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      The Appeals Court in 's-Hertogenbosch has ruled in favor of the taxpayer on the allocation of taxing rights under the Netherlands-Germany tax treaty in relation to income derived from a “lucrative interest” held by a German resident employee in a Dutch company.

      In the Netherlands, a lucrative interest—such as sweet equity—is an (subordinated) equity or equity‑like incentive typically granted to certain management or key employees. It involves a relatively small investment but can generate high returns if a company performs well.

      This case was litigated by KPMG Meijburg & Co.

      WHY THIS MATTERS

      This decision provides important guidance on how taxing rights over certain equity-based compensation could be allocated under tax treaties. By rejecting source‑state recharacterization of lucrative interest income as employment income in the Netherlands, the Appeals Court enhances treaty certainty for cross‑border situations. As a result, the ruling may lead multinational employers – in particular PE-owned companies using sweet equity or similar management incentive structures – to reassess how compensation packages involving lucrative interests (i.e., sweet equity) are designed and documented. This is especially relevant for companies based in the Netherlands or when employees are located in the Netherlands.

      Key Highlights

      Key issue before the Appeals Court

      The central question was which treaty article governs income from a lucrative interest (i.e., sweet equity) and whether the Netherlands, as source state, could tax such income under the employment income article on the basis of its alleged “true nature” as remuneration for services.

      Classification of income

      The Appeals Court has decided that:

      • Dividend income derived from lucrative interest falls under the dividend article of the treaty.
      • Capital gains realized on the disposal of such interests fall under the capital gain article, generally taxable only in the state of residence.
      • The Appeals Court found no basis to treat lucrative interest income as employment income (which was the Dutch tax inspector’s argument), noting that Dutch law defines such income as “result from other activities,” not as wage and treaty application to follow the legal character of the income, not its economic motivation.

      Treaty interpretation

      The Appeals Court referenced the OECD Commentary supporting dividend/capital gains treatment.

      Applying the employment income article would shift the agreed allocation of taxing rights between the Netherlands and Germany. The Appeals Court held that such recharacterization is not permissible under a good-faith interpretation of the treaty in the absence of an explicit treaty basis.

      Potential for appeal

      The Deputy Minister of Finance may yet appeal this judgment to the Dutch Supreme Court; as of now, the judgment stands.

      KPMG INSIGHTS

      In light of this ruling – and against the backdrop of evolving compensation practices, particularly within PE-owned portfolios – organizations with a presence in the Netherlands may wish to consider the following:

      • Review existing and future compensation arrangements involving lucrative interests to confirm correct treaty classification and allocation of taxing rights, as well as related withholding positions.
      • Reassess the tax compliance procedures and documentation for similar cases, with proper classification of income under applicable treaties.
      • Update HR, payroll, and global mobility processes, as well as employee communications when equity-based compensation is used in cross-border contexts.

      If assignees and/or their program managers have any questions or concerns about the scope of the amending protocol, its potential application and impacts, they should consult with their qualified tax professional or a member of the GMS tax team with Meijburg & Co in the Netherlands (see the Contacts section).

      RELATED RESOURCE

      This article is excerpted, with permission, from "Treaty law interpretation of benefits derived from directly held lucrative interests" (2 February 2026), a publication of the KPMG International member firm in the Netherlands.

      Contacts

      sandy-govers
      Sandy Govers

      Senior Tax Manager

      KPMG in the Netherlands

      Fatima El Barkani
      Fatima El Barkani

      Manager

      KPMG in the Netherlands

      Jelmer Post
      Jelmer Post

      Senior Tax Manager

      KPMG in the Netherlands

      More Information

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      Disclaimer

      The information contained in this newsletter was submitted by the KPMG International member firm in the Netherlands.

      GMS Flash Alert is a Global Mobility Services publication of the KPMG LLP Washington National Tax practice. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

      © 2026 Meijburg & Co is a partnership of limited liability companies under Dutch law, is registered in the Trade Register under number 53753348 and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.