and
to revise the 1966 Treaty, but these were interrupted and
has not been updated to reflect the OECD Model (2010).7
only restarted in 2002. Both the Netherlands and Switzer-
The 2010 Treaty must be ratified by both the Netherlands
land thought that it was necessary to update the existing
and Swiss Parliaments. At the time of the writing of this
1966 Treaty as a result of the many economic and tax
article, the Second Chamber of the Netherlands Parlia-
developments since 1951 and 1966. The 1966 Treaty was
ment had still to approve the 2010 Treaty. With regard to
also considered to be difficult to apply in practice, even
for the tax authorities and specialists, due to its unusual
and old-fashioned text. A final draft of a new tax treaty
was initialled in November 2007, but had to be modified
before entering into the parliamentary approval process. * MAS in Business Law, Master in Swiss Law and Manager, Ernst &
Young, Geneva. The author can be contacted at eric.duvoisin@ch.ey.
Specifically, due to the international context and follow- com.
ing a decision of the Swiss Federal Council in March 2009, ** MAS in French and International Tax Law and Assistant, Ernst &
Young, Geneva. The author can be contacted at marie.moniez@ch.ey.
Switzerland wished to modify most of its existing tax trea- com.
ties to adapt them, in particular, to the new standards on
1. This article is based on the information available up to and including 17
exchange of information. June 2011.
2. Convention Between the Kingdom of the Netherlands and the Swiss Con-
During the consultation process on Swiss side, the ne- federation for the Avoidance of Double Taxation with respect to Taxes on
gotiation of a new tax treaty was generally well received. Income and Capital [unofficial translation] (12 Nov. 1951) (as amended
It should, however, be noted that, in November 2009, through 1966), Treaties IBFD.
3. The term “1966 Treaty” is used generically in this article to apply, inter alia,
the Association of Swiss Bankers 4 publicly advised the to the 1951 Treaty as amended in 1966.
Swiss Federal Tax Administration (FTA) that they would 4. See Swiss Banking, available at www.swissbanking.org.
support the adoption of the new tax treaty only if the ex- 5. Convention Between the Kingdom of the Netherlands and the Swiss Con-
federation for the Avoidance of Double Taxation with respect to Taxes on
change of information clause (see section 2.27.) contained Income (26 Feb. 2010), Treaties IBFD.
a requirement that any request made by the Netherlands 6. OECD Model Tax Convention on Income and on Capital (15 July 2008),
should specify the name of the taxpayer and the bank, Models IBFD.
7. OECD Model Tax Convention on Income and on Capital (22 July 2010),
and provide a detailed description of the relevant facts. Models IBFD.

444 BULLETIN FOR INTERNATIONAL TAXATION AUGUST 2011 © IBFD

The Netherlands–Switzerland Income Tax Treaty (2010) – An Analysis

the Swiss ratification process, the 2010 Treaty has been provided that this does not result in double non-taxation,
approved by both the Chambers of the Swiss Parliament i.e. where the source state would deem a partnership to be
with a mandatory referendum deadline (to allow the transparent and the residence state would consider the
population and/or the cantons to request a popular vote partnership to be a corporation. Third, again according
if they so wish) of the end of September 2011. The date to the Protocol and in contrast to the 1966 Treaty which
of the entry into force of the 2010 Treaty is, therefore, contained no such provision, pension funds and Swiss
yet to be determined under the relevant provisions (see pension schemes recognized by Swiss law are considered
section 2.30.). to be resident. Fourth, yet again according to the Protocol
and a new development compared to the 1966 Treaty
It should be noted that article 14 (Independent personal
which included no provisions on this issue, a person on a
services), which had already been removed from the
ship or a boat without a real domicile in either of the state
OECD Model (2008), is still included in the 2010 Treaty.
is deemed to be a resident of the state of the home harbour
This gives rise to certain differences between the 2010
of the ship or boat.
Treaty and the OECD Model (2008), which are not ad-
dressed in this article.
2.6. Permanent establishment
2.2. Persons covered Article 5 of the 2010 Treaty is standard. It should, how-
ever, be noted that, in contrast to the 1966 Treaty, a build-
Article 1 of 2010 Treaty agrees (or is standard) with the
ing site, construction or installation project is consid-
OECD Model (2008). As this kind of article was absent
ered to be a permanent establishment (PE) as soon as the
from the 1966 Treaty, article 1 should assist in determin-
12-month period is exceeded. Under the 1966 Treaty,
ing the scope and extent of the application of the 2010
such activities were not considered to be PE if they had
Treaty.
temporary characteristics. According to the transitional
rule, the 2010 Treaty only applies to activities commenced
2.3. Taxes covered
after its entry into force.
Article 2 of the 2010 Treaty is standard, subject to the
following comments. First, capital taxes are not covered 2.7. Income from immovable property
by the 2010 Treaty, as opposed to the 1966 Treaty. This
Article 6 of the 2010 Treaty is standard. Compared to
should, in principle, not result in any double taxation is-
the 1966 Treaty, there are no changes, except for the fact
sues, as, whilst Switzerland still levies cantonal and com-
that, whilst, under the 1966 Treaty, the debt claims of a
munal capital taxes, the Netherlands net worth tax was
resident secured by a real estate mortgage in the source
abolished with effect from 1 January 2001. Second, the
state are taxable in the residence state, there is a limita-
2010 Treaty, as with the 1966 Treaty, does not apply to
tion of taxation at source as under article 11 of the 2010
taxes withheld at source on lottery prizes. In this regard,
Treaty (see section 2.12.). Accordingly, the 2010 Treaty
it should be noted that a 35% withholding tax applies to
is more favourable than the 1966 Treaty and even more
prizes distributed by lotteries organized in Switzerland.
than the original 1951 Treaty to the residence state in
respect of debt claims secured by a real estate mortgage
2.4. General definitions
in the other state.
Article 3 of the 2010 Treaty is standard, except for the fact
that the new tax treaty also applies to the territorial sea 2.8. Business profits
and the additional area under Netherlands sovereignty
Article 7 of the 2010 Treaty is standard. This provision
within Europe. This is of particular relevance for conti-
has no equivalent in the 1966 Treaty. The changes intro-
nental shelf activities (see section 2.24.).
duced into the OECD Model (2010) regarding article 7
have not (see section 2.1.) been implemented in the 2010
2.5. Resident
Treaty. In particular, the OECD Model (2010) provides a
Article 4 of the 2010 Treaty is standard and does not dif- two-step approach that differs slightly from the less struc-
fer from 1966 Treaty except in respect of the following. tured approach in the OECD Model (2008), on which the
First, with regard to the double residence of companies, 2010 Treaty is based. For information, a tax treaty based
the place of management is deemed to be the place of on the OECD Model (2010) would include the following:
residence (the tie-breaker rule) as opposed to the 1966 – a functional and factual analysis; and
Treaty, where the place of registration of the legal seat was – an application of the arm’s length principle subject
predominant. Second, according to the Protocol to the to the following changes (compared to previous ver-
2010 Treaty (the “Protocol”) and recommended OECD sions of the OECD Model): (1) the replacement of
practice8 and in contrast to the 1966 Treaty which did not the hierarchy of transfer pricing methods and adop-
cover this issue, with regard to fiscally transparent entities tion of the principle of “most appropriate method to
in the source or a third state, classification as transpar- the circumstances of the case” in the selection of the
ent or non-transparent by the source state determines
whether or not the 2010 Treaty applies to income sourced
in a state and paid to such an entity with a partner resident
in the other state. This is valid and the 2010 Treaty applies, 8. OECD, The Application of the OECD Model Tax Convention to Partner-
ships (1999), Intl. Orgs.’ Docn. IBFD.

