MAY 1991 EUROPEAN TAXATION
INTERNATIONAL:
Dual-Resident Companies
The Second Sentence of Article 4(1) of the OECD Model
Convention of 1977
By Christo J.A.M. van Gennep"
I. INTRODUCTION
Article 4 of the OECD-Model Convention of 1977 defines
who is resident of a Contracting State and, therefore, who
may invoke the application of a tax treaty according to
Article I. The first sentence of Article 4(1) of the OECD-
Model Convention of 1977 states, "[flor the purposes of
this Convention, the term "resident of a Contracting State"
means any person who, under the laws of that State, is
liable to tax therein by reason of his domicile, residence,
place of management or any other criterion of a similar
nature". The second sentence of Article 4(1) states, "Hut
this term does not include any person who is liable to tax
in that State in respect only of income from sources in that
State or capital situated therein". In a situation of dual res-
idence of a company as a result of Article 4(1), then
Article 4(3) prescribes, "[w'here by reason of the provi-
sions of paragraph 1 a person other than an individual is a
resident of both Contracting States, then it shall be deemed
to be a resident of the State in which its place of effective
management is situated".
According to Article 2(4) of the Dutch Corporate Income
Tax Act 1969, a company incorporated under Dutch pri-
vate law, e.g. a Dutch limited liability company (Besloten
Vemiootschap – B.V.), is always deemed to be located in
the Netherlands and is treated as a Dutch resident which is
subject to Dutch corporate income taxation on its world-
wide income.
If the place of effective management of a Dutch company
is located in another country (country A) and that other
country (country A) treats the Dutch company as a resi-
dent, a situation of dual residence could arise as a result of
Article 4(1) of the tax treaty between the Netherlands and
country A.' Under Article 4(3) of the tax treaty between
the Netherlands and country A, the Dutch company will be
deemed to be a resident of country A. With respect to a
third country (country B), the question is whether the
Dutch company having its place of effective management
in country A can be deemed to be a resident of the
Netherlands under Article 4(1) of the tax treaty between
the Netherlands and country B = and whether it is entitled to
the application of the tax treaty between the Netherlands
and country B for the income derived from that country B.
The Dutch Undemiinister of Finance has taken the follow-
ing point of view.' Because the place of effective manage-
ment of the Dutch company is located in another country
(country A), with regard to country A, a situation of dual
residence exists. Article 4(3) of the tax treaty between the
• Netherlands and country A determines that in order for
© 1991 International Bureau of Fiscal Documentation
141
that tax treaty to apply the dual-resident Dutch company
will be treated as a resident of country A.
According to the allocation rules of the tax treaty between
the Netherlands and country A. the Dutch company will be
subject to taxation in the Netherlands for specific Dutch-
source income only, as mentioned in that tax treaty. This
means that the dual-resident Dutch company cannot be
considered a resident of the Netherlands with respect to a
third country (country B) due to the second sentence of
Article 4(1) of the tax treaty between the Netherlands and
country B, which provides that persons who are liable to
tax on only domestic- (i.e. Dutch-)source income are not
treated as residents of that country (i.e. the Netherlands).
Consequently, no certificate of residence will be issued by
the competent Dutch tax authorities.
The above especially influences Dutch companies which
have their place of effective management in another coun-
try, involved in holding, finance and/or (sub-)licence
activities, which receive income from third countries. In
the view of the Dutch Underminister of Finance, such
companies are not entitled to tax treaty protection under
the Dutch tax treaty network with respect to the income
derived from third countries, because they cannot be con-
sidered resident of the Netherlands due to the application
of the second sentence of Article 4(1) of the tax treaty
between the Netherlands and the respective third coun-
tries. One may question whether or not the point of view of
the Dutch Underminister of Finance with respect to the
application of the second sentence of Article 4(1) of the
OECD-Model Convention of 1977 is correct.
II. THE FIRST SENTENCE OF ARTICLE 4(1)
According to the first sentence of Article 4(1) of the
OECD-Model Convention of 1977 "for the purposes of
this Convention, the term 'resident of a Contracting State'
means any person who, under the laws of that State, is
* Arthur Andersen & Co.. Rotterdam. Member of the International Tas
Group in Europe of Arthur Andersen & Co.
