Corporate income tax
Dutch corporate income tax can be levied on corporations as well as certain other types of entities. These corporations include companies incorporated under Dutch law such as public companies (NVs), private companies with limited liability (BVs) and open limited partnerships (open CVs). Foreign companies, in particular corporations, can also be subject to Dutch corporate income tax. Corporations are subject to corporate income tax at a national level only in the Netherlands (i.e. there are no regional taxes, municipal taxes et cetera).
A corporation in general is considered to be resident in the Netherlands if it is incorporated under Dutch law (i.e. a BV or an NV). Companies incorporated under foreign law are considered tax resident in the Netherlands if their effective management is located in the Netherlands. Corporate residency depends on individual facts and circumstances and no criterion can be applied. In broad terms, the factors that are relevant are the residence of the directors, the location of the shareholding meetings and the location of the assets.
A Dutch company incorporated under Dutch law but having its effective management outside the Netherlands will, subject to certain exceptions, still be treated as a resident company under Dutch law. However, the Netherlands may still be prevented from taxing such companies on their worldwide profits under an applicable tax treaty.
The domestic right to tax income of residents and non-residents may be limited or the tax mitigated, by applicable tax treaties or domestic double tax relief rules, as described below. Certain entities are specifically exempted from corporate income tax. These include qualifying pension funds and charitable institutions. Certain other entities are subject to corporate income tax only on their business profits. These include certain state-owned enterprises as well as certain types of association (“vereniging”). Special regimes can apply for investment funds.
The question as to whether and to what extent profits are subject to Dutch corporate income tax depends on where the entity resides. Resident companies are liable to tax on their worldwide profits while non-resident companies are liable only in respect of specified types of Dutch source income. The latter include profits from a business carried out in the Netherlands through a Dutch permanent establishment (commonly referred to as a branch), as well as income from real estate located in the Netherlands. Companies are liable to corporate income tax on their annual taxable profits after allowable deductions and any available loss relief. Profits are attributed to each taxable period (generally a period of 12 months that need not be a calendar year) following the principle of ‘sound business practice’.
Taxable profits are computed by comparing the equity at year-end – according to the balance sheet for tax purposes – with the equity at the beginning of the year. The meaning of sound business practice has been developed by the courts and follows generally accepted accounting principles in many respects. An important element of sound business practice is the prudence concept. Under this concept, unrealised losses may be recognised while unrealised profits may be deferred (although the principle may be overridden where ‘hedge accounting’ principles have to be applied for tax purposes). Subject to this and any other specific tax rules, profits are initially based on the financial statements. The same rules generally apply for computing taxable profits for residents and non-residents, although in the latter case the profit and loss account (income statement) is used as the starting point. Profits are computed in Euros unless the applicable conditions are satisfied for computing in a functional currency and a request is filed and approved (see below).
Substantial share regime
Shareholders of a Dutch company may be subject to Dutch corporate income tax under the so-called substantial tax regime, which has been amended as from 1st January 2012. Under the new rules, the shareholder is subject to Dutch corporate income tax (at a rate of max 25%) for dividends received and any capital gains derived in case:
- The share interest is at least 5%;
- there is abuse of Dutch or foreign law and;
- the share interest is not attributable to the enterprise of the shareholder.
In any such case levy by the Netherlands may possibly be prevented by applicable tax treaties.
Corporate income tax rates
The corporate income tax rate (2013) is as follows:
- 20% to the first € 200,000
- 25% in excess of € 200,000
Tax deductible expenditure
In arriving at taxable trading profits, a company should be entitled to deduct expenses that are wholly and exclusively incurred for the purposes of the trade. In principle, all expenses incurred for the purpose of carrying a on a business are deductible in calculating taxable profits. Nevertheless, certain expenses are specificity non-deductible.
Certain expenses are specifically non-deductible, including the following:
- Dutch corporate income tax and, if a double taxation relief provision applies or the income is exempt from Dutch tax, foreign taxes on income or profits;
- Certain fines and penalties imposed under Dutch law or European law (including tax fines and penalties and traffic fines).
