New tax treaty signed between the Netherlands and Zambia

The new tax treaty applies to the European part of the Kingdom of the Netherlands and also to the BES islands (i.e. Bonaire, St. Eustatius and Saba) the Caribbean part of the Kingdom of the Netherlands with the exception of Aruba, Curaçao and St. Maarten.

In the new tax treaty the following withholding tax rates apply:

Dividends

• If the beneficial owner of the dividend is a company which holds at least 10% of the capital of the company distributing the dividends (or a pension fund) the dividend withholding tax is 5% of the gross amount of the distributed dividends;
• In all other circumstances dividend withholding tax is 15% of the gross amount of the distributed dividend.

Interests

• Interest withholding tax is maximized to a rate of 10%.

Royalties

• Royalty withholding tax is maximized to a rate of 7.5%.

The tax treaty follows the principles of the OECD Model Tax Convention (2014). However, the new treaty deviates at some points. Without being complete, the most important deviations can be specified as follows.

A main purpose test regarding dividends, interests and royalties is included in the new tax treaty. Under the provisions of this main purpose test treaty benefits will be denied if the main purposes, or one of the main purposes for the assignment of shares, debt claims or rights was to obtain treaty benefits.

Furthermore, the term ‘dividend’ also includes: cinematographic films, films or tapes or discs for radio or television broadcasting.

In the protocol to the tax treaty it has been clarified that in the event an entity is treated as transparent in one country and non-transparent in the other country, the countries will try to resolve this by a mutual agreement procedure. Further, it is clarified that it is decided by mutual agreement procedure if a resident of a contracting state is subject to a special tax regime and as a result is not entitled to treaty benefits. In this respect it is already clarified that a Dutch exempt investment institution (in Dutch: ‘vrijgestelde beleggingsinstelling’) is not entitled to treaty benefits. The period for reclaiming a refund of excess withholding tax is 5 years in the case of the Netherlands and 6 years in the case of Zambia. Furthermore, it is clarified that for the purposes of the tax treaty the income received in connection with a (partial) liquidation of a company or the purchase of own shares by a company is considered to be a dividend.

To avoid double taxation Zambia will apply the credit method. The Netherlands will apply the credit method and the exemption-with-progression method for the avoidance of double taxation.

The new tax treaty enters into force on the last day of the month following the month in which the last treaty partner notifies the other treaty partner that it has ratified the treaty.