I. Assumin g that the tax treat y between the Netherlands and the other coun-
try (countr y A) has an article which is similar to article 4 of the OECD-Model
Convention of 1977 to determine the term resident of a Contracting State.
2. Assuming that the tax treaty between the Netherlands and the third country
(country Bi has an article which is similar to Article 4 of the OECD-Model
Convention of 1977 to determine the term resident of a Contracting State.
3. See Ministry of Finance, 12 June 1989, IFZ 89/320, Infobullerin 89/448,
VaLuudie Nieuws 1989. at 2501-2502. The Dutch Undersecretar y of Finance
expressed this opinion in 1988, Tweede Kamer (Lower House), 1987-1988, 20
365, No. 5, answer to question 48.
 142 EUROPEAN TAXATION
liable to tax therein by reason of his domicile, residence,
place of management or any other criterion of a similar
nature". Paragraph 4 of the commentary to Article 4 of the
OECD-Model Convention of 1977 states, "[c]onventions
for the avoidance of double taxation do not normally con-
cern themselves with the domestic laws of the Contracting
States laying down the conditions under which a person is
to be treated fiscally as "resident" and, consequently, is
fully liable to tax in that State. They do not lay down stan-
dards which the provisions of the domestic laws on "resi-
dence" have to fulfil in order that claims for full tax lia-
bility can be accepted between the Contracting States. In
this respect the States take their stand entirely on the
domestic laws".
According to the first sentence of Article 4(1), the resi-
dence of a company in a particular country is solely deter-
mined by the domestic tax legislation of that country.
Thus, whether, for purposes of a tax treaty, a company is
resident of the Netherlands is prescribed by Dutch tax leg-
islation only.
Residence of a company in the Netherlands
In the Netherlands, the residence of a company is where
the place of effective management of that company is sit-
uated. However, according to Article 2(4) of the Dutch
Corporate Income Tax Act 1969, for Dutch corporate
income tax purposes companies incorporated under Dutch
private law are always deemed to be located in the
Netherlands and are treated as Dutch residents which are
subject to Dutch corporate income taxation on their world-
wide income. As, in the opinion of the Dutch Under-min-
ister of Finance, incorporation according to Dutch private
law should be considered to be "any other criterion of a
similar nature", 4 this means that under the first sentence of
Article 4(1) of the OECD-Model Convention of 1977, a
Dutch company should be treated as a resident of the
Netherlands for purposes of a tax treaty, even if the place
of effective management of the Dutch company is located
abroad. This interpretation is in line with paragraph 8 of
the commentary to Article 4 of the OECD-Model Con-
vention of 1977 which states, "[i]t (i.e. the term 'resident
of a Contracting State'; CvG) also covers cases where a
person is deemed, according to the taxation laws of a
State, to be a resident of that State and on account thereof
is fully liable to tax therein ...".
Ill. DOES THE SECOND SENTENCE OF
ARTICLE 4(1) APPLY TO COMPANIES?
Subsequently, the meaning of the second sentence of
Article 4(1) has to be analysed. First of all, the question
whether the second sentence of Article 4(1) applies to
companies needs to be answered, because the commentary
to Article 4 of the OECD-Model Convention of 1977 deals
only with individuals (see below).
In the second sentence of Article 4(1), the term person is
used, rather than the term "individual" or a "person other
than a company".` Article 3(1) (a) defines a person as "an
individual, a company and any other body of persons". So,
the second sentence of Article 4(1) applies to companies
as well and not only to individuals.' Moreover, in the first
s-,) 1991 Interna[tonai Bureau o` Fiscal Documentation
MAY 1991
sentence of Article 4(1) the same term person is used.
There can be no doubt that the first sentence is applicable
to companies as well. Finally, Article 4(3), which contains
a provision for a situation of dual residence of a company,
refers to Article 4(1) and not just to the first sentence of
Article 4(1). Since this paragraph deals with companies
and also refers to the second sentence of Article 4(1), the
latter provision should cover the residence of companies
as well as individuals.'
IV. THE SECOND SENTENCE OF ARTICLE 4(1)
The second sentence of Article 4(1) restricts the term resi-
dent of a Contracting State as defined in the first sentence.