© IBFD BULLETIN FOR INTERNATIONAL TAXATION AUGUST 2011 445

Eric Duvoisin and Marie Moniez

transfer pricing method; (2) a detailed discussion of 2.12. Interest
the importance and requirements of a “comparability
Article 11 of the 2010 Treaty is standard. Compared to the
analysis”; and (3) the extension and refinement of the
1966 Treaty, there is, however, no withholding tax, i.e. the
guidance provided for on the application of transac-
residence state has the exclusive right to tax, whilst, under
tional profit methods, i.e. the transactional profit split
the old tax treaty, the withholding tax was 5%, i.e. there
and transactional net margin methods.
was a non-exclusive right to tax for the residence state. It
Article 7 of the 2010 Treaty may, therefore, leave a margin is intended that any disputes as to the exclusive right to
for the states to apply national methods regarding the tax in respect of the residence state should be settled by
international allocation of profits. The authors are, nev- mutual agreement between the states. The form of such
ertheless, of the opinion that, despite the fact that article a mutual agreement had, at the time of the writing of this
7 of the OECD Model (2010) is not included in the 2010 article, not been discussed by the contracting states.
Treaty, it is likely that Netherlands and Swiss tax authori-
ties will use it as a reference in applying article 7 of the 2.13. Royalties
new tax treaty. The authors would also refer to section
3.3. on Swiss advance pricing agreements (APA), which
1966 Treaty, the exclusive right to tax for the residence
could be of significant help to taxpayers in preventing
state has been retained, but this is now stated in a specific
double taxation. In contrast to the 1966 Treaty, which
provision as opposed to the general provision in the old
provided for specific rules in respect of business profits
tax treaty.
allocation for insurance companies, article 7 of the 2010
Treaty applies to companies in the insurance industry and
2.14. Capital gains
in other industries.
2.9. Shipping, inland waterways and air transport following comments. Many of the differences compared
to the OECD Model (2008) relate to the alienation of
shares in a real estate company, which is defined as a com-
1966 Treaty, the place of effective management is more
pany whose assets consist, directly or indirectly, for more
detailed. Specifically, profits from a participation in a
than 50% of immovable property. With regard to such
joint business or an international operating agency are
an alienation, a non-exclusive right to tax is, in principle,
now clearly subject to article 8.
granted to the real estate, i.e. not the residence state. The
exceptions, which imply an exclusive right to tax for the
2.10. Associated enterprises
residence state, are as follows. The first exception applies
Article 9 of the 2010 Treaty is standard, subject to the to shares quoted on a recognized stock exchange. The
following. First, cost-sharing agreements are deemed to second exception is in respect of holdings of less than 5%
comply with the arm’s length principle. Second, corres- in a real estate company. The third exception applies to
ponding adjustment in the second state are not auto- gains derived in the course of a corporate reorganization,
matic, but are, rather, subject to the approval of that state. amalgamation, division or similar transaction. The fourth
Third, and as noted in section 2.8., the application of the and final exception is in respect of immovable property
arm’s length principle under the 2010 Treaty should, in used by a company for its own business. A further differ-
principle, disregard the OECD Model (2010). ence compared to the 1966 Treaty and the OECD Model
(2008) is the non-exclusive right to tax, granted to the
2.11. Dividends Netherlands, in respect of the application of a “preserva-
tive tax assessment” (see section 2.11.).
Article 10 of the 2010 Treaty is standard. Compared
to the 1966 Treaty, the following should, however, be
2.15. Independent personal services
noted. First, the holding threshold to benefit from 0%
withholding tax rate on dividend is reduced from 25% to Article 14 of the 2010 Treaty is no longer standard, as this
10%. Second, the “arranged or maintained relationship” kind of article was removed from OECD Model (2000).9
anti-abuse rule has been preserved, but it is now in the Compared to the 1966 Treaty, the following differences
Protocol. Third, the statute of limitations within which should be noted. First, the definition of professional ser-
to request a tax credit is now governed by domestic law. vices in the 2010 Treaty includes the same activities as in
Consequently, for Switzerland, the deadline is now three the 1966 Treaty, except that the activities of dentists and
years after the expiry of the civil year in which a divi- accountants (compared to only expert-accountants in
dend was received compared to two years under the 1966 old tax treaty) are added and those of tax advisors and of
Treaty. Fourth, pension funds and Swiss pension schemes patent agents (both included in the old tax treaty) have
(see section 2.5.) benefit from a 0% withholding tax rate, been removed. However, this is mitigated by the fact that
irrespective of any other requirements. Fifth and finally, the definition of professional services in the 2010 Treaty
the taxation rights allocated under article 10 do not pre- is not comprehensive, but, rather, provides examples of
vent the Netherlands from applying a “preservative tax as-
sessment” (“conserverende aanslag”) to individuals ceasing
to be resident the Netherlands and holding investments at 9. OECD Model Tax Convention on Income and on Capital (29 Apr. 2000),
the time of their departure from the Netherlands. Models IBFD.



