Notes regarding the Protocol… US and Netherlands, March 8, 2004

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 sha reholding on or after October 1
st
, 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 first-
mentioned 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 first-
mentioned 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 three-
year 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 above-
mentioned 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 policy-
making 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 compa ny 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 above-
mentioned 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 31
st
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.