DEPARTMENT OF STATE 

WASHINGTON 

March 8,2004 

Excellency: 

I have the honor to refer to the Protocol signed today between the 

United States of America and the Kingdom of the Netherlands Amending 

the Convention for the Avoidance of Double Taxation and the Prevention of 

Fiscal Evasion with Respect to Taxes on Income and to propose on behalfof 

the Government of the United States the following: 

In the course of the negotiations leading to the conclusion of the 

Protocol signed today, the negotiators developed and agreed upon the 

Understanding that is attached to this note. The Understanding is a 

statement of intent setting forth a common understanding and 

His Excellency 

Boudewijn van Eenennaam, 

Ambassador of the Kingdoni of the Netherlands 

DIPLOMATIC NOTE 
interpretation of certain provisions of the Protocol reached by the 

delegations of the United States and the Kingdom of the Netherlands on 

behalf of their respective governments. These understandings and 

interpretations are intended to give guidance both to the taxpayers and the 

tax authorities of our two countries in interpreting these provisions. It was 

further decided that this Understanding will supersede the LJnderstanding 

accompanying the 1992 Convention and the related exchange of notes 

accompanying the 1993 Protocol. 

If the understandings and interpretations in the Understanding are 

acceptable, this note and your note reflecting such acceptance will 

memorialize the understandings and interpretations that the parties have 

reached. 

Accept, Excellency, renewed assurances of my highest consideration. 

For the Secretary of State: 

Attachment: 

As stated. 
Ambnnodc unii lift 

Koninltrijk der Nederlanden 

March 8, 2004 

Mr. Secretary: 

I have the honor to confirin receipt of your Note of today’s date which 

reads as follows: 

“I have the honor to refer to the Protocol signed today between the 

United States of America and the Kingdom of the Netherlands Amending 

the Convention for the Avoidance of Double Taxation and the Prevention of 

Fiscal Evasion with Respect to Taxes on Income and to propose on behalf of 

the Government of the United States the following: 

In the course of the negotiations leading to the conclusion of the 

Protocol signed today, the negotiators developed and agreed upon the 

Understanding that is attached to this note. The Understanding is a 

statement of intent setting forth a common understanding and interpretation 

of certain provisions of the Protocol reached by the delegations of the United 
States and the Kingdom of the Netherlands on behalf of their respective 

governments. These understandings and interpretations are intended to give 

guidance both to the taxpayers and the tax authorities of our two countries in 

interpreting these provisions. It was further decided that this Understanding 

will supersede the Tinderstanding accompanying the 1992 Convention and 

the related exchange of notes accompanying the 1993 Protocol. 

If the understandings and interpretations in the IJnderstanding are 

acceptable, this note and your note reflecting such acceptance will 

memorialize the understandings and interpretations that the parties have 

reached. 

Accept, Excellency, renewed assurances of my highest consideration.” 

I have the honor to inform you, that my Government agrees to the 

above. 

Accept, Your Excellency, the ssion of my highest consideration. 
UNDERSTANDING REGARDING THE CONVENTION BETWEEN THE KINGDOM 

OF THE NETHERLANDS AND THE UNITED STATES OF AMERICA FOR THE 

AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL 

EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED ON DECEMBER 18, 

1992 AND AMENDED BY PROTOCOLS SIGNED ON OCTOBER 13, 1993 AND 

MARCH 8, 2004 

I. In reference to paragraph 1 of Article 4 (Resident) 

(a) It is understood that for purposes of the Convention, the Government of one of the 

States, its political subdivisions or local authorities are to be considered as residents of 

that State. 

(b) It is understood that a company that is or would be a resident of a State pursuant 

to that State’s domestic law will not be treated as a resident of that State for purposes of 

the Convention if it is treated as a resident of a third state pursuant to an income tax 

convention between that State and the third state. 

II. In reference to paragraph 4 of Article 4 (Resident) 

It is understood that, if a company is a resident of the Netherlands under paragraph 1 of 

Article 4 (Resident) and, because of the application of Section 269B of the Internal 

Revenue Code, such company is also a resident of the United States under paragraph 1 of 

Article 4, the question of its residency for the purposes of the application of this 

Convention shall be subject to a mutual agreement procedure as laid down in paragraph 4 

of Article 4. 

III. In reference to Article 7 (Business Profits) 

It is understood that with respect to paragraphs 1 and 2 of Article 7 (Business Profits), 

where an enterprise of one of the States carries on business in the other State through a 

permanent establishment situated therein, the profits of that permanent establishment 

shall not be determined on the basis of the total income of the enterprise, but shall be 

determined only on the basis of that portion of the income of the enterprise that is 

attributable to the actual activity of the permanent establishment in respect of such 

business. Specifically, in the case of contracts for the survey, supply, installation or 

construction of industrial, commercial or scientific equipment or premises, or of public 

works, when the enterprise has a permanent establishment, the profits attributable to such 

permanent establishment shall not be determined on the basis of the total amount of the 

contract, but shall be determined on the basis only of that part of the contract that is 

effectively carried out by the permanent establishment. The profits related to that part of 

the contract that is carried out by the head office of the enterprise shall not be taxable in 

the State in which the permanent establishment is situated. 
IV. In reference to Article 9 (Associated Enterprises), Article 12 (Interest) and Article 

29 (Mutual Agreement Procedure) 

Nothing in paragraph 1 of Article 9 (Associated Enterprises) or paragraph 5 of Article 12 

(Interest) shall prevent either State from determining the appropriate amount of interest 

deduction of an enterprise not only by reference to the amount of interest with respect to 

any particular debt-claim but also by reference to the overall amount of debt capital of the 

enterprise. In the context of a mutual agreement procedure under Article 29 (Mutual 

Agreement Procedure), the amount of the interest deduction shall be determined in a 

manner consistent with the principles of paragraph 1 of Article 9, by reference to 

conditions in commercial or financial relations which prevail between independent 

enterprises dealing at arm's length. Those principles are more fully examined and 

explained in OECD publications regarding "thin capitalization". 