such services. Second, artistes not covered by article 17 of dealt with; and (3) independent sportspersons were only
the 2010 Treaty and, therefore, subject to article 14, are taxed in the residence state.
liable to an international profit allocation where activities
are performed both in the residence and source states, 2.19. Pensions, annuities and social security payments
i.e. where there is a fixed base, as opposed to the 1966
Article 18 of the 2010 Treaty is not standard. First, an
Treaty, under which the source state had the exclusive
exclusive right to tax is granted to the residence state.
right to tax.
Second, there is a non-exclusive right to tax for the source
state if the following three cumulative conditions are met
2.16. Dependent personal services
(in brief): (1) exemption, deduction or favourable tax
Article 15 of the 2010 Treaty is standard, subject to the treatment in the source state; (2) exemption or “below
following. The “183-day” general exception (paragraph 90%” taxation in the residence state; and (3) the relevant
2) only relates to the fiscal year in question, as opposed income exceeds EUR 20,000. If Switzerland is the source
to verification in “any 12-month period commencing or state, the latter provision does not apply, as the pensions
ending in the fiscal year concerned” under the OECD are taxed at the ordinary tax rate. Third, in respect of a
Model (2008). Accordingly, the 2010 Treaty may give rise single payment, i.e. either not periodic in nature or in
to difficulties or opportunities where the fiscal years of lieu of multiple periodic payments, a non-exclusive right
the states do not coincide. Compared to the 1966 Treaty, to tax is granted to the source state. Under Swiss internal
there is now clarity regarding the duration test (a “183- law, Swiss income taxes at source are levied on Swiss-
day test” as opposed to a “temporary stay test”) and the source pensions, annuities and social security payments
test of remuneration not borne by employer’s PE in the made in favour of foreign residents. Fourth, pension
source state is now a condition, whereas it was not re- capital transferred (not paid directly to the individual
quired under the 1966 Treaty. Consequently, except with benefitting from the pension) from a source state to the
regard to possible interpretations of the “temporary stay pension capital of another state is taxable only in the resi-
test”, the 2010 Treaty appears to be more favourable to dence state.
the source state.
Compared to the 1966 Treaty, the authors note that, on
the one hand, periodic public pensions, annuities and so-
2.17. Directors’ fees
cial security payments are, in the 2010 Treaty, exclusively
Article 16 of the 2010 Treaty is standard, subject to the taxed in the residence state, whereas such payments were
following exceptions. First, in contrast to the OECD only taxed in the source state under the 1966 Treaty. On
Model (2008), which grants a non-exclusive right to tax the other hand, (1) private, non-periodic and (2) private
to the source state without exception, a Netherlands com- lump-sum pensions, annuities and social security pay-
pany paying fixed remuneration and other payments to ments, in both cases paid before the date of the beginning
Swiss-resident “bestuurders”, i.e. those in charge of gen- of the pension or annuity, are, under the 2010 Treaty,
eral management, is taxable at 50% in both the Nether- non-exclusively taxed in the source state, whereas such
lands and Switzerland. Second, and also in contrast to the payments were only taxed in the residence state under
OECD Model (2008), which grants a non-exclusive right the 1966 Treaty.
to tax to the source state without exception, a Netherlands
company paying fixed remuneration and other payments 2.20. Government service
to Swiss-resident “bestuurders” by reason of the exercise
Article 19 of the 2010 Treaty is standard, except for the
of activities in respect of a PE in Switzerland is taxed in
following. First, the situation in which a resident of the
Switzerland, i.e. In this case, there is a non-exclusive right
residence state provides government services for the ben-
to tax. This is the only difference with the 1966 Treaty.
efit of the source state results in a non-exclusive right to
tax for the source state, but subject to the exception in
2.18. Entertainers and sportspersons
article 19(1)(b) of the 2010 Treaty. Second, pensions, an-
Article 17 of the 2010 Treaty is standard, except for the nuities and social security payments are subject to article
following comments. First, the 2010 Treaty does not ap- 18 of the 2010 Treaty (see section 2.19.) and not article 19
ply where neither the entertainers or sportspersons nor in contrast to the OECD Model (2008). Compared to the
related persons, whether or not residents of that state, 1966 Treaty, under the 2010 Treaty, a person (1) residing
participate, directly or indirectly, in the receipts or profits in the residence state and (2) with the nationality of this
of another person in any way. Accordingly, the additional state or who did not become a resident of that state only
clause favours correctly structured “star” companies in to provide government services, and (3) who works in
third countries. Second, if entertainers or sportspersons that state and provides government services to the source
are financed in respect of their activities by public funds state is exclusively taxable in the residence state. In this
or perform activities that take place under a cultural regard, the 1966 Treaty granted an exclusive right to tax
agreement between the states, an exclusive right to tax to the source state.
is granted to the residence state. Compared to the 1966
Treaty, the differences are that: (1) other interposed per- 2.21. Students
sons were not specifically addressed in the 1966 Treaty;
Article 20 of the 2010 Treaty is standard. Compared,
(2) public financing and cultural agreements were not
however, to the 1966 Treaty, under the 2010 Treaty,