This can be assumed from the words, "[b]ut this term does
not include ...". Nevertheless, because of the exclusion
clause in the second sentence a company which is resident
of a country based upon the first sentence of Article 4(1)
may not qualify. This exclusion will apply if a company
"... is liable to tax in that State in respect of only income
from sources in that State ...". The next question is how
should the latter be interpreted. Two points of view seem
to be possible.
First, does this situation arise when only a company's
domestic-source income is taxed because of the domestic
tax legislation of that country, as in the first sentence of
Article 4(1) where the domestic tax legislation is decisive?
According to this approach, a Dutch company with its
place of effective management in country A cannot be
excluded as a resident of the Netherlands with respect to
country B as a result of the application of the second sen-
tence of Article 4(1), since under the Dutch tax legislation
a Dutch company is always deemed to be resident in the
Netherlands and is subject to Dutch corporate income tax
on its world-wide income (see above).
Alternatively, will the exclusion in the second sentence of
Article 4(1) be applicable if, as a result of the application
of another tax treaty, a company is subject to taxation in a
country on only its domestic-source income.' The latter
point of view implies that the residence article of the tax
treaty with another country (country A) has influence on
the residence article of the tax treaty with a third country
(country B). As a result, a Dutch company might not be
considered a resident of the Netherlands for application of
the tax treaty with country B. Apparently the Dutch
4. Tweede Kamer, 1984-1985.18 747 (R 1271), No. 6.
5, The commentary to Article 4 of the OECD-Model Convention of 1963 (in
connection with Art. 4(1), in paragraph 10. which deals with the situation as
described in the second sentence of Art. 4(I) of the OECD-Model Convention of
1977) mentions "individual", and Art. 4(3) of the OECD-Model Convention of
1977 is applicable to "a person other than an individual".
6. See also Prof. K. van Raad, The Netherlands Model Income Tax
Treaty, Intertax 1988/89, at 241-250. But see M.J. de Lignie, De woon-
plaatsverklaringen hij dubbele vestigingsplaats, Weekhlad your Fisiaal
Rerhr (1990) at 44I-448.
7. Obviously. the Dutch Undersecretary of Finance is also of the opinion that
the second sentence of Article 4(1) applies to companies as well (see above).
8. The distinction between limited taxation as a result of the domestic tax leg-
islation or another tax treaty is only relevant if one assumes that a tax treaty
entered into by a particular country eannot he considered to he part of the domes-
tic tax legislation of that country. Recently the Dutch Supreme Court decided
that a tax treaty concluded by the Netherlands with another country is indeed not
part of the Dutch tax legislation. See Reslissin,en m Relosnn,_aken Neder-
land N(' Belusnngrechcspraak (BNB) I000/178.
 MAY 1991 EUROPEAN TAXAT ION
^ Underminister of Finance supports the latter viewpoint
(see above). This position is taken by some others as well
(see below). Implicitly, it is also taken by those who argue
that the opinion expressed by the Dutch Underminister of
Finance (see above) is not correct because a Dutch com-
pany with its place of effective management in another
country, without a permanent establishment in the
Netherlands, cannot he considered to generate taxable
income from only Dutch sources, as certain exchange
gains or (in absence of an "other income" article in the tax
treaty with the other country)' other income due to be
taxed in the Netherlands.
However, according to the wording of both sentences of
Article 4(1) of the OECD-Model Convention 1977, the
commentary thereto and the commentary to Article 4(1)
of the OECD-Model Convention 1963, the restriction in
the second sentence of the term "resident of a Contrac-
ting State" applies to a company which is liable to tax
only on domestic-source income in a country under the
domestic tax legislation of that country. This can be
argued as follows:
41, 1. The second sentence of Article 4(1) refers to the term
resident of a Contracting State as mentioned in the first
sentence of Article 4(1). Since the meaning of the term
resident in the first sentence is solely determined by the
domestic tax legislation of the country involved (see
above), the restriction of the term resident as described in
the second sentence should be based solely on domestic
tax legislation as well.
