Gains and losses from a participation are normally no part of the taxable profits. The Dutch Participation Exemption (PE) scheme guarantees that profits, which are charged at a subsidiary, will not be charged again at the parent company. This article explains how the exemption works in practice.
Companies which are tax resident in the Netherlands are generally subject to Dutch corporate income tax (CIT). The regular CIT rate of 20-25% applies to a company’s worldwide profits. The worldwide profits include business income, trading income, dividend income, royalty income and interest income.
Under the application of the PE regime, income items received in connection with a qualifying shareholding are exempt from CIT. This income includes dividends, other profit distributions, capital gains and foreign exchange rate results realized by a Dutch resident company. Furthermore, losses are non-deductible, except for liquidation losses/ loss on a dissolution and currency exchange losses in case the tax-payer chooses (conditions apply).
You can perform 5 tests in order to determine if a subsidiary qualifies for the PE regime:
- The subsidiary needs to be a company for Dutch tax purposes (“Company Test”);
- The shareholder needs to be the legal owner of 5% in the nominal paid-up share capital in the subsidiary (“Shareholding Threshold Test”) (exception include a.o., 5% voting-power, member of Cooperative);
- The shareholder does not intend to hold the subsidiary as portfolio investment (“Intention Test”);
- The subsidiary is not a deemed portfolio investment (“Deemed Portfolio Investment Test”);
- If 4 applies, then the subsidiary may be a qualifying portfolio investment (“qualifying portfolio investment exception test”).
Based on tests 1, 2 and 3, one can determine if the PE-regime applies to a specific participation. Moreover, test 4 investigates whether the subsidiary is a deemed portfolio investment. Then, one needs to determine if the subsidiary is a qualifying portfolio investment (5).
Ad 5) Qualifying Portfolio Investment Exception Test
If the subsidiary meets test 4, the PE-regime is still available if the participation meets the qualifying portfolio investment exception test (5). In particular, this is the case if it meets either of two tests:
- Less than 50% of the assets of the participation directly and indirectly consist of “low-taxed free portfolio investments” (“Asset Test “); or,
- The participation is subject to a profit tax that results in a genuine levy according to Dutch tax standards (“ETR Test”).
If the participation does not meet the above conditions, the PE is not suitable. In this case, a credit for underlying tax may be available. Other exceptions apply to real estate companies. Here, tax-exempt investment vehicles do not own real estate and rights.
Do you want to know more about the Dutch PE? Please do not hesitate to contact us! We can tell you more about the requirements and how to apply for the exemption. In addition, we have a one-pager about the Dutch PE and a white paper (15 pages) available for free, as well.