any payment for study purposes sourced from any state gard to pension schemes for employed and self-employed
other than the study state, i.e. the source or a source third persons. This last provision was not included in the 1966
party state, is not taxed in the study state. Under the 1966 Treaty.
Treaty, only payments from the source state could benefit
from the exclusive right to tax. In practice, it appears that 2.26. Mutual agreement procedure
one of the main differences and where the 2010 Treaty
helps to avoid double taxation could be if a paying entity
following comments. First, the method of communica-
resident in the source state with a PE in a third state finan-
tion between states for the purpose of reaching an agree-
cially supports a visiting student via a PE.
ment is not specified. Second, the deadline before the ar-
bitration procedure commences is three years rather than
2.22. Other income
the OECD standard of two years. Third, the procedures
Article 21 of the 2010 Treaty is standard and similar to regarding communication to the arbitration board and
provisions in 1966 Treaty. related confidentiality are included in the article. Com-
pared to the 1966 Treaty, the filing upfront of a claim or
2.23. Elimination of double taxation an appeal under the mutual agreement procedure against
a disputed tax decision is not required. The three-year
deadline is also a significant improvement, as the 1966
following comments. First, the 2010 Treaty authorizes
Treaty did not provide for any time limit in which to
the Netherlands and Switzerland to compute the tax rate,
reach an agreement. However, compared to other tax
but not the taxable basis, of their residents on all income
treaties negotiated recently by Switzerland, the 2010
whether or not they could be, exclusively or not exclu-
Treaty does not include a provision on assistance in the
sively, taxed in the source state. Second, the Netherlands
collection of taxes.
reserves its right to apply the tax credit method to deemed
passive income as defined by Netherlands law. Third, (1)
2.27. Exchange of information
with regard to capital gains realized by a Swiss resident on
the alienation of shares in a Netherlands real estate com- Article 26 of the 2010 Treaty is standard, subject to the
pany and (2) entertainers and sportspersons with per- following. First, information received by a state may be
sonal activities in the Netherlands, Switzerland eliminates used for any additional tax purposes other than assess-
double taxation by exemption only after the taxation of ment, collection, enforcement and prosecution, and the
such gains and income in the Netherlands has been dem- determination of appeals. Such purposes must be admis-
onstrated. This could, for example, disadvantage a Swiss sible under the law of both states and also require that
resident taxpayer if Netherlands tax authorities only is- the information-providing state gives its consent. This
sue a tax assessment after the statute of limitation for the provision should, in particular, prevent the use of sto-
Swiss tax authorities to issue a tax assessment has elapsed. len Swiss bank data. Second, the 2010 Treaty extends the
Fourth, with regard to non-periodic pension payments procedural rights of the tax authorities of the requested
and dividends with a non-exclusive right to tax in the state to be provided with any means necessary to obtain
Netherlands as the source state, Switzerland eliminates information held by a bank, other financial institution,
double taxation using the following three methods: (1) nominee or person acting in an agency or fiduciary capac-
a tax credit; (2) lump-sum reduction in respect of Swiss ity or ownership information. Third, under the Protocol
taxes; and (3) exemption, at discretion of the Swiss tax to the 2010 Treaty, which was modified after signature
authorities. Taxpayers now, therefore, have an increased by Switzerland and subject to approval by the Nether-
awareness of the methods for eliminating double taxa- lands Parliament, the requested state, in principle, only
tion, whereas, under the 1966 Treaty, such matters were exchanges information if the information request con-
governed only by internal laws. tains the names and addresses of the taxpayer and of the
information holder. However, names and addresses are
2.24. Continental shelf activities not required if the following cumulative conditions are
satisfied: (1) the information is not available to the re-
Article 23 of the 2010 Treaty is a specific provision and
questing state; (2) other sufficient information regarding
does not have any counterpart in the OECD Model
the taxpayer can be provided; (3) the request is not a “fish-
(2008). It applies only to Swiss resident companies carry-
ing expedition”; and (4) the legal principles of propor-
ing on activities in the Netherlands, which corresponds
tionality and practicability are respected in relation to the
to current Netherlands treaty policy. The main condition
exchange of information request and without providing
for the application of the article, and, therefore, for the
any details on the information holder.
recognition of a PE in the Netherlands, is a 30-day test.
There was no such provision in the 1966 Treaty. Fourth, only the exchange on request is mandatory for
the states. The automatic and spontaneous exchanges of
2.25. Non-discrimination information are, therefore, at the states’ discretion. Fifth,
the requesting state should have pursued all the means
available to it to obtain information. Finally, there was
following. First, the provision of the OECD Model (2008)
no exchange of information provision in the 1966 Treaty.
regarding stateless persons is not reproduced in the 2010
However, further to a 1970 Swiss Supreme Federal Court
Treaty. Second, a new paragraph has been added with re-