V. In reference to Article 9 (Associated Enterprises) and Article 29 (Mutual 

Agreement Procedure) 

In accordance with paragraph 3 of Article 29 (Mutual Agreement Procedure) the 

competent authorities shall endeavor to resolve by mutual agreement any case of double 

taxation arising by reason of an allocation of income, deductions, credits or allowances 

caused by the application of internal law regarding thin capitalization, earnings stripping, 

or transfer pricing, or other provisions potentially giving rise to double taxation. In this 

mutual agreement procedure, the proper allocation of income, deductions, credits or 

allowances under the Convention will be determined in a manner consistent with the 

principles of paragraph 1 of Article 9 (Associated Enterprises) by reference to conditions 

in commercial or financial relations that prevail between independent enterprises dealing 

at arm's length. Consistent with the mutual agreement procedures of other income tax 

conventions, including those entered by both States, a procedure under Article 29 

concerning an adjustment in the allocation of income, deductions, credits or allowances 

by one of the States might result either in a correlative adjustment by the other State or in 

a full or partial readjustment by the first-mentioned State of its original adjustment. 

VI. In reference to subparagraph 2 a) and paragraph 6 of Article 10 (Dividends) 

It is understood that a beneficial owner of the dividends, who holds depository receipts or 

trust certificates evidencing beneficial ownership of the shares in lieu of the shares 

themselves in the company in question, may also claim the treaty benefits of 

subparagraph 2 a) of Article 10 (Dividends). In addition, it is understood that where a 

person loans shares (or other rights the income from which is subject to the same taxation 

treatment as income from shares) and receives from the borrower an obligation to pay an 

amount equivalent to any dividend distribution made with respect to the shares or other 

rights loaned during the term of such loan, such person shall be treated as the beneficial 

owner of the dividend paid with respect to such shares or other rights for purposes of the 

application of Article 10 to any such equivalent amount. 
VII. In reference to Article 10 (Dividends) and subparagraph 8 b) ii) of Article 26 

(Limitation on Benefits) 

For the purpose of Article 10 and subparagraph 8 b) ii) of Article 26 (Limitation on 

Benefits), it is understood that depository receipts or trust certificates of shares will be 

considered to possess the rights attached to the shares which they replace, including the 

voting rights thereof. 

VIII. In reference to paragraph 3 of Article 10 (Dividends), paragraph 3 of Article 11 

(Branch Tax) and paragraph 7 of Article 26 (Limitation on Benefits) 

It is understood that a resident that would qualify for benefits under subparagraph 3 a) of 

Article 10 (Dividends) or Article 11 (Branch Tax), but does not do so because it acquired 

the relevant shareholding on or after October 1st, 1998, is not prevented from requesting a 

determination from the competent authority pursuant to subparagraph 3 d) of that Article, 

so long as it also does not meet the requirements of 3 b) and 3 c). 

IX. In reference to paragraph 1 of Article 14 (Capital Gains) 

In determining for purposes of paragraph 1 of Article 14 (Capital Gains) whether the 

assets of a corporation resident in the United States consist, directly or indirectly, for the 

greater part of real property situated in the United States and whether the stock of such 

corporation is a "United States real property interest", the United States confirms that it 

will take into account the fair market value of all of the assets of the corporation, 

including intangible business assets such as goodwill, whether or not appearing as an 

asset on the balance sheet for tax purposes, going concern value and intellectual property. 

X. In reference to paragraph 8 of Article 14 (Capital Gains) 

It is understood that paragraph 8 of Article 14 (Capital Gains) shall not apply to an 

alienation of property by a resident of one of the States if the tax that would otherwise be 

imposed on such alienation by the other State cannot reasonably be imposed or collected 

at a later time. For example, under the domestic law of the United States, a foreign 

corporation that qualifies as a "United States real property holding corporation" is taxed 

in some circumstances if it transfers its assets to a United States corporation in a 

reorganization. In such a case, only if the shareholders of such foreign corporation agree 

to reduce basis (if and only to the extent available) by "closing agreement" can the tax 

that otherwise would be imposed on such alienation be reasonably imposed or collected 

at a later time. 

XI. In reference to paragraph 4 of Article 19 (Pensions, Annuities, Alimony) 

It is understood that the term "other public pensions" as used in paragraph 4 of Article 19 

(Pensions, Annuities, Alimony) is intended to refer to United States tier 1 Railroad 

Retirement benefits. 
XII. In reference to paragraphs 7, 8, 9 and 10 of Article 19 (Pensions, Annuities, 

Alimony) 

It is understood that the term “exempt pension trust” includes those arrangements that are 

treated as exempt pension trusts for purposes of Article 35 (Exempt Pension Trusts). 

XIII. In reference to paragraph 11 of Article 19 (Pensions, Annuities, Alimony) 

It is understood that the competent authorities of both States will consult with a view to 

agreeing rules that will reduce the burden of the undertakings required of exempt pension 

trusts. Such rules will also seek to reduce the burden on the members or beneficiaries 

which may arise under Netherlands law. 

XIV. In reference to paragraph 4 of Article 24 (Basis of Taxation) 

(a) It is understood that, where, by virtue of paragraph 4 of Article 24 (Basis of 

Taxation) an item of income is considered by a State to be derived by a person who is a 

resident of that State, and the same item is considered by the other State to be derived by 

a person who is a resident of that other State, the paragraph shall not prevent either State 

from taxing the item as the income of the person considered by that State to have derived 

the item of income. 