2. Article 4(1) of the OECD-Model Convention 1963 is
almost identical to the first sentence of Article 4(1) of the
1977 Model, except that it has no second sentence.
Paragraph 10 of the commentary to Article 4 of the
OECD-Model Convention 1963 states, "[amn individual,
however, is not to be considered a `resident of a
Contracting State' in the sense of the Convention if,
although not domiciled in that State, he is considered as a
resident according to the national law and is only subject
to limited taxation on the income arising in that State".
In the OECD-Model Convention 1977, the above
• described situation is explicitly mentioned in the second
sentence of Article 4(1).'° In other words, what has been
described in one sentence in the 1963 Model, has been
defined in two sentences in the 1977 version. In a situation
where two sentences together define one tern, and there is
such a strong connection between both sentences as out-
lined above, they should be read together. Since the
domestic tax legislation is decisive in determining the
meaning of the term resident in the first sentence of Article
4(1) of the 1977 Model, this should also be applicable for
the second sentence.
3. This point of view appears to be supported by paragraph
8 of the commentary to Article 4 of the OECD-Model
Convention 1977 which states, "[p)aragraph 1 provides a
definition of the expression 'resident of a Contracting
State' for the purposes of the Convention. The definition
.refers to the concept of residence adopted in the domestic
laws (cf. Preliminary Remarks)". Since this commentary
refers to Article 4(I ), it would appear to apply to both the
first and the second sentence. It is also relevant that the
• above quoted commentary to Article 4 of the OECD-
() 1991 International Bureau of Fiscal Documentation
j4:<
Model Convention of 1977 is the same as the commentary
to Article 4 of the 1%3 version. Even though Article 4(1
of the OECD-Model Convention of 1977 contains a sec-
ond sentence, in contrast to Article 4(1) of the 1963 ver-
sion, the 1977 commentary refers to the whole of para-
graph 1 and not just to the first sentence.
4. In Article 4(1) of the OECD-Model Convention 1963,
the domestic tax legislation determines the contents of the
term resident, including the restriction of this term as
described in the second sentence of Article 4(1) of the
1977 version, as far as individuals are concerned. For this
reason, the domestic tax legislation ought to be decisive in
determining the meaning of the restriction of the tenn res-
ident, including the restriction of this term as described in
the second sentence of Article 4(1) of the OECD-Model
Convention 1977, at least for individuals. If, with respect
to individuals, the domestic tax legislation is considered to
be decisive in interpreting the second sentence of Article
4(1), this should also be the case for companies.
5. In paragraph 8 of the commentary to Article 4 of the
OECD-Model Convention 1977, the following is stated:
"fif n accordance with the provisions of the second sen-
tence of paragraph 1. however, a person is not to be con-
sidered a `resident of a Contracting State' in the sense of
the Convention if, although not domiciled in that State, he
is considered to be a resident according to the domestic
laws but is subject only to a taxation limited to the income
from sources in that State or to capital situated in that
State. That situation exists in some States in relation to
individuals, e.g. in the case of foreign diplomatic or con-
sular staff serving in their territory". Since the commen-
tary explicitly mentions "in some States", it must be refer-
ring to existing situations of limited taxation in certain
States, i.e. taxation based on the domestic tax legislation
of those States, because otherwise the words "in some
States" have no meaning, since limited taxation as a result
of the influence of the residence article of a tax treaty on
the residence article of another tax treaty might in princi-
ple occur in all countries.
6. Another argument that the second sentence of Article
4(1) should be based on domestic tax legislation can be
found in paragraph 5 of the commentary to Article 4 of the
OECD-Model Convention 1977 which states, "[tjhe spe-
cial point in these cases is only that no solution of the con-
flict can be arrived at by reference to the concept of resi-
dence adopted in the domestic laws of the States con-
cerned. In these cases special provisions must be estab-
lished in the Convention to determine which of the two
concepts of residence is to be given preference". Para-
graph 9 of the commentary to Article 4(2) states, "[tjhis
paragraph relates to the case where, under the provisions of
paragraph 1, an individual is a resident of both Contracting
9. See Prof. K. van Raad. Dual Residence and 1977 OECD Model Treaty
Article 4(1), Second Sentence. 30 European Taxarton I (1990) at 27-29 and M.