decision,10 Switzerland, in practice, exchanged with the 3. Swiss Tax Law and Developments
Netherlands on request any information deemed neces-
3.1. Exchange of information and peer review
sary, but only under strict application of the 1966 Treaty.
This Swiss practice was not granted in respect of only On 6 April 2011, the Federal Council sought authorisa-
Netherlands internal tax purposes, i.e. if there was no tion from the Swiss Parliament to amend the 2010 Treaty
double taxation, or in respect of bank data (with regard to in line with internationally applicable standards on the
tax evasion under the now outdated Swiss view). exchange of information. Subject to certain reservations,
Switzerland has accepted the concept of a “level playing
2.28. Members of diplomatic missions and consular field”. With this decision and its submission for approval
posts to Parliament, the Federal Council was implementing the
amendments to the requirements for administrative as-
sistance requests decided on 13 February 2011. With the
following. First, the 2010 Treaty restrictively defines
proposed modifications, Switzerland was also eliminating
who is considered to be a member of a diplomatic mis-
an obstacle to the effective exchange of information in tax
sion and/or consular post. The criterion is that such an
matters, thereby reducing the threat of failure in the peer
individual is subject to the ordinary tax obligations of the
review process of the Global Forum on Transparency
resident state. Second, the benefits of the 2010 Treaty are
and Exchange of Information for Tax Purposes. Due to
denied to such individuals of a third state who are also not
these and other actions, on 1 June 2011, Switzerland suc-
treated as a resident of the state in terms of income tax
cessfully passed Phase 1, i.e. an assessment of the quality
(and who work in the other state according to the authors’
of Switzerland’s legal and regulatory framework for the
understanding of the article). The provision in the 1966
purposes of the exchange of information, of the peer re-
Treaty is substantially similar to that in the 2010 Treaty,
view process.11 The positive outcome of the peer review
except for the second exception, which did not exist in
process is subject to certain recommendations and is also
the old tax treaty.
obviously subject to the approval by the Swiss Parliament
of the modification to the articles 26 of the various rene-
2.29. Territorial extension
gotiated tax treaties (see section 2.27. for article 26 of the
Article 28 of the 2010 Treaty is standard, but includes 2010 Treaty).
a clause in relation to the territory of the Netherlands.
Based on a Swiss law, which has been adopted by the
Specifically, the 2010 Treaty may be extended to the
Swiss Parliament, together with the ratification of the
territories of the Netherlands in the Caribbean, i.e. Bo-
2010 Treaty, the Federal Council will declare publicly to
naire, Saint Eustatius and Saba, Aruba, Curaçao, and Sint
the Netherlands government that: (1) Switzerland will not
Maarten.
respond to an exchange information request that, under
Swiss law, is based on illegally obtained data; and (2) Swit-
2.30. Entry into force
zerland will seek international judicial co-operation to
Article 29 of the 2010 Treaty provides for the following prosecute any person who has committed or participated
rules. The 2010 Treaty will enter into force 30 days after in the illegal procurement or transmission of information.
the date of the receipt of the last notification regarding
full compliance of all internal constitutional formalities. 3.2. Swiss anti-abuse rules
The provisions of the 2010 Treaty will apply to fiscal years
3.2.1 Where Switzerland is the residence state
beginning on or after the first day of January following its
entry into force. The exchange information provision and 3.2.1.1. Opening remarks
the related provisions in the Protocol will only apply to
It should be noted that, in 2010, Switzerland significantly
requests made on or after the entry into force of the 2010
amended its internal rules regarding its anti-avoidance
Treaty, which relate to fiscal years beginning on or after
rules, i.e. the strict rules and their relaxation (see sections
the first day of March following the date of signature of
3.2.1.2. and 3.2.1.3., respectively). With regard to both the
tax treaty. As the 2010 Treaty was signed on 26 February
1966 and the 2010 Treaties, these rules only apply to the
2010, this date is 1 March 2010. The 1966 Treaty will
Netherlands-source income received by a Swiss resident
terminate on the day before the entry into force of the
at the latest by 31 July 2010. Since 1 August 2010, the rules
2010 Treaty, but will continue to apply to fiscal years not
no longer apply to Netherlands-source income.
covered by the 2010 Treaty. This provision, therefore, ter-
minates the 1966 Treaty as described here and not under
the provisions of article 15 of that tax treaty.