The following example demonstrates the application of the preceding paragraph: 

Individual Z, a resident of the Netherlands, is the sole member of Y, a U.S. limited 

liability company (LLC). Y owns X, a U.S. corporation. Y has elected under the U.S. 

entity classification rules to be taxed as a U.S. corporation. Under Netherlands law, 

however, Y is treated, in this situation, as a fiscally transparent entity. On date A, X 

distributes a $100 dividend to Y. On date B, Y distributes a $100 dividend to Z. Under 

Netherlands law, the dividend from X to Y is considered to be derived by Z. The two 

States agree that, in these circumstances, the United States is not prevented from 

exercising full taxing jurisdiction over Y (which is treated as a U.S. corporation) and, 

accordingly, the United States may tax the dividends from X to Y and from Y to Z in 

accordance with its domestic law. However, with respect to the dividend from Y to Z, 

the rate of tax applicable to the dividend shall be determined in accordance with Article 

10. 

(b) The competent authority of a State may grant the benefits of the Convention to a 

resident of the other State with respect to an item of income, even though it is not treated 

as income of the resident under the laws of that other State, in cases where the income 

would have been exempt from tax if it had been treated as the income of that resident. 

The following example demonstrates the application of the preceding paragraph: 

Z is an exempt pension trust within the meaning of Article 35 (Exempt Pension Trusts) 

that is a resident of the Netherlands for purposes of the Convention. Z is a member of Y, 
a U.S. limited liability company that has elected to be treated as fiscally transparent for 

U.S. tax purposes. Because of certain characteristics, Y is non-transparent under 

Netherlands law. Y owns shares in a number of U.S. companies that pay dividends 

currently. Under the general rule of paragraph 4 of Article 24 (Basis of Taxation), Z 

would not be entitled to the benefits of Article 10 (Dividends) because the income 

derived by Y is not treated by the Netherlands as the income of Z. However, the U.S. 

competent authority may determine that Z is entitled to benefits because Z would be 

exempt from tax on the income even if it were treated as having derived the income. 

XV. In reference to Article 26 (Limitation on Benefits) 

It is understood that the term “gross income” means the total revenues derived by a 

resident of a State from its principal operations, less the direct costs of obtaining such 

revenues. 

XVI. In reference to subparagraph 2 f) and paragraph 3 of Article 26 (Limitation on 

Benefits) 

It is understood that the proof a Dutch resident investment organization (a 

"beleggingsinstelling" in the sense of Article 28 of the "Wet op de 

vennootschapsbelasting 1969") has of the number of its Dutch resident individual and 

corporate shareholders as a result of the procedure used by such Dutch resident 

investment organization when claiming a reimbursement of tax withheld on its foreign 

dividend and interest income under paragraph 1 b) of Article 28 of the "Wet op de 

vennootschapsbelasting 1969", can be used by such Dutch investment organization to 

show that it fulfills the requirements of paragraph 2 f) and paragraph 3 respectively of 

Article 26 (Limitation on Benefits). 

XVII. With reference to paragraphs 2 and 5 of Article 26 (Limitation on Benefits) 

The competent authorities may, by mutual agreement, notwithstanding the provisions of 

these paragraphs, determine transition rules for newly-established business operations, 

newly-established corporate groups or newly-established headquarters companies. 

XVIII. In reference to paragraph 3 of Article 26 (Limitation on Benefits) 

The following example demonstrates an application of paragraph 3 of Article 26. 

A Netherlands resident company, Y, owns all of the shares in a U.S. resident company, Z. 

Y is wholly owned by X, a U.K. resident company that would not qualify for all of the 

benefits of the U.S.-U.K. income tax treaty but may qualify for benefits with respect to 

certain items of income under the “active trade or business” test of the U.S.-U.K. treaty. 

X, in turn, is wholly owned by W, a French resident-company that is substantially and 

regularly traded on the Paris Stock Exchange. Z pays a dividend to Y. For purposes of 

this example, assume that Y does not qualify for benefits under paragraph 2 of Article 26 

(Limitation on Benefits). Y does qualify for benefits under paragraph 3 of Article 26, 
however, assuming that the requirements of subparagraph 3 b) of Article 26 are met. Y is 

directly owned by X, which is not an equivalent beneficiary within the meaning of 

subparagraph 8 f) of Article 26 (X does not qualify for all of the benefits of the U.S.-U.K. 

tax treaty). However, Y is also indirectly owned by W, which is an equivalent 

beneficiary for purposes of the benefits provided by paragraph 2 a) of Article 10 within 

the meaning of subparagraph 8 f) of Article 26 (because W is a French resident company 

whose shares are substantially and regularly traded on a recognized stock exchange, 

within the meaning of the Limitation on Benefits Article of the U.S.-France income tax 

treaty). Accordingly, U.S. withholding tax on the dividend from Z to Y will be imposed 

at a rate of 5% in accordance with subparagraph 2 a) of Article 10. 

XIX. In reference to paragraph 4 of Article 26 (Limitation on Benefits) 

It is understood that an item of income is to be considered as derived “in connection” 

with an active trade or business in a State if the activity generating the item in the other 

state is a line of business which forms a part of, or is complementary to, the trade or 

business conducted in the first-mentioned State. The line of business in the firstmentioned State may be “upstream” to that going on in the other State (e.g., providing 

inputs to a manufacturing process that occurs in that other State), “downstream” (e.g., 

selling the output of a manufacturer which is a resident of the other State) or “parallel” 

(e.g., selling in one State the same sorts of products that are being sold by the trade or 

business carried on in the other State). 

It is understood that an item of income derived from a State would be considered 

“incidental” to the trade or business carried on in the other State if the item is not 

produced by a line of business which forms a part of, or is complementary to, the trade or 

business conducted in that other State by the recipient of the item, but the production of 

such item facilitates the conduct of the trade or business in that other State. An example 

of such “incidental” item of income is interest income earned from the short-term 

investment of working capital or a resident of a State in securities issued by person in the 

other State. 