Romyn, Beperkte binnenlandse belastingplicht en verdragstoepassing. Fo aul
Weekhlad FED, 1989/536, at 1303-I305. In this respect. it is mentioned that the
particular exchange gains or the absence of an "other income" article are cir-
cumstances which may not lead to the recognition of income from non-Dutch-
soutce income. See infra notes 12 and 13.
10. Since the term person is used rather than individual, the second sentence of
Article 4(1 I, OECD-Model Convention 1977 applies not only to individual, but
to companies as well (see above).
 144 EUROPEAN TAXATION
States". Paragraph 21 of the commentary to Article 4(3)
states, "[sic), in the case of companies, etc., also, special
rules as to the preference must be established". From this
commentary, it can be seen that in Article 4(2) and (3) spe-
cial rules apply, but in the first and second sentence of
Article 4(1) the domestic tax legislation prevails. In addi-
tion, the above-quoted commentary to Article 4 of the
OECD-Model Convention 1977 is the same as the com-
mentary to Article 4 of the 1963 version. A second sen-
tence has been added to the first sentence of Article 4(1)
in the 1977 version, but the commentary still refers to the
whole of paragraph 1. This commentary applies, there-
fore, in principle to the second sentence as well.
7. In order to support the position that the second sentence
of Article 4(1) of the OECD-Model Convention 1977
applies to a company which is liable to tax only on domes-
tic-source income in a country as a result of the domestic
tax legislation of that country, the answer to the question,
whether or not the residence article of a tax treaty with
another country can indeed have influence on the residence
article of a tax treaty with a third country, is relevant. If the
answer to this question is negative, the domestic tax legis-
lation should be decisive. The first sentence of Article 4(1)
states that, ""[flor the purposes of this Convention, the term
`resident of a Contracting State' means ...". Thus, the term
resident mentioned in the first sentence of Article 4(1) of
the tax treaty between the Netherlands and another country
has meaning only for that tax treaty. Since the second sen-
tence of Article 4(1) refers to the first sentence and restricts
the term resident of a Contracting State as defined in the
first sentence, it, therefore, is part of the definition of that
term (see above). The second sentence has meaning only
for the tax treaty between the Netherlands and the other
country. Consequently, the term resident as defined in
Article 4(1) is only of importance for the tax treaty between
the Netherlands and the other country. Since Article 4(2)
and (3) refer to paragraph 1 of that article, the meaning of
those paragraphs is restricted to the tax treaty between the
Netherlands and the other country as well. Therefore, the
outcome of which person is a resident and of which coun-
try, with respect to the tax treaty between the Netherlands
and the other country, is relevant solely for the application
of that tax treaty and not for any other tax treaty.
8. If the position is taken that the second sentence of
Article 4(1) can be read independently of the first sen-
tence, the meaning of the second sentence, especially the
words "this term" (i.e. -resident of a Contracting State")
should also be based on the domestic tax legislation, as a
result of Article 3(2) of the OECD-Model Convention
1977, unless the context requires otherwise."
V. EVALUATION
In the above analysis it has been argued that a company will
not be a resident of a particular country under the second
sentence of Article 4(1) of the OECD-Model Conven-tion
1977 if it is liable to tax only on domestic-source income in
that country, according to domestic tax legislation of that
country, rather than as a result of the application of the resi-
dence article of another tax treaty. According to Dutch tax
legislation, especially Article 2(4) of the Dutch Corporate
Income Tax Act 1969, a company incorporated under Dutch
© 1991 International Bureau of Fiscal Documentation
MAY 1991
private law is always deemed to be located in the
Netherlands, and is treated as a Dutch resident being subject
to Dutch corporate income tax on its worldwide income.
This implies that a Dutch company with its place of effec-
tive management in another country (country A) should be
treated as a resident of the Nether-lands with respect to a
third country (country B) according to the first and second
sentence of Article 4(1) of the tax treaty between the
Netherlands and country B. Therefore, such a Dutch com-
pany is entitled to apply the tax treaty of the Netherlands
with country B for the income derived from country B. This
means that Dutch holding, finance and/or (sub-)licence
companies with their place of effective management in
country A can apply the tax treaty between the Netherlands
and country B to the income derived from country B.