2.31. Termination
Article 30 of the 2010 Treaty is standard. 10. CH: BG, 20 Nov. 1970, i.S. X. gegen Eidg. Finanz- und Zolldepartement,
BGE 96 (1970) I 733, Tax Treaty Case L. IBFD.
11. OECD, Global Forum on Transparency and Exchange of Information
for Tax Purposes, Peer Review Report: Phase 1: Legal and Regulatory
Framework - Switzerland (2011), available at www.keepeek.com/Digital-
Asset-Management/oecd/taxation/global-forum-on-transparency-and-
exchange-of-information-for-tax-purposes-peer-reviews-switzerland-
2011_9789264114661-en.



3.2.1.2. Strict rules (2) the direct stock exchange test;
(3) the indirect stock exchange test, i.e. where one or
Tax relief, for example, under the 2010 Treaty, is claimed
more companies that meet the direct stock exchange
abusively by an individual, a legal entity or a partner-
test are the direct shareholders of a predominant in-
ship resident in Switzerland if, by way such a claim, a
terest (over 50% of the voting rights and nominal
substantial part of the tax relief would benefit, directly
value) in a subsidiary; and
or indirectly, persons not entitled to benefit from the tax
(4) the pure holding company test.
treaty. Tax relief is considered to be abusive in the four
following alternative situations:
3.2.2. Where Switzerland is the source state
(1) There is an abusive transfer of income to non-qual-
3.2.2.1. Opening remarks
ifying persons where a substantial part of treaty-fa-
voured income earned is used, directly or indirectly, The most important provisions in Swiss law, case law and
to satisfy the rights or claims of persons not entitled the practice of the tax authorities with regard to tax trea-
to benefit from a tax treaty. The purpose of this pro- ties are considered in sections 3.2.2.2. to 3.2.2.6.12
vision is to counter conduit companies. No abusive
transfer of income is deemed to occur if the following 3.2.2.2. General anti-avoidance
two conditions are satisfied: (i) no more than 50% of
There is no general anti-avoidance provision in Swiss tax
the income in respect of which tax relief is requested
law. However, in a tax case decided in 1933, the Federal
on the basis of the tax treaty is used to satisfy the
Supreme Court13 adopted the following criteria in respect
contractual rights or claims of persons not entitled to
of general anti-avoidance:14
benefit from the tax treaty; and (ii) only the adminis-
trative costs and taxes relating to the treaty-protected Under this general anti-avoidance doctrine, the following three
income remaining, after satisfying the claims of per- requirements must be met [in order for Swiss authorities to ap-
ply anti-avoidance measures]: [(i)] the legal form chosen by the
sons not entitled to treaty relief, are deducted. taxpayer is apparently unwarranted, inappropriate or unusual
(2) A further example of abuse relates to the situation and, in all cases, completely inappropriate to the economic facts
(the objective element); [(ii)] the choice was made merely with
where a Swiss resident company, in which persons the intention of saving tax (the subjective element); and [(iii)] the
not entitled to benefit from a tax treaty hold an es- method chosen would effectively lead to a substantial reduction
sential part of the interest, does not make appropriate in tax (the factual element).
profit distributions. Under this anti-abuse rule, the
following two cumulative conditions must be satis- 3.2.2.3. Specific anti-avoidance in respect of withholding
fied to avoid being considered to be an inappropriate tax
profit distribution: (i) where a company accumulates
Under Swiss withholding tax law, the refund of Swiss
income rather than making appropriate dividend dis-
withholding tax is refused where this would permit eva-
tributions and there is a risk that the income may be
sion of Swiss tax, for example, on the basis of fictitious
distributed to non-qualifying persons at a later date, a
facts. The FTA has expressly stated that it would apply
foreign-controlled (and not a Swiss-controlled) Swiss
this provision in an international context.15
company must distribute a minimum of 25% of the
gross treaty-protected income every business year;
3.2.2.4. Beneficial ownership
and (ii) where a Swiss company that is heavily in-
debted to foreign creditors can transfer a significant The OECD states that “[t]he term of ‘beneficial owner’...
part of its treaty-favoured income to non-qualifying should be understood in its context and in light of the ob-
beneficiaries in the form of interest, the maximum ject and purposes of the Convention, including avoiding
related party debt financing should respect the thin double taxation and the prevention of fiscal evasion and
capitalization rules, i.e. the debt:equity ratios, as im- avoidance”.16 However, the concept of beneficial owner-
plemented by the FTA. ship is not completely autonomous and is often defined
by the contracting states in their law and/or case law. As
(3) The allocation of income that, as a result of a fiduciary
a result of Swiss case law and the interpretation of such
relationship, benefits a person not entitled to benefit
court decisions by most authors, the Swiss concept of
from the tax treaty is considered to be abusive.
beneficial ownership has the following characteristics: (1)
(4) The allocation of income received by Swiss resident subjectively, the person in the residence state should be
family foundations or partnerships not carrying on
business in Switzerland is abusive if persons not en- 12. In this respect, the debate on Swiss case law and practice is not considered
titled to benefit from the tax treaty hold an essential in this article.
part of the interest. 13. CH: BG, 1 Dec. 1933, Société pour l’industrie de l’aluminium contre Canton
du Valais, BGE 59 I 284.
14. M. Jung, Branch Reports: Switzerland, in Tax treaties and tax avoidance: ap-
3.2.1.3. Relaxation of the strict rules plication of anti-avoidance provisions, IFA Cahier de droit fiscal nternational
sec. 1.1.1. (Sdu Uitgevers 2010), Online Bks. IBFD.
Under more generous rules in Swiss federal practice, a 15. M. Bauer-Balmelli, H.P. Hochreutner & M. Kuepfer eds., Die Praxis der
company qualifies for treaty relief if it satisfies one of the Bundessteuern, II. Teil: Stempelabgaben und Verrechnungssteuer, Band
2 – Geltendes Recht (Verrechnungssteuer) , VStG Art. 21, Abs. 2, nr. 32.
following four “relaxation” tests: 16. OECD Model Tax Convention on Income and on Capital: Commentary on
(1) the active trade or business test; Article 11, para. 9. (15 July 2008), Models IBFD.