XX. In reference to subparagraph 4 a) of Article 26 (Limitation on Benefits) 

It is understood that for purposes of subparagraph 4 a) of Article 26 (Limitation on 

Benefits), a bank only will be considered to be engaged in the active conduct of a 

banking business if it regularly accepts deposits from the public and makes loans to the 

public, and an insurance company only will be considered to be engaged in the active 

conduct of an insurance business if its gross income consists primarily of insurance or 

reinsurance premiums, and investment income attributable to such premiums. 

XXI. In reference to paragraph 8 of Article 12 (Interest) and subparagraph 4(a) of 

Article 26 (Limitation on Benefits) 

For the purpose of subparagraph 4 a) of Article 26 (Limitation on Benefits) and 

paragraph 8 of Article 12 (Interest) it is understood that interest derived from group 
financing or portfolio investments shall be considered to be part of the business of 

making or managing investments. 

XXII. In reference to subparagraph 4 b) of Article 26 (Limitation on Benefits) 

It is understood that the substantiality requirement of subparagraph b) is intended to 

prevent a narrow case of treaty-shopping abuses in which a company attempts to qualify 

for treaty benefits by engaging in de minimis connected business activities that have little 

economic cost or effect with respect to the company’s business as a whole. 

Whether a trade or business is substantial for purposes of this paragraph will be 

determined based on all the facts and circumstances. Such determination will take into 

account the comparative sizes of the trades or businesses in each Contracting State 

(measured by reference to asset values, income and payroll expenses), the nature of the 

activities performed in each Contracting State, and, in cases where a trade or business is 

conducted in both Contracting States, the relative contributions made to that trade or 

business in each Contracting State. In making each determination or comparison, due 

regard will be given to the relative sizes of the U.S. and Netherlands economies. 

In any case, however, a trade or business will be deemed substantial if, for the preceding 

taxable year, or for the average of the three preceding taxable years, the asset value, the 

gross income, and the payroll expense that are related to the trade or business in the firstmentioned State equal at least 7.5 percent of the resident’s (and any related parties’) 

proportionate share of the asset value, gross income and payroll expense, respectively, 

that generated the income in the other State, and the average of the three ratios exceeds 

10 percent. If the resident owns, directly or indirectly, less than 100 percent of an 

activity conducted in either State, only the resident's proportionate interest in such 

activity will be taken into account for purposes of the test described in this paragraph. 

The following examples demonstrate the application of the substantiality requirement. 

Example 1 (i) V, a resident of a country that does not have a tax treaty with the 

Netherlands, wants to acquire a Netherlands financial institution. However, since its 

country of residence does not have a tax treaty with the Netherlands, any dividends 

generated by the investment would be subject to a Netherlands withholding tax of 25%. 

V establishes a U.S. corporation with one office in a small town to provide investment 

advice to local residents. That U.S. corporation acquires the Netherlands financial 

institution with capital provided by V. 

(ii) The Netherlands source income is generated from business activities in the 

Netherlands that are related to the investment advisory business conducted by the U.S. 

parent. However, the substantiality test would not be met in this example, so the 

dividends would remain subject to withholding in the Netherlands at a rate of 25% rather 

than the rate provided in Article 10 (Dividends). 
Example 2 (i) S is a banking organization that is organized and managed and 

controlled in the Netherlands. S has a large number of local branches and customers in 

the Netherlands and sufficient employees to provide banking services to those customers. 

However, because the banking market in the Netherlands is crowded with competitors, S 

determined that it needed to establish branches outside the Netherlands in order to expand 

its business. In accordance with that plan, S established branches in several major cities 

in the United States to engage in the same type of banking business as in the Netherlands. 

Over time, the U.S. branches have grown significantly, and now are equal in size to the 

entire Netherlands business of S. 

(ii) The business activities of the U.S. branches of S are related to the business 

conducted by S in the Netherlands. Because S has a large number of local branches and 

employees in the Netherlands, the activities of S in the Netherlands are substantial for 

purposes of subparagraph 4 b) of Article 26 (Limitation on Benefits). 

Example 3 

NLCo, a Netherlands corporation, owns 100 percent of the stock of USCo, a U.S. 

corporation, and 50 percent of the stock of NLSub, a Netherlands corporation. NLCo 

does not directly conduct an active trade or business. USCo and NLSub are actively 

engaged in the music business. USCo has a number of employees who are responsible 

for discovering new recording artists. USCo also produces recordings and is responsible 

for production and distribution within the United States. Employees of NLSub are 

responsible for promoting the recordings in the Netherlands and developing a distribution 

strategy for the rest of Europe. European sales of U.S. recording artists contribute 

substantiality to the profitability of USCo. 

NLCo receives payments of interest and dividends from USCo. In order for these 

payments to be entitled to treaty benefits under paragraph 4 of Article 26, NLCo must be 

considered to be engaged in the active conduct of a trade or business in the Netherlands. 

Under subparagraph 4 b), because NLCo and USCo are related persons, the activities 

conducted in the Netherlands and attributed to NLCo must be substantial in relation to the 

activities conducted by USCo. NLCo will be deemed to satisfy this requirement if the 

ratio of the assets, income and payroll attributable to NLCo to the assets, income and 

payroll attributable to USCo are at least 10 percent and each ratio is at least 7.5 percent. 

For each of the four most recently concluded taxable years, the asset values, gross 

income and payroll expenses of these corporations that are attributable to the trade or 

business were as follows: 

USCo NLSub 

Assets......................................$300 $50 

Income........................................50 10 

Payroll........................................60 10 
NLCo has no assets, income or payroll that are attributable to the trade or 

business. The assets, income and payroll of NLSub that are related to the trade or 

business may be attributed to NLCo, however, under subparagraph c), since NLCo is 

connected to NLSub by reason of its 50% beneficial ownership in NLSub. Accordingly, 

50 percent of NLSub’s assets, income and payroll are attributed to NLCo. The amounts 

attributed to NLCo and the percentage of USCo’s corresponding amounts are as follows: 

NLCo as a Percentage 

NLCo of USCo 

Assets.................................$25 8.3 

Income................................... 5 10.0 

Payroll....................................5 8.3 

Since none of these percentages is greater than 10 percent, NLCo does not meet the 

requirements for the safe harbor described above. Moreover, application of the threeyear average rule does not change the result, since the relevant amounts for the three 

preceding years (and the resulting ratios) are equal to those for the first preceding taxable 

year. 

