A Dutch holding company that has owned a United States operating subsidiary for several years arrives at a sale with a straightforward-looking question: who taxes the gain. The answer is usually favorable, and the favorable answer is what makes the rest of the transaction go wrong. Groups treat the treaty result as the whole analysis, sign a share purchase agreement drafted for a domestic seller, and meet the withholding, the representations and the election deadlines afterwards.
The gain is the smallest part of the file. What decides the outcome is whether the target holds real property, whether the buyer wants a step-up in the tax basis of the assets, whether cash can be moved before completion without paying for the privilege, and whether the Dutch holding actually qualifies for the convention it is relying on.
Where the convention puts the gain
Article 14(7) of the convention between the United States and the Netherlands, signed in 1992 and amended by the protocols of 1993 and 8 March 2004, provides that gains from the alienation of any property other than the property referred to in paragraphs 1 through 5 are taxable only in the state of which the alienator is a resident. A Dutch company selling shares in a United States corporation is therefore, as a starting point, outside the United States charge on the gain. Paragraph 9 qualifies that rule, but only for an individual who was resident in the source state within the preceding five years and owns at least 25 per cent of a class of shares. It does not reach a corporate seller.
The exclusions matter more than the rule. Paragraph 1 gives the United States the right to tax gains from the disposition of real property situated there, and defines that term to include shares or comparable corporate rights in a company resident in that state whose assets consist, directly or indirectly, for the greater part of real property situated there, and an interest in a partnership, trust or estate to the extent attributable to such property. It then states that in the United States the term includes a United States real property interest as defined in the Internal Revenue Code on the date of signature, and as amended from time to time without changing the general principles of that paragraph. Within that limit the convention adopts domestic law rather than restraining it.
Paragraph 3 covers gains from the alienation of personal property forming part of the business property of a permanent establishment or pertaining to a fixed base, including the alienation of the establishment itself. A Dutch seller with no permanent establishment there is untroubled by it on a share sale, but it becomes relevant the moment the transaction is restructured as a sale of assets held directly.
The exception that reaches asset-heavy targets
Section 897(a) of the Internal Revenue Code treats gain from the disposition of a United States real property interest by a foreign corporation as if the seller were engaged in a trade or business within the United States and the gain were effectively connected with it. Section 897(c)(2) defines a United States real property holding corporation as one whose United States real property interests have a fair market value equal to or exceeding 50 per cent of the combined fair market value of those interests, its interests in real property located outside the United States and any other of its assets used or held for use in a trade or business.
Two features of that definition catch sellers out. The test is applied on fair market value, not on book value, so a manufacturing subsidiary that bought a site thirty years ago can fail it on figures appearing nowhere in its accounts. And the burden runs against the seller: the shares are a United States real property interest unless the taxpayer establishes that the corporation was at no time a real property holding corporation during the shorter of the five-year period ending on the date of disposition and the period after 18 June 1980 during which the taxpayer held the interest. A company that ceased to be real property heavy eighteen months before completion is not automatically outside the rule. Section 897(c)(1)(B) cleanses the shares only where the corporation holds no such interests at the disposition date, every one held during that period was disposed of in a fully taxable transaction, and neither it nor a predecessor was a regulated investment company or a real estate investment trust in the period.
Where the target is a real property holding corporation, the gain becomes taxable in the United States and the treaty does not prevent it, because Article 14(1) has already conceded the point. That is the first question on the seller side, and it is answered by a valuation, not by an assertion.
The 15 per cent withholding, and the affidavit that stops it
Section 1445(a) requires the transferee to deduct and withhold a tax equal to 15 per cent of the amount realized on the disposition of a United States real property interest by a foreign person. The obligation sits on the buyer, who is in most cases the withholding agent and may be held liable for the tax if it fails to withhold, and it is measured on the gross consideration rather than on the gain. On a sale at a modest margin, it can exceed the entire economic profit of the transaction.
Section 1445(b) provides the exits. Paragraph (2), the affidavit that the transferor is not a foreign person, does not help a Dutch seller. Paragraph (3) is the working answer: no withholding is required where the non-publicly traded domestic corporation whose shares are sold furnishes an affidavit, under penalty of perjury, that it is not and has not been a United States real property holding corporation during the applicable period, or that interests in it are not United States real property interests as of the date of disposition. Paragraph (4) produces the same result through a qualifying statement obtained from the Internal Revenue Service. None of this is automatic: paragraph (7) withdraws the affidavit route where the buyer knows it is false, is told by an agent that it is false, or fails to file a copy where the regulations require one.
That affidavit is signed by the target rather than by the seller. It has to be prepared, checked against a valuation and delivered at completion. The alternative is slower than it looks, because the Internal Revenue Service generally acts on a withholding certificate application within 90 days of a complete filing. Left to the closing checklist, the affidavit becomes the reason a buyer withholds 15 per cent and the seller spends a year recovering it on a return.
Share sale, asset sale, and the election that turns one into the other
A buyer acquiring shares inherits the target’s historic tax basis in its assets. A buyer acquiring assets takes a basis equal to what it paid, and depreciates and amortizes from there. That difference is worth real money, and buyers price it.
Section 338 allows a purchasing corporation that has made a qualified stock purchase to elect to treat the acquisition as a deemed purchase of the target’s assets at fair market value at the close of the acquisition date. A qualified stock purchase requires stock meeting the requirements of section 1504(a)(2), which is at least 80 per cent of total voting power and a value equal to at least 80 per cent of total value, acquired by purchase within a twelve-month acquisition period. Except as regulations otherwise provide, the election under section 338(g) must be made not later than the fifteenth day of the ninth month beginning after the month in which the acquisition date occurs, and it is irrevocable once made.