As a Dutch company having its place of effective manage-
ment in another country will generally also be treated as a
resident in country A, it can in principle also apply the tax
treaty of country A with a third country (country B) for the
income derived from country B. In other words, the Dutch
company as a dual-resident can apply two tax treaties to
the income derived from country B. Where the Dutch
company is entitled to the application of two tax treaties, it
can select the most favourable tax treaty. Generally, this
will result in the application of the tax treaty between the
Netherlands and the particular third country.
Although the dual-resident Dutch company may apply the
Dutch tax treaty with country B, the income derived from
country B might not be subject to Dutch corporate income
tax at the level of the company because of the tax treaty
between the Netherlands and country A. The Netherlands
is, in principle, only entitled to tax income from country B
if a dual-resident Dutch company has a permanent estab-
lishment in the Netherlands and if the income from coun-
try B is business income of the company which can be
allocated to that Dutch permanent establishment under the
tax treaty between the Netherlands and country A,'' or
II. Thereby, it is relevant that another tax treaty cannot be considered a part of
the Dutch tax legislation. See supra note 8.
12. One may query whether currency results arising at the level of the Dutch
company in the Netherlands are also covered by the tax treaty between the
Netherlands and the country where the place of effective management of the
Dutch company is located (country A), since these profits are by their nature
only subject to Dutch corporate income taxation (i.e. no double taxation). From
the decision of the lower court of the Hague of 30 January 1990. No. 254/89-M-
4, dealing with a Dutch company whose place of effective management was
located in Ireland, it can be derived that currency results in such a situation (i.e.
currency results at permanent establishment level for purposes of the tax treaty)
are indeed covered by the tax treaty between the Netherlands and the country
where the place of effective management of the Dutch company is located. The
lower court decided that, since the Dutch company had no Dutch-source income
(i.e. no permanent establishment in the Netherlands). Article 8(9) of the Dutch-
Irish tax treaty was not applicable. Thus. the Netherlands was entitled to levy
Dutch dividend withholding tax at a rate of 5% as a result of application of the
Dutch—U.S. tax treaty. since the parent company of the Dutch company was a
U.S. corporation, incorporated under the laws of the United States and located in
the United States. The lower court has not given any attention to currency
results. It may not be assumed that no currency results have arisen at the level of
the Dutch company in the Netherlands in view of the continuous changing cur-
rency exchange rates_ Obviously. the lower court is of the opinion that these cur-
rency results are covered by the tax treaty, and (in the absence of a permanent
establishment in the Netherlands) are not subject to Dutch corporate income tax-
ation. The lower court of the Hague expressed this opinion explicitly in the deci-
sion of 17 January 1990, No. 3940/87-M-II, dealing with a Dutch company
whose place of effective management was located in Spain.
MAY 1991 EUROPEAN 1AXATION
where the income from country B is non-business income
of the company and there is no appropriate "other income"
article (Article 21, OECD-Model Convention 1977) in the
tax treaty between the Netherlands and country A." Since
Dutch holding, finance and/or (suh-)licence companies
with their place of effective management in country A
generally have no permanent establishment in the Nether-
lands and usually generate only business income, the
income derived by these companies from a third country
(country B) will in principle not be subject to Dutch cor-
porate income tax under the tax treaty between the
Netherlands and country A.
However, as argued above, the conclusion that the dual-
resident Dutch company is not subject to Dutch corporate
income tax for the income derived from country B,
according to the tax treaty between the Netherlands and
the country where the place of effective management of
the Dutch company is located (country A), does not pre-
vent it from being a resident of the Netherlands, according
to the first and second sentence of Article 4(1) of the tax
treaty between the Netherlands and country B. It may,
therefore, apply the tax treaty between the Netherlands
and country B. This also implies that the position of the
Dutch Underminister of Finance which was set out above
may not be correct.
Dutch literature
Recently in Dutch tax literature attention has been given to
the meaning of the second sentence of Article 4(1) of the
OECD-Model Convention of 1977 with regard to a Dutch
company having its place of effective management in
another country, especially as to whether such a company
can be treated as a resident of the Netherlands with respect
to the income derived from third countries.
