What is the Dutch participation exemption?

By Caitlyn Buchanan, 18th July 2017

The Participation Exemption applies to Dutch Holding Companies, it means that all dividends and capital gains arising from a qualifying shareholding are tax-exempt.  The purpose is to provide a type of double taxation relief on the profits of an enterprise between parent companies and their subsidiaries. This provision can be quite complex so we have provided a basic overview.

Corporate Tax

Companies that a resident in the Netherlands are generally subject to Dutch Corporate income tax (CIT) on worldwide income. A 20% rate applies to taxable income up to €200,000 and a 25% rate applies to taxable income exceeding €200,000.

Corporate Residence

A Company must pay CIT if it is resident in the Netherlands this is determined by:

• 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

The Participation Exemption

Although 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 if the shareholder qualifies as a Dutch tax resident company.

The purpose of the participation exemption is to prevent double corporate income tax on the profits of an enterprise and its parent company. The participation exemption also provides relief from international double taxation.

Dutch tax exempt

Qualifying Shareholding

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 the nominal paid-up share capital (or 5% of the voting rights) of a company with a capital divided into shares.

2. One of the following three tests is met:
a) Motive Test: 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; or
b) Asset Test: the direct and indirect assets of the subsidiary generally consist of less than 50% of ‘low-taxed free passive assets’; or
c) Subject-to-Tax Test: the subsidiary is subject to an adequate levy according to Dutch tax standards.

3. The payment received from the subsidiary is not deductible for CIT purposes in the country of the subsidiary.

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