In the tax treaty between the Netherlands and India a provision is included that limits the deduction of head office expenses (in relation to a permanent establishment). In this provision it is stated that in case the Netherlands or India concludes a tax treaty with another state, which tax treaty has a more beneficial provision regarding head office expenses, this more beneficial provision may also be applied in the relationship between the Netherlands and India. In the decree the State Secretary of Finance indicates that this most-favoured nation clause will not be applied automatically.
In the protocol of the tax treaty between the Netherlands and India, a most-favoured nation clause is also included with respect to dividends, interest and royalties. This clause shall apply if India, after signing a tax treaty with another state who is member of the OECD, applies a lower tax rate for dividends, interest and royalties.
On 17 February 2005 a tax treaty between India and Slovenia entered into force. On 21 July 2010 Slovenia became a member of the OECD. These changes have an impact on the tax treaty concluded between the Netherlands and India, because in the tax treaty between India and Slovenia a tax rate of 5% applies if the receiving company owns directly at least 10% of the capital of paying the dividends. Due to the fact that Slovenia became member of the OECD, this lower tax rate will also apply in relation to the Netherlands and India with retroactive effect as of 21 July 2010. As a result, if a company in the Netherlands pays a dividend to a company in India and the Indian company owns at least 10% of the capital in the Dutch company, the tax rate is reduced from 15% to 5%. With respect to other dividends (i.e. portfolio dividends), the tax rate will be 10% (based on the tax treaty between India and Germany).
Furthermore, with respect to the interest and royalties the tax rate is determined at 10% rate (based on the tax treaty between India and Germany). As the Netherlands does not levy withholding taxes on interest and dividends, this provision will not have any effect from a Dutch tax perspective.