able to control the use of the income when this falls due 3.4. Swiss finance branches
(comparable to an “agent test”, under which, if a resident
A Swiss finance branch is a Swiss-foreign tax scheme,
is deemed to be an agent of another person, the resident
whereby the Swiss branch of a foreign-based head of-
is not the beneficial owner); and (2) objectively, only
fice primarily exercises financing activities in respect of
the property rights of the resident person are relevant
a group of companies. Such scheme can benefit from fa-
(and not other aspects, such as a “subject to tax test” and
vourable corporate income tax treatment in Switzerland.
“substance test”).17 It should, however, be noted that, in
Briefly, the main federal conditions, which are similar to
practice, the FTA often questions international structures
the cantonal ones, to benefit from this regime are that:
using a substance test in addition to the beneficial owner-
– the branch’s assets should be at least CHF 100 million;
ship test and the other tests described section 3.2.2.
– the branch’s activity should primarily be that of group
financing, with three-quarters of the gross profits de-
3.2.2.5. Thin capitalization and interest rate rules
rived from financing activities and three-quarters of
According to Jung (2010), “[t]hin capitalization and its assets invested in financing activities; and
arm’s length interest rate rules are specific domestic anti- – loans or advances granted by the branch to any Swiss
avoidance measures that are also applied to the cross- subsidiary cannot exceed 10% of the total assets of the
border context and thus, have international effect in the branch at any time.
tax treaty context”.18
In order to be effective from an international tax perspec-
tive, a Swiss finance branch must be established with a
3.2.2.6. Additional withholding tax provision
head office state that:20
Under Swiss withholding tax law, guarantees may be re- – adopts the exemption method with regard to the
quested from a Swiss company to secure potential with- branch’s profit under the relevant tax treaty;
holding tax that may be in jeopardy. On the basis of the – undertakes no or the low allocation of profit, as, usu-
law and its ordinance, withholding tax is considered to be ally, the head office does not perform any activity in
in jeopardy if the following conditions are satisfied: respect of the Swiss finance branch;
– a Swiss company is, directly or indirectly, held by – has a comprehensive treaty network to be able to re-
foreign tax residents for at least 80%; cover foreign taxes at source on financial income;
– more than 50% of the assets of the Swiss company are – can distribute the branch’s profits as dividends to its
located abroad; and own parent company with low to no withholding tax;
– the Swiss company does not pay appropriate annual and
profit distributions, i.e. amounting to at least 6% of – does not apply detrimental (treaty and/or internal)
equity. anti-abuse rules.
Whilst this provision is clearly not an anti-avoidance The Swiss finance branch should also not be negated by
measure, it must be considered in connection with anti- anti-abuse regulations in the state of source of the finan-
avoidance for the following reasons. First, the provision cial income.
could permit the FTA to examine the benefit of a tax
According to Widmar and Blom (2000), “[f]rom the out-
treaty significantly before any dividend payment to share-
set, the Netherlands has generally been chosen as the head
holders in the residence is decided on and paid. Second,
office country. However, a change in the Netherlands do-
according to the verbally confirmed practice of the FTA, if
mestic treatment of passive income (such as financial in-
the benefit of a tax treaty can be obtained, only the resid-
come) earned by a foreign branch, effective in 1998, made
ual treaty withholding tax must be secured by a guarantee.
the Netherlands unsuitable as a head office location”. 21 As
noted in section 2.23., the 1966 Treaty did not prevent
3.3. APAs: the Swiss perspective
the application of this 1998 Netherlands tax rule. How-
According to the OECD, “[n]o formal procedure for ever, under the article 22 of the 2010 Treaty, it appears
Advanced Pricing Arrangements [(thereafter APA)] ex- that the exemption method could be helpful in reviving
ists in Switzerland. However, bilateral Advance Pricing a Swiss finance branch with regard to the Netherlands
Agreements are conducted under the corresponding Mu- and Switzerland. Nevertheless, article 22(4) of the 2010
tual Agreement provision in the applicable double tax Treaty, which reserves the application of the Netherlands
treaty”.19 Consequently, an APA is a mutual agreement legislation regarding passive income, could prevent the
that is negotiated and concluded between the contract- use of such a scheme.
ing states in advance of, as opposed to after, a tax as-
sessment. Under the 2010 Treaty, Swiss taxpayers can
initiate an APA procedure to agree transfer prices where
transactions are between group companies or between a 17. R. Danon, Le concept de bénéficiaire effectif dans le cadre du MC OCDE -
head office and its PE, and the Netherlands and Swiss tax Réflexions et analyse de la jurisprudence récente, IFF Forum für Steuerrecht
(2007).
treatments of certain transactions. This is a significant 18. Jung, supra n. 14, at sec. 1.3.4.
improvement on the 1966 Treaty, where this was only an 19. OECD, Transfer Pricing Country Profile, available at www.oecd.org/datao-
option that was unlikely to be agreed on given the absence ecd/21/51/42572950.pdf.
20. S. Widmar & M Blom, Reviving the Swiss Branch Concept, 11 Intl. Tax Rev.
of a time limit in which the contracting states had to reach 49 (2000).
an agreement (see section 2.26.). 21. Id, at p. 49.