Nevertheless, NLCo will still qualify for benefits with respect to dividends 

received from USCo. The activities performed by NLSub are substantial in relation to 

those of USCo, taking into account the contributions of each company to the overall 

business of the group. 

XXIII. In reference to subparagraph 5 a) of Article 26 (Limitation on Benefits) 

(a) For the purpose of subparagraph 5 a) of Article 26 (Limitation on Benefits) it is 

understood that the activities referred to in that subparagraph must be performed in the 

State of residence of the person performing such activities. 

(b) It is understood that for purposes of paragraph 5 a) of Article 26 (Limitation on 

Benefits) a person will be considered to be engaged in "supervision and administration" 

activities, only if it engages in a number of the kinds of activities listed below. For 

example, a person will be considered a headquarters company if it performs a significant 

number of the following functions for the group: group financing (which cannot be its 

principal function), pricing, marketing, internal auditing, internal communications and 

management. A simple comparison of the amount of gross income that the headquarters 

company derives from its different activities cannot be used alone to determine whether 

group financing is, or is not, the company's principal function. The above-mentioned 

functions are intended to be suggestive of the types of activities in which a headquarters 

company will be expected to engage; it is not intended to be exhaustive. 

Furthermore, it is understood that in determining if a substantial portion of the overall 

supervision and administration of the group is provided by the headquarters company, the 

activities it performs as a headquarters company for the group it supervises must be 
substantial in comparison to the same activities for the same group performed within the 

multinational. 

For example, a Japanese corporation establishes a subsidiary in the Netherlands to 

function as a headquarters company for its European and North American operations. 

The Japanese corporation also has two other subsidiaries functioning as headquarter 

companies; one for the African operations and one for the Asian operations. The Dutch 

headquarters company is the parent company for the subsidiaries through which the 

European and North American operations are carried on. The Dutch headquarters 

company supervises the bulk of the pricing, marketing, internal auditing, internal 

communications and management for its group. Although the Japanese overall parent sets 

the guidelines for all of its subsidiaries in defining the world-wide group policies with 

respect to each of these activities, and assures that these guidelines are carried out within 

each of the regional groups, it is the Dutch headquarters company that monitors and 

controls the way in which these policies are carried out within the group of companies 

that it supervises. The capital and payroll devoted by the Japanese parent to these 

activities relating to the group of companies the Dutch headquarter company supervises is 

small, relative to the capital and payroll devoted to these activities by the Dutch 

headquarters company. Moreover, neither the other two headquarter companies, nor any 

other related company besides the Japanese parent company, perform any of the abovementioned headquarter activities with respect to the group of companies that the Dutch 

headquarter company supervises. In the above case the Dutch headquarters company will 

be considered to provide a substantial portion of the overall supervision and 

administration of the group it supervises. 

XXIV. In reference to paragraph 7 of Article 26 (Limitation on Benefits) 

(a) It is understood that a company resident in one of the States will be granted under 

paragraph 7 of Article 26 (Limitation on Benefits) all the benefits of the Convention 

otherwise accorded to residents of a State with respect to the income it derives from the 

other State if it satisfies any other specified conditions for the obtaining of such benefits 

and if: 

(1) shares representing more than 30 percent of the aggregate vote and value 

of all of its shares are owned, directly or indirectly, by persons who are 

qualified persons by reason of subparagraphs a), b), clause i) of 

subparagraph c), or subparagraphs d) or e) of paragraph 2 of Article 26; 

(2) shares representing more than 70 percent of the aggregate vote and value 

of all its shares (and at least 50 percent of any disproportionate class of 

shares) are owned, directly or indirectly, by seven or fewer persons who 

are equivalent beneficiaries within the meaning of subparagraph 8 f); and 

less than 50 percent of the company's gross income for the taxable year in which the item 

of income arises is paid or accrued, directly or indirectly, to persons who are not 

equivalent beneficiaries, in the form of payments that are deductible for the purposes of 
the taxes covered by the Convention in the State of which the company is a resident (but 

not including arm's length payments in the ordinary course of business for services or 

tangible property and payments in respect of financial obligations to a bank, provided that 

where such bank is not a resident of a Contracting State such payment is attributable to a 

permanent establishment of that bank located in one of the Contracting States). 

(b) The competent authorities agree to use reasonable efforts to make a determination 

pursuant to paragraph 7 within six months of receiving from the taxpayer all necessary 

information. Further, the competent authorities of both States will meet semi-annually to 

discuss the status of all cases in which a determination has been requested. 

XXV. In reference to subparagraph 2 c) and subparagraph 8 a) ii) of Article 26 

(Limitation on Benefits) 

A company that is listed on the Paris or Brussels stock exchanges that, together with the 

Amsterdam Stock Exchange, constitute Euronext, will be treated as satisfying the listing 

requirement of paragraph 2(c) so long as securities regulators in the Netherlands continue 

to supervise the functioning of the portion of the exchange that is located in the 

Netherlands. If the functioning or supervision of Euronext change substantially, the 

competent authority of the Netherlands will notify the competent authority of the United 

States and the two competent authorities will consider whether such treatment remains 

appropriate and whether adjustments should be made to achieve the purpose of this 

paragraph. 