For a foreign seller that is the relevant election, because the section 338(h)(10) route requires the target to have been a member of a selling consolidated group, meaning a group that includes the target and files a consolidated return. Where the buyer elects under section 338(g), the target is treated as selling its assets and bears the resulting United States tax itself, so the cost falls inside the entity being acquired. Whether the seller pays for it is a negotiation that belongs before signing rather than in the ninth month afterwards.
Taking cash out before completion
Surplus cash in a target is rarely paid for at full value, so groups distribute it before the sale. What that costs depends on the dividend article and, behind it, on limitation on benefits.
Article 10(2) of the convention caps source state tax at 5 per cent of the gross dividend where the beneficial owner is a company holding directly at least 10 per cent of the voting power in the payer, and at 15 per cent in all other cases. Article 10(3), as substituted by the Protocol of 8 March 2004, removes the source state charge entirely where the beneficial owner is a company resident in the other state that has owned directly shares representing 80 per cent or more of the voting power for a twelve-month period ending on the date the dividend is declared. Neither the 5 per cent rate nor the exemption reaches dividends paid by a regulated investment company, a real estate investment trust or a Dutch beleggingsinstelling.
That is where most summaries stop, and where they mislead. The zero rate applies only if the recipient also satisfies one of four further conditions: it owned 80 per cent or more directly or indirectly before 1 October 1998; it is a qualified person by reason of Article 26(2)(c), the publicly traded company test; it is entitled to benefits with respect to the dividends under Article 26(3); or it has received a determination under Article 26(7). A privately held Dutch holding formed after 1998 satisfies neither of the first two. It is left with Article 26(3), which requires that at least 95 per cent of the aggregate voting power and value be owned, directly or indirectly, by seven or fewer equivalent beneficiaries, and that less than 50 per cent of gross income be paid or accrued in deductible form to persons who are not equivalent beneficiaries, arm’s length payments for services or tangible property in the ordinary course of business and payments on financial obligations to a bank being left out of that count. Failing that, it must seek a discretionary determination.
The practical reading is that 5 per cent is the realistic planning assumption for most privately held Dutch holdings, and the zero rate is a position to be built and evidenced rather than assumed.
Limitation on benefits conditions everything above
Article 26 is not confined to dividends. A resident deriving income from the other state is entitled to the benefits of the convention only if it is a qualified person and satisfies any other specified conditions, which means the analysis that keeps the gain outside the United States charge fails together with the analysis on the distribution.
There is more than one road to qualification. Paragraph 2 lists the qualified persons, among them the listed and regularly traded company and the company at least half owned by five or fewer of those. Paragraph 3 is the derivative benefits test, paragraph 4 the active trade or business test, paragraph 5 the headquarters company test, and paragraph 7 the discretionary determination. All of them are answered by facts that exist before the transaction rather than by facts assembled for it. Who the ultimate owners are, where they are resident, what the Dutch company does beyond holding, whether it has employees, premises and a board that meets and decides in the Netherlands: these are the ordinary substance questions, and they are the ones a buyer’s counsel asks when the seller relies on the treaty in the representations. A holding company that cannot pass them is not without options, but the competent authority route takes time that a signed transaction rarely has.
The Dutch side of the same transaction
At the level of the Dutch holding, the disposal falls within the participation exemption where the conditions are met. Article 13(2)(a) of the Wet op de vennootschapsbelasting 1969 sets the primary threshold at a shareholding of at least 5 per cent of the nominal paid-up capital of the subsidiary, and article 13(16) keeps the exemption running for three further years where an interest held and exempt for more than a year falls below it. The gain is then outside the taxable base.
The threshold is not the whole test. Article 13(9) switches the exemption off for a participation held as an investment, and for the costs of acquiring or disposing of it, unless the participation is a qualifying investment participation. Article 13(11) then gives two separate ways back, and they are not interchangeable: either the subsidiary is subject to a profits tax amounting to a real levy by Dutch standards, which is the subject to tax test, or its assets usually consist for less than half of low-taxed free investments, which is the asset test. A United States operating subsidiary ordinarily clears the first question without reaching either test, but that is a conclusion to be recorded rather than assumed.
The exemption is symmetrical, so a loss on the same participation is not deductible, and costs directly connected with the acquisition or the disposal are not deductible either. The exception on losses is the liquidation loss of article 13d, which arises only once the subsidiary has been dissolved and stops at five million euro unless the interest, residence and five-year continuity conditions of article 13d(2) are met. The cost point is worth pricing at the outset: a group that has budgeted transaction costs net of tax relief has budgeted wrongly.
Where the exemption does not apply, the ordinary rates run. For 2026 the Belastingdienst publishes 19.0 per cent on the part of the taxable amount up to and including 200,000 euro and 25.8 per cent above it, the same brackets it publishes for 2025, 2024 and 2023. Any United States tax suffered on a real property holding corporation gain then has to be relieved under Article 25, which lists paragraphs 1 and 3 of Article 14 among the items the Netherlands exempts by a reduction of its own tax computed under Dutch law rather than by crediting the United States tax, and the relief is not always complete.
What has to be true before the agreement is signed
Four things. First, a defensible view on whether the target is or has been a United States real property holding corporation within the look-back period, supported by a valuation rather than by the balance sheet. Second, the section 1445(b)(3) affidavit drafted and capable of being signed, or a withholding certificate application already in progress. Third, a decision on the section 338(g) election, with the price adjusted for it. Fourth, a limitation on benefits file for the Dutch holding that a buyer’s counsel can read.
None of these is difficult in isolation. All of them are difficult under a signed timetable, and the last two cannot be repaired afterwards at all. The sequence is the deliverable, and it belongs before anyone starts drafting the agreement.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.