4. Conclusions Finally, it can be questioned as to how adversely
the exchange information clause will affect the
In the authors’ opinion, the 2010 Treaty is a welcome
Swiss banking (and finance) industry. It is common
legislative evolution in Netherlands-Swiss commercial
preconception that the Swiss banking (and finance)
and economic developments. Due to the standardised
industry would be detrimentally affected in an
and up-to-date text, the 2010 Treaty has increased
international context by the exchange of information.
predictability and should result in greater legal
Such a negative effect could, however, be mitigated by
certainty for the taxpayers. In particular, the arbitration
the facts that: (1) almost every banking and finance
clause should help to prevent double taxation.
location worldwide should hopefully soon be subject
However, in certain respects, the benefits of the 2010 to the same exchange of information rules (a level
Treaty can be regarded as limited. For example, playing field); and (2) the “Rubik” proposals made by
no substantial changes to tax treatment in general Switzerland to Germany and the United Kingdom and
should result from the 2010 Treaty. Accordingly, the currently under negotiation could serve as an example
authors do not envisage that it will contribute much for a more pragmatic and less detrimental approach,
to improving commercial relations between the as opposed to the over-extended use of exchange of
Netherlands and Switzerland. information.

Cumulative Index

[continued from page 442] MERCOSUR – available online at http:// Uruguay
online.ibfd.org/kbase Carlos Forcada:
MERCOSUR The Economic Effect of Taxation on the
Carlos Forcada: Russia Flow of Software Copyright Royalties in
The Economic Effect of Taxation on the Elena Variychuk: MERCOSUR – available online at http://
Flow of Software Copyright Royalties in In Search of Effective Regulation: Draft online.ibfd.org/kbase
MERCOSUR – available online at http:// Bill on Transfer Pricing 107
online.ibfd.org/kbase Zambia
Singapore Kennedy Munyandi:
Netherlands Lee Fook Hong: Mining Taxation in Zambia: An Evaluation
H.T.P.M. van den Hurk: Singapore’s 2011 Budget: Focusing on of the Variable Profit Tax – available online
The Common Consolidated Corporate Strengthening the Economy and Society at http://online.ibfd.org/kbase
Tax Base: A Desirable Alternative to a for the Future 408
Flat EU Corporate Income Tax? 260 South Africa IFA Congress Articles
Sarig Shalhav: Ernest Mazansky:
Netherlands Tax Aspects of (Private) New Headquarter Company Regime 166 France
Class Action Antitrust Lawsuits 390 Pierre-Yves Bourtourault and Marc Bénard:
Annet Wanyana Oguttu and French Tax Aspects of Cross-Border
New Zealand Christian Schulze: Restructurings 179
Sybrand A. van Schalkwyk: The Role of Tax Havens in the Global
Tax Harmonization in Australia and New Financial Crisis: A Critique of International Christian Comolet-Tirman:
Zealand: Lessons from the European Initiatives and Measures to Curb the French Treaty Policy 199
Union – available online at Resultant Fiscal Challenges and the Example Bruno Gouthière:
http://online.ibfd.org/kbase of South Africa – available online at – Beneficial Ownership and Tax Treaties:
http://online.ibfd.org/kbase A French View 217
Nigeria
Abiola Sanni: Switzerland – Key Practical Issues in Eliminating the
Recent Developments in Company Markus Frank Huber and Eric Duvoisin: Double Taxation of Business Income 188
Income Taxation in Nigeria – available Federal Supreme Court on Treatment of Philippe Martin:
online at http://online.ibfd.org/kbase Exchange Differences and Environment Interaction between Tax Treaties and
for Internal Group Financing Improved 113 Domestic Law 205
Onuora R. Ugwoke:
Capital Allowances: A Fiscal Policy Jessica Salom:
Instrument for Industrial Development in The Attribution of Income in Swiss and Julien Saïac:
Nigeria – available online at International Tax Law 394 Non-Cooperative Jurisdiction Tax
http://online.ibfd.org/kbase Reform in France 211
United States
OECD Tony Anamourlis and Les Nethercott: International
Tony Anamourlis and Les Nethercott: The EU-US (“Brussels”) Agreement on Pierre-Yves Bourtourault and Marc Bénard:
The EU-US (“Brussels”) Agreement on European Banking Secrecy and the Effect French Tax Aspects of Cross-Border
European Banking Secrecy and the Effect on on Tax Information Exchange Agreements – Restructurings 179
Tax Information Exchange Agreements – available online at http://online.ibfd.org/kbase Bruno Gouthière:
available online at http://online.ibfd.org/kbase Aleksandra Bal: Key Practical Issues in Eliminating the
Paraguay Taxation of Virtual Wealth 147 Double Taxation of Business Income 188
Carlos Forcada: Viva Hammer:
The Economic Effect of Taxation on the US Update 333 [continued on page 480]
Flow of Software Copyright Royalties in


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