U.S.-Netherlands agreement on reduced U.S. withholding tax on dividends and interest earned by certain Dutch mutual funds

9 Jul

The Internal Revenue Service has released a copy of a competent authority agreement entered into with the Dutch tax authorities in May. The agreement concerns the eligibility of a besloten fonds voor gemene rekening (limited fund for mutual account) (“LFMA”) and its participants, for treaty-reduced rates of withholding on U.S. source dividends and interest under the U.S.-Netherlands income tax treaty. The agreement is entered into under the mutual agreement procedure of the treaty.

An LFMA is a Dutch arrangement, whereby participants agree to pool their capital to invest collectively and to share in the proceeds. A LFMA is not a legal entity, and each participant is entitled to a pro rata share of the LFMA’s income and assets. Participations are recorded in registered form.

Under Dutch law, a LFMA is treated as a fiscally transparent entity. The participants in the LFMA, wherever resident, are required to take into account separately, on a current basis, their respective share of an item of income paid to the LFMA, whether or not distributed. The character and source of the item of income in the hands of the participant are determined as if such item were realized directly.

An LFMA is not a “resident” of the Netherlands, because it is not a person that is liable to tax in the Netherlands. Therefore, a LFMA is not eligible to claim benefits in its own right under the U.S.-Netherlands tax treaty.

Under the treaty, in the case of an item of income derived through a fiscally transparent person, the item is considered to be derived by a U.S. or Dutch resident, to the extent that the item is treated under U.S. or Dutch tax law, as the case may be, as the income of a resident.

The U.S. and Dutch tax authorities have now agreed that U.S.-source dividends and interest received by a LFMA will be treated as income derived by a resident of the Netherlands, to the extent that the income is subject to tax as the income of a Dutch resident. Thus, a Dutch resident deriving dividends or interest through an LFMA may be entitled to treaty benefits, if the resident otherwise meets all applicable requirements.

Most LFMAs will file Form W–8lMY to claim treaty benefits, either as a withholding foreign partnership or a non-withholding foreign partnership. Existing special procedures for exempt pension trusts remain governed by a mutual agreement entered into in 2007.

James Cantillon Ross
Attorney at law
(LL.M. Taxation)
Bars of California, New York and Quebec
mail: 230 Cook Street # 23019 RPO, Victoria V8V 4Z8
(not admitted in British Columbia)
tel/fax 206 338 4456 cantilon@cruzers.com
https://cantillonlegis.wordpress.com

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