M.J.W.M. Ellis" is of the opinion that a Dutch company
with its place of effective management in another country
might not be considered a resident of the Netherlands with
respect to third countries as a result of the influence of the
residence article of the tax treaty with the other country,
but he seems to prefer the line of thinking that the resi-
dence article of the tax treaty between the Netherlands and
that other country does not influence the residence arti-
cle of the tax treaty between the Netherlands and a
third country.
Prof. K. van Raad takes the position that, "... the designa-
tion of Dutch B.V. as a Belgium resident for purposes of
the Dutch–Belgian treaty has no impact on its residence
status under Dutch tax law nor on its residence for purpos-
es of Dutch treaties with other countries".' 9 Prof. Van Raad
subsequently presents an example whereby a Dutch com-
pany receives income from Indonesia and is entitled to
apply the Dutch–Indonesian tax treaty in respect thereof.
Although Article 4(1) of the Dutch–Indonesian tax treaty
does not contain a similar second sentence to the second
sentence of Article 4(1) of the OECD-Model Convention
of 1977, the above conclusion seems to be applicable as
well to third countries having a tax treaty with the
Netherlands containing a second sentence in Article 4(1)
due to its broad wording without any restriction.
Moreover, he states "... if the dual residence of a
O 1991 International Bureau of Fiscal Documentation
14'
Netherlands-incorporated company arises under a treaty in
which an `Other income' provision (Article 21 OECI)) is
absent, as is the case in a number of recent Netherlands
treaties, in such instance it is clear that the taxing right of
the Netherlands is not restricted to Netherlands-source
income, with the consequence that the provision of Article
4(1), second sentence of treaties with third countries can-
not be applied".' From the latter sentence, the conclusion
could be drawn that Prof. Van Raad takes the opposite
position, i.e. if the taxing right of the Netherlands is limit-
ed to Dutch-source income, the (residence article of the)
tax treaty between the Netherlands and another country
may influence the residence article of the tax treaty
between the Netherlands and a third country. On the sur-
face, it appears that in the latter situation Prof. Van Raad is
focusing on the meaning of Dutch-source income rather
than taking a position on the effect of one tax treaty on
another tax treaty."
In this respect, E.A. Brood' takes the position that the
term resident in Article 4(1), including the second sen-
tence, might be based on the domestic tax legislation.
O.E. van der Donk and O.H.B. van Gent" are of the opin-
ion that the second sentence of Article 4(1) may have an
independent meaning which is completely separate from
the first sentence, which could result in the situation that a
Dutch company with its place of effective management in
another country could not be considered a resident of the
Netherlands in connection with (the income derived from)
a third country due to the influence of the residence article
of the tax treaty with the other country.
Finally, K. van der HeedenZ0 is of the opinion that the tax
treaty between the Netherlands and another country may
influence the application of the tax treaty between the
Netherlands and a third country as a result of which a
Dutch company having its place of effective management
13. A Dutch company is deemed to conduct its business with its whole net
equity, i.e. all assets and liabilities are treated as business related, according to
Art. 2(5) of the Dutch Corporate Income Tax Act 1969. This could result in the
situation that a Dutch company with its place of effective management in coun-
try A is considered to have only "profits of an enterprise" (i.e. business income)
in the sense of Art. 7(1) of the OECD-Model Convention 1977. If this is the case,
it is no longer relevant whether there is an appropriate "other income" article in
the tax treaty between the Netherlands and the country where the place of effec-
tive management of the Dutch company is located (country A).
14. See M.J.W.M. Ellis. De vennootschap met dubbele vestigingsplaats: Dc
dual-resident company, Fiscale aspecten van ondememingen. festschrift for
Prof. D.A.M. Meeles, at 19-39.
15. See Prof. K. van Raad, Dual Residence, 28 European Taxation 8 (1988) at
241-246.
16. See Prof. K. van Rand, The Netherlands Model Income Tax treaty. Intel-tax
1988/8-9, at 241-250.
17. See K. van Raad, Dual Residence and 1977 OECD-Model Treaty Article
4(I ). Second Sentence, 30 European Taxation I (1990) at 27-29.
