Chapter 1: The Netherlands: The Definition of “International Traffic” in Article 3(1)(e) of the OECD Model: Which Vessel Types Qualify?

Ton Stevens

1.1. Introduction

In December 2021, the Dutch Supreme Court rendered an interesting decision on the applicability of article 15(3) of the Netherlands-Switzerland Income Tax Treaty (2010), which is almost identical to article 15(3) of the OECD Model (in the pre-2017 version) on the wages earned by a Dutch resident seaman who worked on board a construction vessel. Although the case handles the applicability of article 15(3), the specific issue dealt with in the court case was the reference in article 15(3) to the definition of “international traffic” in article 3(1)(e) of the OECD Model and whether or not construction vessels could qualify as ships operated in international traffic. The special issue in this particular case was the fact that the construction vessel was not operated yet during the working periods of the Dutch seaman but was still in the construction phase. Therefore, two issues were to be decided by the Dutch tax courts in this case: (i) can construction vessels qualify as ships under article 3(1)(e) of the OECD Model?; and (ii) can a ship that is not in the operational phase but still in its construction phase already qualify as a ship operated in international traffic?

1.2. Facts of the case

Mr. X worked in 2014 and 2015 as “second mate” (second officer) on board a construction vessel. The vessel was designed for the single-lift installation and removal of large oil and gas platforms, as well as the installation of record-weight pipelines. 1 Mr. X lived (tax resident) in the Netherlands and was employed by a Swiss company (a sister company of the Swiss single ship company that owned and exploited the construction vessel). The vessel was built in South Korea starting in 2014, and in 2016 it started its first operations. 2 Mr. X was working during 2014 and 2015 for several periods “on board” the vessel, either at the Korean construction yard or in the Rotterdam harbour (where the outfitting and completion of the vessel construction was carried out). His remuneration was not taxed in Switzerland. Mr. X worked also on board the vessel when it sailed from the Korean construction yard to the outfitting location in the Rotterdam harbour. The following working periods can be distinguished:

1.3. The Dutch Supreme Court decision

1.3.1. Question/issue disputed

The court case dealt with the question of whether the income earned by the Dutch seaman (Mr. X) should be qualified as remuneration derived from employment that is exercised aboard a ship operated in international traffic (article 15(3) of the Netherlands-Switzerland Income Tax Treaty (2010)). If the answer to the question was positive (standpoint of the taxpayer), taxation rights would be allocated to Switzerland as the contracting state in which the place of effective management of the shipping enterprise was situated. In that case, the remuneration would be exempted 3 in the Netherlands based on article 22(2) of the tax treaty. In case of a negative answer (standpoint of the Dutch tax authorities), the taxation rights would be allocated to the Netherlands (article 15(1) of the tax treaty), as Mr. X did not work at all between 2014 and 2015 in Switzerland (working state).

More specifically, the question before the Dutch Supreme Court was whether the activities of seamen during the construction phase and the sailing period to a testing/completion site could be qualified as working aboard a ship that is operated in international traffic?

1.3.2. The Court’s decision

The decision of the Dutch Supreme Court can be summarized as follows.

The Supreme Court started by stating that articles 3(1)(g), 8 and 15(3) of the Netherlands-Switzerland Income Tax Treaty (2010) are almost identical to those articles 4 of the OECD Model (2008) (art. 3(1)(e) OECD Model). For that reason, the OECD Commentary on those articles is, in the view of the Dutch Supreme Court, of “utmost importance” for the interpretation of those articles.

The Court continued its decision by stating that article 15(3) and article 8 are two sides of the same coin in the sense that they provide for special allocation rules for the operation of ships or aircrafts in international traffic. From the Commentary on Article 8 of the OECD Model, the Court found that profits derived from the exploitation of ships in international traffic meant profits directly related with the commercial transportation of goods and persons by ship in international traffic (including connected or ancillary activities).

The Court then decided that the facts of the case left no other conclusion than that the vessel was destined for the lifting and removal of big platforms and pipelaying. The transport of goods and persons by the ship was only incidental to this main activity. In such a case, it could not be said that profits from the exploitation of the vessel were directly connected with the commercial transport of goods and persons by ship in international traffic (including connected or ancillary activities).

In the view of the Dutch Supreme Court, there was no further need to answer the question of whether article 15(3) of the Netherlands-Switzerland Income Tax Treaty (2010) is also applicable during the construction phase of a ship that is destined for use in international traffic.

1.4. Comments on the Court’s reasoning

The reference by the Dutch Supreme Court to the OECD Commentary as a source of interpretation seems logical. The phrase “utmost importance“ is already used a couple of times by the Court in older decisions. 5 The issue of dynamic versus static interpretation did not play a role in this court decision because both the OECD Commentary (2008) (negotiation of the tax treaty), (2010) (conclusion of the tax treaty), (2014-2015) (facts of the case) and (2017) (latest version) were identical on this issue.

The focus of articles 3(1)(e), 8 and 15(3) of the OECD Model on “transportation” activities can clearly be derived from the text of the OECD Model and its Commentary, and is furthermore confirmed by literature 6 and other international court cases. 7 In that respect, the decision of the Dutch Supreme Court does not come as a surprise. Already the text of article 3(1)(e) refers in its definition of “international traffic” to “any transport” by a ship or aircraft. Furthermore, paragraph 4 of the Commentary on Article 8 states, with regard to profits that are directly obtained from the operation of ships or aircrafts in international traffic: “The profits covered consist in the first place of the profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft … that it operates in international traffic.” Such link to transportation-related activities, of course, raises questions in the case of vessels with multi-purpose activities. In the case at hand, the Dutch Supreme Court said, in fact, that the main activity of the vessel is lifting or dismantling of offshore platforms and pipelaying. The transport of platforms/pipes is only ancillary to this activity. Therefore, there are no transportation activities and, thus, article 15(3) is not applicable. A similar reasoning can be found in a Danish case 8 concerning an offshore construction vessel where the Danish court searched for the “primary function” of the vessel.

The question remains open of how to treat any remuneration...