New tax treaty between Ireland and the Netherlands
A new tax treaty between Ireland and the Netherlands was signed in Dublin on 13 June 2019. This treaty replaces the 1969 tax treaty between the two countries.
The new tax treaty is aligned as much as possible with current Dutch tax treaty policy and with the anti-abuse agreements made under the OECD’s BEPS project. The BEPS (Base Erosion and Profit Shifting) project contains a number of action points to combat tax avoidance through base erosion and profit shifting.
One of the major changes in the new tax treaty is the allocation of pensions. Persons already receiving pensions subject to the 1969 tax treaty will continue to be taxed according to the provisions of the 1969 tax treaty. The text below aims to illustrate if switching to the conditions of the new treaty is feasible.
In this text ‘pensions’ also include ‘annuity’ and social security benefits. However, government pensions are not included in this definition and won’t be discussed here. A ‘resident’ refers to a ’tax resident’.
Allocation of taxing rights on pensions under the 1969 tax treaty
The 1969 tax treaty stated that pensions may only be taxed in the country where the recipient resides (the country or state of residence).
Allocation of taxing rights on pensions under the new tax treaty
Under the new tax treaty pensions are (still) in principle taxable in the country where the recipient lives. However, if the following conditions are met, the country where the pension originates (the country or state of source) may tax the pension payment. These cumulative conditions are:
- The total gross pension payments exceed € 25,000 in a tax year (i.e. a calendar year); and
- A tax facility was given during the accrual phase.
An exception to this is in the case that a lump sum pension payment has been received. In that case the country of source may tax the payment – regardless of the amount of the payment.
Ad 1. Payments exceeding € 25,000 in a tax year
In their tax treaty negotiations, the Netherlands take the position that pensions should solely be taxed by the country of source. In the negotiations with Ireland it was agreed that this only applies if the total annual pension payments exceed € 25,000.
Ad 2. Tax facility
The Dutch pension system qualifies pension payments as deferred wages. The pension accrual contributions and pension entitlement are exempt from taxation in the Netherlands. However, the pension payout is taxed.
Emigration to (in this case) Ireland before reaching retirement age creates a tax leak in the Netherlands: the pensioner has never paid tax in the Netherlands on his pension accrual and pension entitlement and now – without further stipulations – also not on the pension payout. The Netherlands does not consider this as a desirable situation. In their treaty negotiations the Netherlands therefore try to include a provision that nevertheless gives the Netherlands a right to tax the payouts of a Dutch pension even if the pensioner lives abroad, in this case in Ireland.
In 2021 an Irish resident receives a Dutch pension of € 10,000 and a Dutch Old Age State Pension (‘AOW’) of € 5,000. Total gross pension in 2021: € 15,000.
As the total gross benefit is less than € 25,000, the levy on the Dutch pension payout and the received AOW is fully allocated to Ireland.
In 2021 an Irish resident receives a Dutch pension of € 50,000 and an AOW of € 5,000. Total gross pension in 2021: € 55,000.
As the total gross benefit exceeds € 25,000, the levy on the Dutch pension payout (€ 50,000) and the received AOW (€ 5,000) is fully allocated to the Netherlands.
In 2021 an Irish resident receives a Dutch pension of € 15,000, a Dutch pension commutation of € 30,000 and an AOW of € 5,000. Total gross pension in 2021: € 50,000.
The total gross benefit is higher than € 25,000, but because lump sum payments are not periodic benefits and are by definition allocated to the source state for tax levies, the pension commutation of € 30,000 is not included in determining the € 25,000 limit. The total amount of the periodic payouts is € 20,000. As this is less than € 25,000 and because a Dutch tax facility was applicable during the accrual phase, the levy on the Dutch pension payout and the received AOW is fully allocated to Ireland. The Netherlands may (and will) levy tax on the lump sum payment of € 30,000.
Elimination of double taxation from a Dutch perspective
The Netherlands taxes its residents on their worldwide income. This means that foreign income is also included in Dutch taxation. In certain cases this can lead to double taxation.
Prevention of double taxation under the old 1969 tax treaty
If a Dutch resident receives pension benefits from Ireland, he needs to declare this income in his (Dutch) personal income tax return. Following the declaration, this (Dutch) resident can request a tax exemption from the Irish tax authorities using a form to obtain an exemption from Irish taxation. (Links are in Dutch only).
Prevention of double taxation under the new tax treaty for periodic pension benefits
If a Dutch resident receives an Irish periodic pension and/or a periodic payment under the Irish social security system, he needs to declare this income in his (Dutch) personal income tax return.
If the annual total of these payments exceeds € 25,000 and if a tax allowance was made for these payments during the accrual phase, then a prevention of double taxation can be claimed in the Dutch personal income tax return.
If the annual total of these payments is less than € 25,000, then by definition the state of residence (i.e. the Netherlands) may tax the full amount and no double tax prevention can be claimed in the Dutch personal income tax return.
Prevention of double taxation under the new tax treaty for lump sum payments
If a Dutch resident commutes his Irish pension, he needs to declare this income in his (Dutch) personal income tax return. Based on the tax treaty, the levy on the lump sum payment is allocated to Ireland. This means that a prevention of double taxation can be claimed in the Dutch personal income tax return.
Effective date of new tax treaty
The provisions of the new tax treaty started being used as of 29 February 2020, even though the treaty was signed into effect on 1 January 2021. This means that pension benefits received for the first time after 29 February 2020 already fall under the provisions of the new tax treaty, meaning that the transitional law (see below) does not apply.
At Ireland’s request the tax treaty provides a transitional arrangement for pensions. A person receiving pensions prior to 29 February 2020 will continue to be taxed under the conditions of the 1969 tax treaty.
However, on request, the recipient can opt for treatment in accordance with the new tax treaty. The Irish and Dutch tax authorities need to be notified before 1 January 2023. This decision is final.
In its treaty negotiations, the Netherlands aims to include a state tax at source for pensions that received tax deductions or exemptions during the accrual phase. The new pension article in the tax treaty with Ireland complies with this treaty policy. It is remarkable that the old tax treaty remains valid indefinitely for pension benefits that had already started payout before 29 February 2020.
If you are aware of someone who could be affected by this change, it is important to determine what could be the most advantageous from a tax perspective for pension benefits that have already started prior to 29 February 2020. Is it better to opt for taxation in accordance with the new treaty or not? Please feel free to contact me by using the contact form below.