One of the most important aspects of the Dutch corporate income tax system is the participation exemption, under which all dividends and capital gains arising from a qualifying shareholding are tax-exempt. The provision however is quite complex. Therefore a general overview can come in handy.
Dutch corporate income tax rate
In general, a Dutch resident company is subject to Dutch Corporate income tax (“CIT”) on its worldwide income. A rate of 20% applies to taxable income up to EUR 200,000. A 25% rate applies to taxable income exceeding EUR 200,000.
A Company is subject to CIT if it is resident in the Netherlands. The place of tax residency of an entity is based on facts and circumstances. The main facts and circumstances that determine whether the place of effective management is in the Netherlands are:
- the place where the important business decisions are made, and;
- the place where the directors work and meet, and;
- the place where the business records are kept and the financial statements are prepared
An entity is thus tax resident in the Netherlands if its ‘place of effective management’ is in the Netherlands.
The participation exemption
Despite the fact that in general a Dutch resident company is subject to CIT on its worldwide income, all benefits arising from a qualifying shareholding are exempt from CIT at the shareholder’s level , whereby the shareholder is qualified as a Dutch tax resident company. The aforementioned exemption is the so called ‘participation exemption’.
The purpose of the participation exemption is twofold. In the purely Dutch domestic context, it aims at the prevention of double corporate income tax on the profits of one enterprise (i.e. first on the profits of the enterprise itself and subsequently at the level of the parent company, etc. ) In the international context, the participation exemption has the effect of relief from international double taxation.
Based on the current legislation, the participation exemption applies to benefits from a shareholding held by a Dutch parent resident company if the following requirements are met:
1. The parent company holds a participation of at least 5% of, generally, the nominal paid-up share capital (or, in certain circumstances, 5% of the voting rights) of a company with a capital divided into shares (the ‘Minimum Threshold Test’);
2. One of the following three tests is met:
a) the parent company’s objective with respect to its participation is to obtain a return that is higher than a return that may be expected from portfolio asset management (the ‘ Motive Test’ );
b) the direct and indirect assets of the subsidiary generally consist of less than 50% of ‘low-taxed free passive assets’ (the ‘Asset Test’); or
c) the subsidiary is subject to an adequate levy according to Dutch tax standards (the ‘ Subject-to-Tax Test); and
3. The payment received from the subsidiary is not deductible for CIT purposes in the country of the subsidiary.
Participations not qualifying for the participation exemption
If the Minimum Threshold Test (participation of at least 5% of, generally, the nominal paid-up share capital) is met but the remaining conditions of the participation exemption are not, a credit will be granted for the underlying tax paid by the participation at a maximum rate of 5% (except for qualifying EU participations, for which the actual tax can be credited).
The Motive Test
The Motive Test is a facts-and-circumstances test that will be met when the holding company aims to obtain a return on its subsidiary that exceeds a portfolio investment return. This is generally considered to be the case, for instance, if the holding company takes part in the management of the subsidiary or if the holding company (or its parent company) fulfills an essential function for the benefit of the business enterprise of the group. If more than 50% of the consolidated assets of the subsidiary consist of shareholdings of less than 5%, or if the subsidiary (together with its subsidiaries) predominantly functions as a group financing, leasing or licensing company, the Motive Test is deemed to be failed.
The Asset Test
An asset is a ‘low-taxed free passive asset’ if:
i. It is a passive asset that is not reasonably required within the enterprise carried out by its owner; and
ii. The income from such asset is effectively taxed at a rate of less than 10%.
Real estate is always considered to be a ‘good asset’ for purposes of the Asset Test (regardless of its function within the owner’s enterprise and regardless of taxation). For purposes of the 50% threshold of the Asset Test, the fair market value of the assets is decisive. The Asset Test is a continuous test and has to be met throughout (almost) the entire tax year.
Assets that are used for group financing, leasing or licensing activities are generally deemed to be passive, unless they form part of an active financing or leasing enterprise as described in Dutch law, or are 90% or more financed with loans from third parties.
Subject –to-Tax Test
Generally, a participation is considered to be subject to an adequate levy if it is subject to a tax on profits levied at a rate of at least 10%. However, certain tax base differences, such as the absence of any limitations on interest deduction, a too broad participation exemption, deferral of taxation until distribution of profits, or deductible dividends, may cause a profit tax to be disqualified as an adequate levy, unless the effective tax rate according to Dutch tax standards is at least 10%.
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