XXVI. In reference to subparagraphs 8 d) ii) and 8 e) iii) of Article 26 (Limitation on 

Benefits) 

(a) In making the determination in subparagraph 8 d) ii), it is understood that the 

determination is based on an assessment of the decision making activities of all of the 

executive officers and senior management employees who are members of the Executive 

Board or the Board of Directors of the company, as the case may be, unless such persons 

merely provide formal approval of decisions that are in fact made by others. If the 

executive officers of direct or indirect subsidiaries of the company perform the policymaking functions that are normally the responsibility of the Executive Board or Board of 

Directors of a corporate group, such as those described in subparagraph 8 e) iii), they will 

be deemed to be members of the Executive Board or the Board of Directors of the 

company for these purposes. If there are special voting or other arrangements that 

indicate that the board members (including persons described in the preceding sentence) 

do not in fact share equally in decision making, those persons will be considered only to 

the extent that they are responsible for making the decisions described in subparagraph 

8 e) iii). 

(b) If a company that is a resident of the Netherlands and is regularly traded on one or 

more recognized stock exchanges is a parent company for an integrated group of 

companies that includes another parent company that is also regularly traded on one or 

more recognized stock exchanges and that other parent company is a resident of a state in 
the primary economic zone of the Netherlands that has an income tax treaty with the 

United States that provides for the same or lower rates of withholding with respect to 

dividends, branch tax, interest and royalties as are provided in Articles 10 (Dividends), 11 

(Branch Tax), 12 (Interest) and 13 (Royalties) of the Convention in comparable 

circumstances, then the first-referenced company will be treated as satisfying the 

requirements of subparagraph 8) e) iii) with respect to the location of staffs if the staffs 

conduct more of the activities described therein in the Netherlands and that other state 

than in any state other than the Netherlands and that other state. For this purpose, an 

“integrated group of companies” is a group of companies that includes the two parent 

companies described in the preceding sentence and chains of subsidiaries in which the 

parent companies have joint economic ownership. 

XXVII. In reference to subparagraph 8 h) of Article 26 (Limitation on Benefits) 

It is understood that, if a class of shares was not listed on a recognized stock exchange in 

the twelve months referred to in the subparagraph, that class of shares will be treated as 

regularly traded only if that class meets the aggregate trading requirements of the 

subparagraph for the taxable year in which the income arises. 

XXVIII. In reference to paragraph 7 of Article 26 (Limitation on Benefits) 

(a) For purposes of paragraph 7 of Article 26 (Limitation on Benefits), in determining 

whether the establishment, acquisition, or maintenance of a corporation resident of one of 

the States has or had as one of its principal purposes the obtaining of benefits under this 

Convention, the competent authority of the State in which the income in question arises 

may consider the following factors (among others): 

(1) The date of incorporation of the corporation in relation to the date that this 

Convention entered into force; 

(2) The continuity of the historical business and ownership of the corporation; 

(3) The business reasons for the corporation residing in its State of residence; 

(4) The extent to which the corporation is claiming special tax benefits in its country of 

residence; 

(5) The extent to which the corporation's business activity in the other State is dependent 

on the capital, assets, or personnel of the corporation in its State of residence; and 

(6) The extent to which the corporation would be entitled to treaty benefits comparable to 

those afforded by this Convention if it had been incorporated in the country of residence 

of the majority of its shareholders. 
(b) It is understood that a company resident of one of the States will be granted the 

treaty benefits under paragraph 7 of Article 26 (Limitation on Benefits) with respect to 

the income it derives from the other State, if such company: 

(1) Holds stocks and securities the income from which is not predominantly from sources 

in the other State; 

(2) Has widely dispersed ownership; and 

(3) Employs in its state of residence a substantial staff actively engaged in trades of 

stocks and securities owned by the company. 

It is further understood that paragraph 7 of Article 26 will not apply if any of the abovementioned factors is absent. 

(c) It is understood that in applying paragraph 7 of Article 26 (Limitation on 

Benefits), the legal requirements for the facilitation of the free flow of capital and persons 

within the European Communities, together with the differing internal income tax 

systems, tax incentive regimes, and existing tax treaty policies among member states of 

the European Communities, will be considered. Under such paragraph, the competent 

authority is instructed to consider as its guideline whether the establishment, acquisition 

or maintenance of a company or the conduct of its operations has or had as one of its 

principal purposes the obtaining of benefits under this Convention. The competent 

authority may, therefore, determine under a given set of facts, that a change in 

circumstances that would cause a company to cease to qualify for treaty benefits under 

paragraphs 2 and 3 of Article 26 need not necessarily result in a denial of benefits. Such 

changed circumstances may include a change in the state of residence of a major 

shareholder of a company, the sale of part of the stock of a Netherlands company to a 

person resident in another member state of the European Communities, or an expansion 

of a company's activities in other member states of the European Communities, all under 

ordinary business conditions. The competent authority will consider these changed 

circumstances (in addition to other relevant factors normally considered under paragraph 

7 of Article 26) in determining whether such a company will remain qualified for treaty 

benefits with respect to income received from United States sources. If these changed 

circumstances are not attributable to tax avoidance motives, this also will be considered 

by the competent authority to be a factor weighing in favor of continued qualification 

under paragraph 7 of Article 26. 

(d) When a corporation resident in one of the States that is entitled to benefits under 

Article 26 (Limitation on Benefits) acquires a controlling interest in a corporation 

resident in a third state that in turn owns a controlling interest in a second corporation 

resident in the first-mentioned State, that second corporation may not be entitled to the 

benefits of the Convention due to the provisions of subparagraph 2 c) ii) of Article 26 

with respect to income derived from sources within the other State. It is understood that 

in these circumstances the competent authority of the other State, in considering a request 

for benefits under the Convention under paragraph 7 of Article 26, will consider 
favorably a plan of reorganization submitted by the second corporation resident in the 

first-mentioned State, if such plan would result in the second corporation being entitled to 

the benefits of the Convention within a reasonable transition period (determined without 

regard to paragraph 7 of Article 26). 

