Netherlands: Domestic Corporate Taxation
Corporate Income Tax on Dividend Income Received
Where a Dutch holding company comes within the "participation exemption rules" all income received by the holding company from the subsidiary whether by way of dividends or otherwise is tax free. To come within the "participation exemption rules" the following criteria must be satisfied:
- 5% rule: the Dutch holding company must hold at least 5% of the subsidiary's shares. The 5% rule makes Holland a particularly attractive jurisdiction in which to base international holding companies. Similar regimes in other countries require much higher percentage shareholdings if the company is to qualify for favorable tax treatment and require that the company be a proper holding company in the sense that its sole economic activity is to hold shares in other subsidiaries. In Holland by contrast a company which trades but also happens to own shares in another corporate entity can be deemed a holding company for the purposes of the participation exemption rules.
- Shares must be held since beginning of fiscal year: The shares must be held since the beginning of the fiscal year in which the participation exemption benefits are claimed.
- Subsidiary profits must be taxed: The subsidiary must pay tax on its profits in the foreign jurisdiction no matter how low those tax rates may be.
- Active Management: The parent company must actively involve itself in its subsidiary's management.
- Tax Exempt Portfolio Company: The subsidiary must not be a "tax exempt portfolio investment company".
N.B. Advance rulings are available to determine whether or not both the corporate entities come within the participation exemption rules. A debt equity ratio of more than 3:1 may result in the company being denied the participation exemption. The participation exemption rules are as follows:
- Expenses Incurred by Parent Corporation: The costs to the parent corporation of running the subsidiary are deductible from the taxable profits of the parent corporation in Holland.
- High Debt Equity Ratio: Where the funds to the subsidiary are provided by the parent corporation too high a debt equity ratio may prevent the corporate structure being deemed a structure to which the participation exemption rules apply. Advance rulings are available to determine whether or not a company comes within the participation exemption. A debt equity ratio of more than 3:1 may result in the company being denied the participation exemption.
- Branch converted into a Subsidiary: If a branch is converted into a subsidiary the losses made by the branch in the previous 8 years must first be covered by profits represented by taxable dividends before the branch can become a subsidiary covered by the participation exemption rules.
- Foreign Taxes: Foreign taxes paid by the subsidiary on income earned by the subsidiary can be credited or debited against the taxable profits of the parent company.
- Undistributed Profits from Earlier Periods: Dividends which relate to undistributed profits made prior to the subsidiary being covered by the participation exemption rules are not tax free in Holland. This follows the landmark ruling in the The Dutch Holdco BV Case.