The Dutch tax authorities have clarified that permanent establishments must be subject to actual net taxation in the source country to qualify under the Minimum Tax Act 2024—not just theoretically eligible for taxation under treaty provisions. This strict interpretation ensures only substantively taxed PEs receive favourable treatment under the global minimum tax framework, closing potential loopholes for multinational enterprises. 

RF Report

The Dutch tax authorities issued guidance clarifying when a permanent establishment (PE) qualifies under the Minimum Tax Act 2024 (WMB 2024) on 26 February 2026, addressing critical questions about the Netherlands’ implementation of the global minimum tax rules.

The central issue is whether the source country must actually tax the PE’s income in practice, not merely possess the treaty right to do so. This distinction has significant implications for multinational enterprises navigating the new minimum tax framework.

Two questions were examined: Must the source state include PE income in its tax assessment under the domestic law? If so, how specifically should this taxation occur?

Three core requirements for treaty PE qualification

1. Treaty-based PE status

A valid permanent establishment must exist under an applicable tax treaty between the source country (where the PE is located) and the residence country (where the parent entity is located). The PE must meet the standard treaty definition.

2. Actual taxation requirement

The source state must include the PE’s attributable income in its tax assessment under domestic law. This is a critical clarification: simply having the right to tax under treaty provisions is insufficient. The source country must exercise that right and actually subject the PE income to taxation.

The Dutch tax authorities explicitly rejected interpretations suggesting that the “may be taxed” language in Article 7 of the OECD Model Tax Convention allows for optional taxation. For WMB 2024 purposes, the income must actually be included in the source state’s tax base.

3. Net income taxation using separate entity approach

The source state must tax PE income on a net basis using methods comparable to how it taxes resident entities. This incorporates the functionally separate entity approach from Article 7 of the OECD Model Tax Convention.

Under this approach, the PE is treated as if it were a separate and independent enterprise. The taxation must account for functions performed, assets used, and risks assumed by the PE. Importantly, gross withholding taxes do not satisfy this requirement—the source country must allow deductions for expenses attributable to earning the PE income.

Legislative framework and international alignment

The Minimum Tax Act 2024 (WMB 2024) definition explicitly references Article 7 of the OECD Model Tax Convention, which allocates taxing rights over business profits between countries. The Dutch Explanatory Memorandum emphasises that source states must actually tax the income, not merely possess treaty authorisation.

This interpretation aligns with the OECD Pillar 2 Model Rules and Commentary, which specify that PEs must be “subject to tax on their net income in the source jurisdiction.” The EU Pillar 2 Directive uses corresponding language, indicating consistent interpretation across member states.

Practical implications

For multinational groups, this guidance means PE structures receive favourable treatment under minimum tax rules only if:

  • An applicable tax treaty exists between the source and residence countries
  • The PE meets the treaty definition of permanent establishment
  • The source country actually subjects PE income to corporate taxation under domestic law
  • Taxation occurs on a net income basis with appropriate expense deductions
  • The taxation methodology is comparable to how resident entities are taxed

PEs subject only to withholding taxes, or where the source country chooses not to exercise its treaty taxing rights, will not qualify as treaty PEs for WMB 2024 purposes. This affects how such income is allocated and taxed under global minimum tax calculations.

The Dutch tax authorities require actual net taxation of PE income by source states, going beyond mere treaty-based taxing rights. This ensures only PEs genuinely subject to substantive taxation in the source jurisdiction qualify under the minimum tax framework, preventing avoidance through structures that technically create PEs but face no actual source country taxation.