XXIX. In reference to paragraph 8 h) of Article 26 (Limitation on Benefits) 

In order to meet the "regularly traded" test under subparagraph 8 h) of Article 26 

(Limitation on Benefits), a person claiming benefits under the Convention need not prove 

that it has not engaged in, but may need to rebut evidence that it has engaged in, a pattern 

of trades on a recognized stock exchange in order to meet these tests. 

XXX. In reference to Article 27 (Offshore Activities) 

It is understood that transport of supplies or personnel between one of the States and a 

location where activities are carried on off-shore in that State or between such locations is 

to be considered as transport between places in that State. 

XXXI. In reference to paragraph 5 of Article 29 (Mutual Agreement Procedure) 

(a) It is understood that the States will in any case exchange diplomatic notes as provided 

in paragraph 5 of Article 29 (Mutual Agreement Procedure), when the experience within 

the European Communities with regard to the application of the Convention on the 

elimination of double taxation in connection with the adjustment of profits of associated 

enterprises, signed on 23 July 1990, or the application of paragraph 5 of Article 25 of the 

tax convention between the United States of America and the Federal Republic of 

Germany for the avoidance of double taxation and the prevention of fiscal evasion with 

respect to taxes on income and capital and to certain other taxes, signed on 29 August 

1989, has proven to be satisfactory to the competent authorities of both States. After a 

period of three years after the entry into force of the Convention, the competent 

authorities shall consult in order to determine whether the conditions for the exchange of 

diplomatic notes have been fulfilled. 

(b) If the competent authorities of both States agree to submit a disagreement regarding 

the interpretation or application of this Convention in a specific case to arbitration 

according to paragraph 5 of Article 29, the following procedures will apply: 

(1) If, in applying paragraphs 1 to 4 of Article 29, the competent authorities fail to reach 

an agreement within two years of the date on which the case was submitted to one of the 

competent authorities, they may agree to invoke arbitration in a specific case, but only 

after fully exhausting the procedures available under paragraphs 1 to 4 of Article 29. The 

competent authorities will not generally accede to arbitration with respect to matters 

concerning the tax policy or domestic law of either State. 

(2) The competent authorities shall establish an arbitration board for each specific case in 

the following manner: 
(A) An arbitration board shall consist of not fewer than three members. Each competent 

authority shall appoint the same number of members, and these members shall agree on 

the appointment of the other member(s). 

(B) The other member(s) of the arbitration board shall be from either State or from 

another OECD member country. The competent authorities may issue further instructions 

regarding the criteria for selecting the other member(s) of the arbitration board. 

(C) Arbitration board member(s) (and their staffs) upon their appointment must agree in 

writing to abide by and be subject to the applicable confidentiality and disclosure 

provisions of both States and the Convention. In case those provisions conflict, the most 

restrictive condition will apply. 

(3) The competent authorities may agree on and instruct the arbitration board regarding 

specific rules of procedure, such as appointment of a chairman, procedures for reaching a 

decision, establishment of time limits, etc. Otherwise, the arbitration board shall establish 

its own rules of procedure consistent with generally accepted principles of equity. 

(4) Taxpayers and/or their representatives shall be afforded the opportunity to present 

their views to the arbitration board. 

(5) The arbitration board shall decide each specific case on the basis of the Convention, 

giving due consideration to the domestic laws of the States and the principles of 

international law. The arbitration board will provide to the competent authorities an 

explanation of its decision. The decision of the arbitration board shall be binding on both 

States and the taxpayer(s) with respect to that case. While the decision of the arbitration 

board shall not have presidential effect, it is expected that such decisions ordinarily will 

be taken into account in subsequent competent authority cases involving the same 

taxpayer(s), the same issue(s), and substantially similar facts, and may also be taken into 

account in other cases where appropriate. 

(6) Costs for the arbitration procedure will be borne in the following manner: 

(A) Each State shall bear the cost of remuneration for the member(s) appointed by it, as 

well as for its representation in the proceedings before the arbitration board; 

(B) The cost of remuneration for the other member(s) and all other costs of the arbitration 

board shall be shared equally between the States; and 

(C) The arbitration board may decide on a different allocation of costs. 

However, if it deems appropriate in a specific case, in view of the nature of the case and 

the roles of the parties, the competent authority of one of the States may require the 

taxpayer(s) to agree to bear that State's share of the costs as a prerequisite for arbitration. 
(7) The competent authorities may agree to modify or supplement these procedures; 

however, they shall continue to be bound by the general principles established herein. 

XXXII. In reference to Article 30 (Exchange of Information and Administrative 

Assistance) 

If a United States "reporting corporation" (as defined for purposes of section 6038A of 

the United States Internal Revenue Code) that is a United States resident, or a United 

States permanent establishment of a United States "reporting corporation" that is not a 

United States resident, has neither possession of nor access to records that may be 

relevant to the United States income tax treatment of any transaction between it and a 

foreign "related party" (as defined in section 6038A of the United States Internal Revenue 

Code), and such records are under the control of a Netherlands resident and are 

maintained outside the United States, then the United States shall request such records 

from the Netherlands through an exchange of information under Article 30 (Exchange of 

Information and Administrative Assistance) before issuing a summons for such records to 

the United States "reporting corporation", provided that under all the circumstances 

presented, the records will be obtainable through the request on a timely and efficient 

basis. For purposes of this paragraph, records will be considered to be available on a 

timely and efficient basis if they can be obtained within 180 days of the request or such 

other period agreed upon in mutual agreement between the competent authorities, except 

where the statute of limitations may expire in a shorter period. Similar principles shall 

apply with respect to the application of section 6038C. 