18. See E.A. Brood, De vestigingsplaats van vennootschappen: Enige prtvaat-
rechtelijke en fiscaalrechtelijke aspecten. Fiscale monografieen. No. 48
(Amsterdam: Kluwer, 1989) at 301 and 302; Uitdelingen van winst in het
internationale verkeer. enige ontwikkelingen, Weekblad voor Fiscaal Kola
(1990) at 865-76. .
19, See O.E. van der Donk and O.H.B. van Gent, De afgifte van woon-
ptaatsverklaringen bij dubbele vestigingsplaats, Weekhlad voor Fiscaal Reel),
(1989) at 1522-30.
20. K. van der Heeden. Naar de omstandigheden en door de oprichting: De
hefting van vennootschapshelasting en dividendhelastung h+ geval van eel,
dubbele vestigingsplaats, Belastingbeschouwingen festschrift for Prof, Dr. J.H.
Christiaanse, at 237-61.
146 EUROPEAN TAXATION MAY 1991

in another country might not be considered a resident of
the Netherlands in connection with (the income derived
from) a third country.
As can be seen from the various comments, there is no
common opinion as to how the second sentence of Article
4(1) of the OECD-Model Convention of 1977 should be
interpreted.
VI. SUMMARY
In this article, it has been argued that a company will not
be treated as a "resident of a Contracting State" under the
second sentence of Article 4(1) of the OECD-Model
Convention 1977 if such a company is liable to tax only on
domestic-source income based on the domestic tax legisla-
tion of that country rather than as a result of the application
of the residence article of another tax treaty. Since under
Dutch tax legislation, in particular Article 2(4) of the
Dutch Corporate Income Tax Act 1969 a Dutch company
is always deemed to be located in the Netherlands and is
treated as a Dutch resident subject to Dutch corporate
income taxation on its worldwide income, a Dutch compa-
ny with its place of effective management in another coun-
try (country A) has to be considered a resident of the
Netherlands with respect to a third country (country B),
according to the first and second sentence of Article 4(1)
of the tax treaty between the Netherlands and that third
country (country B). Therefore, such a Dutch company is
entitled to apply the tax treaty between the Netherlands
and the third country (country B) for the income derived
from that third country (country B). Upon request, a resi-
dence certificate has to be issued by the competent Dutch
tax authorities indicating that for the application of the tax
treaty between the Netherlands and the particular third
country (country B) such a Dutch company is a resident of
the Netherlands. Consequently, a Dutch company with its
place of effective management in another country (country
A), involved in holding, finance and/or (suh-)licence
activities, may invoke the tax treaty between the
Netherlands and a third country (country B) for the income
derived from that third country (country B). The fact that
the income derived from the third country (country B)
might not be subject to Dutch corporate income tax at the
level of the dual-resident Dutch company, as a result of the
tax treaty between the Netherlands and the country where
the place of effective management of the company is
located, does not influence the above conclusions.

The IBFD The International Tax Academy (ITA) - the education and
training division of the IBFD - has a fast-expanding pro-
gramme of courses in Amsterdam and other locations. As a
International result ITA is looking for a full-time Tutor/Instructor, starting
from 1 October 1991.

Tax Academy In addition to lecturing and other forms of teaching, the

duties of this post will include: research on developments in
international taxation relevant for new or existing courses;
the preparation and development of courses and course
is looking for a materials (including case studies); and assistance in organizing
ITA's international tax conferences.

Tutor/Instructor The successful candidate will:

• be fluent in English (with, preferably, a good grasp of at
least one other major European language;
• have good knowledge of international taxation, prefer-
ably combined with practical experience in the field;
• be familiar with and able to teach about the tax systems of
at least two major European countries (preferably includ-
ing the U.K. and/or France);
• be prepared to travel, and to lecture in different countries.

Initial salary would be 50-70,000 Dutch guilders per annum according to

professional experience. Persons recruited outside the Netherlands may in
certain cases be eligible for a fixed 35% deduction from taxable income. For
more information, write to or telephone Dr. Willem G. Kuiper, Technical
Director ITA, tel. (0)20-626 77 26, Postbus 20237, 1000 HE Amsterdam, the
Netherlands. Applications to Mr. H. Hamaekers, Chief Executive of the IBFD,
at the same address.

ti
^ 1991 International Roman of Fiscal Documentation