Developments in Double Taxation Treaties

In July, discussions took place in Prague on the text of a double taxation treaty between the Czech Republic and Iraq. The treaty with Iraq had already been negotiated in 2018 but was not signed at that time.

News from the European Union

European Commission calls on the Netherlands to adjust tax rules for investment funds
The European Commission has issued a formal opinion urging the Netherlands to align its withholding tax rules on dividends with EU law. The Dutch Dividend Withholding Tax Act grants domestic investment funds relief on dividends received from Dutch companies but denies equivalent benefits to comparable foreign funds. According to the Commission, this discrepancy restricts the free movement of capital and violates Article 63 TFEU and Article 40 of the EEA Agreement.

The Netherlands has not remedied the issue following the Commission’s initial warning of 25 July 2024 and continues to defend its policy by invoking overriding public interest. The recently issued opinion constitutes the second stage of EU infringement proceedings. Should the Netherlands fail to address the breach, the Commission may refer the matter to the Court of Justice of the European Union (CJEU).

Compatibility of Pillar II with EU law: Belgian Constitutional Court refers preliminary question on UTPR
The Belgian Constitutional Court has referred a question to the Court of Justice of the European Union (“CJEU”) on whether the Undertaxed Profits Rule (“UTPR”) under the EU Minimum Tax Directive (Pillar II) complies with EU law, including the fundamental rights and freedoms enshrined in the Treaties.

The UTPR applies to multinational groups with turnover of at least EUR 750 million in two of the preceding four years and allows a jurisdiction to impose top-up taxes on an entity if its parent group pays less than the 15% global minimum tax in another jurisdiction.

The dispute concerns the imposition of additional tax obligations on Belgian entities due to undertaxed profits of foreign companies within the same multinational group. Claimants argued that the UTPR violates:

• Property rights: by imposing disproportionate burdens.
• Freedom to conduct business: by discriminating against Belgian entities based on financial capacity without regard to their specific situation.
• Equality and non-discrimination: by treating loss-making and profit-making entities alike, both individually and at group level.
• Territoriality principle: by requiring Belgian entities to pay tax on undertaxed profits earned in other jurisdictions by companies they do not control and from which they never derive income.

The Belgian Constitutional Court admitted the case and referred the question to the CJEU to assess whether UTPR infringes rights under the EU Charter (freedom to conduct business, property rights, non-discrimination), freedoms under the Treaties (establishment and services), as well as legal certainty and fiscal territoriality.

European Commission presents proposal for a new system of EU own resources
The European Commission has published a draft Council decision on the system of EU own resources, extending and revising earlier proposals from 2021 and 2023. Its aim is to ensure sustainable financing of EU policies, repayment of the Next Generation EU programme, and greater budgetary flexibility in times of crisis. The proposal maintains contributions from the Carbon Border Adjustment Mechanism (CBAM) and the EU Emissions Trading System (EU ETS), and introduces three new resources: the Corporate Europe Resource (CORE), a resource based on uncollected e-waste, and a resource based on tobacco excise duties (TEDOR). More details can be found here.

Further Updates in International Taxation

OECD developments on Pillar II
OECD Secretary-General Mathias Cormann presented a report highlighting important progress in international tax cooperation.

The most anticipated element was the indication of future developments for Pillar II in light of the G7’s “side-by-side” approach to US tax legislation. The report stresses that Qualified Domestic Minimum Top-up Taxes (QDMTT) must gain greater importance for all multinational groups, including those headquartered in the United States.

Other points include the planned simplification of safe harbour qualification rules, allowing multinational groups to avoid extensive calculations by demonstrating a sufficiently high effective tax rate.

Finally, the report notes support for global labour mobility, stressing that tax rules should not hinder opportunities created by workforce mobility (e.g., attracting talent). The OECD also aims to continue assisting jurisdictions in implementing measures that promote transparency and information exchange.

Poland responds legislatively to CJEU rulings on foreign investment funds
The Polish Ministry of Finance has presented a draft amendment to the Corporate Income Tax Act in response to the CJEU judgments in cases C-18/23 (F S.A.) and C-190/12 (Emerging Markets). The amendment seeks to remove inconsistencies in conditions for granting tax exemptions to foreign investment funds and align them with EU law.

The reform would allow foreign funds – including those from third countries outside the EU/EEA – to benefit from exemptions on the same terms as Polish funds, provided they meet relevant regulatory standards. The draft also introduces anti-abuse measures. These changes respond to the CJEU’s finding that previous Polish rules, which limited exemptions to EU/EEA-based and externally managed funds, were incompatible with EU law.

Dutch Supreme Court on anti-abuse rules in dividend taxation
The Supreme Court of the Netherlands has issued two rulings clarifying the application of the anti-abuse rules in the Dutch dividend withholding tax regime, particularly with respect to non-resident personal and family holding companies. Building on EU case law (including the Nordcurrent case, previously reported), the Court emphasised an approach based on genuine economic substance rather than legal form.

The Court confirmed that even structures established for legitimate business reasons may be regarded as abusive if their elements lack functional and genuine substance, leading to denial of tax exemption under the EU Parent-Subsidiary Directive.

The cases concerned two Belgian family holding companies owned by individuals. These holdings invested in Dutch private equity structures. One company displayed signs of activity, incurred portfolio management costs, and maintained office space but had no employees. The other was passive, merely holding shares without incurring significant costs. The Supreme Court upheld the Dutch tax authority’s position that the absence of genuine business operations linked to the respective Dutch holdings indicated abuse. The key factor was that the decision-making authority regarding the assessed investments was exercised de facto by the shareholders themselves, not by the holding companies, and the dividends received could subsequently be distributed to them directly, without any obligation to reinvest them at the holding level.

Luxembourg court denies treaty benefits to “paper” permanent establishment
The Luxembourg Court of Appeal ruled on the existence of a permanent establishment in Malaysia under the Luxembourg–Malaysia double taxation treaty. The case involved a Luxembourg project company (“PSC”) set up to acquire participations in other companies. The PSC claimed that related income should be attributed to its permanent establishment in Malaysia and therefore exempt from taxation in Luxembourg.

The PSC argued that it used office space within a group-owned complex in Malaysia and had a service agreement with another group company that employed staff and maintained facilities there. However, the Court held that while holding and managing participations generally requires limited personnel, actual managerial activities must be substantiated. The PSC failed to do so, with evidence showing serious factual and timing inconsistencies as well as contradictions

The Court concluded that the PSC’s objective was to claim treaty benefits via the Malaysian permanent establishment because Luxembourg’s parent-subsidiary regime was inapplicable. This would have resulted in dividends being untaxed in both Malaysia and Luxembourg. The Court denied treaty benefits not on grounds of abuse, but due to the failure to prove the actual existence of a permanent establishment in Malaysia.