XXXIII. In reference to Article 30 (Exchange of Information and Administrative 

Assistance) 

Pursuant to paragraph 2 thereof, which provides that the competent authorities shall 

endeavor to provide information in the form of depositions of witnesses and authenticated 

copies of unedited original documents, it is understood that the competent authorities of 

the States will work together to develop mutual procedures that reconcile differences in 

internal domestic laws and procedures with the aim of ensuring that information is 

provided in a form that facilitates its use in judicial proceedings in the requesting State. 

XXXIV. In reference to paragraph 1 of Article 30 (Exchange of Information and 

Administrative Assistance) 

It is understood that persons concerned with the "administration" of taxes, as that term is 

used in paragraph 1 of Article 30 (Exchange of Information and Administrative 

Assistance) include, in the United States, the "tax-writing committees of Congress" and 

the "General Accounting Office". Information exchanged under the Convention that is 

otherwise confidential under the Convention may be received under the same 

requirement of confidentiality by these bodies and may be used only in the performance 

of their role of overseeing the administration of United States tax laws. 
Congress's and the "General Accounting Office's" role in overseeing the administrative of 

United States tax law is understood to be limited to ensuring that the administration of the 

tax law by the executive branch is honest, efficient, and consistent with legislative intent. 

XXXV. In reference to Article 31 (Assistance and Support in Collection) 

It is understood that in applying Article 31 (Assistance and Support in Collection) the 

following shall be taken into account: 

(1) The requested State shall not be obliged to accede to the request of the applicant 

State: 

(A) If the applicant State has not pursued all appropriate collection action in its own 

jurisdiction; 

(B) In those cases where the administrative burden for the requested State is 

disproportionate to the benefit to be derived by the applicant State. 

(2) The request for administrative assistance in the recovery of a tax claim shall be 

accompanied by: 

(A) An official copy of the instrument permitting enforcement in the applicant State; 

(B) Where appropriate, certified copies of any other document required for recovery; 

(C) A certification by the competent authority of the applicant State that, under the laws 

of that State, the revenue claim has been finally determined. 

For the purposes of this Article, a revenue claim is finally determined when the applicant 

State has the right under its internal law to collect the revenue claim and all 

administrative and judicial rights of the taxpayer to restrain collection in the applicant 

State have lapsed or been exhausted. 

(3) A revenue claim of the applicant State that has been finally determined may be 

accepted for collection by the competent authority of the requested State and, subject to 

the provisions of paragraph 7 below, if accepted shall be collected by the requested State 

as though such revenue claim were the requested State's own revenue claim finally 

determined in accordance with the laws applicable to the collection of the requested 

State's own taxes. 

(4) Where an application for collection of a revenue claim in respect of a taxpayer is 

accepted: 

(A) By the United States, the revenue claim shall be treated by the United States as an 

assessment under United States laws against the taxpayer as of the time the application is 

received; and 
(B) By the Netherlands, the revenue claim shall be treated by the Netherlands as an 

amount payable under appropriate Netherlands law, the collection of which is not subject 

to any restriction. 

(5) Nothing in this Article shall be construed as creating or providing any rights of 

administrative or judicial review of applicant State's finally determined revenue claim by 

the requested State, based on any such rights that may be available under the laws of 

either State. If, at any time pending execution of a request for assistance under this 

Article, the applicant State loses the right under its internal law to collect the revenue 

claim, the competent authority of the applicant State shall promptly withdraw the request 

for assistance in collection. 

(6) Subject to this paragraph, amounts collected by the requested State pursuant to this 

Article shall be forwarded to the competent authority of the applicant State. Unless the 

competent authorities of the States otherwise agree, the ordinary costs incurred in 

providing collection assistance shall be borne by the requested State and any 

extraordinary costs so incurred shall be borne by the applicant State. 

(7) The requested State may allow deferral of payment or payment by installments, if its 

laws or administrative practice permit it to do so in similar circumstances, but it shall first 

inform the applicant State. Any interest received by the requested State as a result of the 

allowance of a deferral of payment or payment by installments will be transferred to the 

competent authority of the applicant State. 

(8) A revenue claim of an applicant State accepted for collection shall not have in the 

requested State any priority accorded to the revenue claims of the requested State. 

(9) The competent authorities may under this Article grant assistance in collecting any 

tax deferred by operation of paragraph 8 of Article 14 (Capital Gains). 

(10) The competent authorities of the States shall agree upon the mode of application of 

this Article. The competent authorities of the States may further agree to modify or 

supplement these procedures, however, they shall continue to be bound by the general 

principles established herein. 

XXXVI. In reference to paragraph 2 of Article 32 (Limitations of Articles 30 and 31) 

It is understood that the competent authorities of each State shall use all reasonable 

efforts to obtain and provide information respecting interests in a person in response to a 

request from the other State. Paragraph 2 of Article 32 (Limitations of Articles 30 and 

31) does not, however, create an obligation on the competent authorities of either State to 

obtain and provide information respecting interests in a person unless such information 

can be obtained without giving rise to disproportionate difficulties. 
XXXVII. In reference to paragraph 2 of Article 35 (Exempt Pension Trusts) 

For the purpose of paragraph 2 of Article 35 (Exempt Pension Trusts), a person is 

considered to be a related person if more than 80% of the vote or value of any class of the 

shares is owned by the person deriving the income. 

XXXVIII. In General 

It is understood that the two Governments shall consult together at regular intervals 

regarding the terms, operation and application of the Convention to ensure that it 

continues to serve the purposes of avoiding double taxation and preventing fiscal evasion 

and shall, where they consider it appropriate, conclude further Protocols to amend the 

Convention. The first such consultation shall take place no later than December 31st in 

the fifth year following the date on which the Protocol enters into force in accordance 

with the provisions of Article 10 of the Protocol. Further consultations shall take place 

thereafter at intervals of no more than five years. 

Notwithstanding the preceding paragraph, either Government may at any time request 

consultations with the other Government on matters relating to the terms, operation and 

application of the Convention which it considers require urgent resolution.