The deduction of certain expenses, such as the following, may be restricted:
- food and drink
- business entertainment
- congresses, excursions, and similar activities
Business assets with a limited useful life have to be capitalised and depreciated over their expected useful lives. In this respect, business assets other than goodwill may not be depreciated more than 20% per annum, while for goodwill the maximum allowed is 10%. Although assets may not in general be depreciated to below their expected residual value, a floor applies for real estate based on the value of the property as established by the local municipally, known as the ‘WOZ’ value. Investment properties may be depreciated to the WOZ value, while properties used for business purposes may be depreciated to half that value. If the going concern value is below book value, it is under certain circumstances allowed to make a downward valuation adjustment.
Reserves / provisions
Subject to certain conditions, tax-deductible provisions may be setup to cover future contingencies that are reasonable certain to materialize and relate to the year in question. Examples could include guarantees or costs associated with environmental clean-up. A tax-deductible provision for bad and doubtful debts may be made under certain circumstances. The law also provides for a number of specific tax-deductible reserves. Under certain circumstances a reserve may also be set up to cover the replacement of business assets (reinvestment reserve).
The arm’s length principle has traditionally been considered part of the Dutch concept of taxable profits and is also explicitly incorporated in Dutch tax law. Detailed transfer pricing regulations have been published.
As a consequence, taxable profits from domestic or cross-border related party transactions may be adjusted to conform to profits that would have been realized between independent parties. An adjustment of profits may also lead to secondary adjustments, such as deemed dividend or capital contribution characterization, with in the former case the possible imposition of dividend withholding tax. The taxpayer is required to maintain and make available documentation that demonstrates how the transfer prices were set, and from which it can be established whether the prices conform to the arm’s length principle. In principle, the choice of method for setting transfer prices lies with the taxpayer.
In order to avoid transfer pricing issues an advance pricing agreement (“APA”, see below) can be entered into with the Dutch tax authorities. Such APA may be in a unilateral, bilateral or multilateral form, and is governed by detailed procedural regulations.
In arriving at taxable trading profits, a company is generally entitled to deduct interest on borrowings used for the purposes of its trade. Nevertheless, some anti abuse rules are applicable.
Debt verses equity and hybrid loans
Under Dutch (case) law, there are some restrictions as to deductibility of interest paid on so-called hybrid loans. However, Dutch courts have developed the following three exceptions to this general rule:
- the loan is a sham;
- it is clear from the outset that the loan will not be repaid in full; or
- the loan gives the holder effectively an interest in the business of the borrower. This third category has been the subject of a number of court decisions, under which such loan exists if:
- the return on the loan is contingent on profits;
- the loan has no maturity (or maturity in excess of 50 years) and is only repayable in case of liquidation, bankruptcy or suspensions of payments under a creditor’s arrangement; and
- the loan is subordinated.
Anti abuse rules
Anti abuse rules exist to avoid tax base erosion in the Netherlands. It basically disallows deduction of interest (including currency exchange losses and other costs) incurred in connection with financing obtained (directly or indirectly) from a related party in case this finance relates to:
- profit distributions or repayments of contributed capital;
- capital contributions; or
- acquisitions of participations, if participations can be regarded as a related entity after the acquisition.
Generally interest on intercompany debt regarding the aforementioned “tainted” transactions is non-tax deductible unless the counterproof rules apply. Counterproof is possible in either of the following cases:
- sound business reasons are available for both the transaction and the financing;
- the interest is subject to a profit tax in hands of the recipient, which result is tax levied of at least 10% of the profit calculated on basis of Dutch standards. If the recipient has tax loss carry forward or other credits available (or foreseeable / anticipated) this condition is not met. As from 2008 counterproof is not possible if there is a lack of business reasons for the transaction and financing; or
- ultimate external financing (provided certain pre-conditions are met).
Thin capitalization rules
Besides the rules mentioned above, the Netherlands also has thin capitalisation rules. These rules basically disallow interest deduction in case a company is undercapitalized, i.e. is “excessively” financed with debt. Such is the case if:
- The average debt/equity ratio is higher than 3:1 (with a € 500,000 threshold). This ratio not only includes intercompany debt but also third party debt;
- The debt/equity ratio of the company exceeds the debt/equity ratio of the group (on a consolidated level). This test is conducted on basis of commercial figures.
These tests should be carried out annually (the straight average of the debt to equity computation at the beginning and at the end of the financial year) to determine whether the interest paid in a certain year is restricted from deduction.
A special regime to encouraging investments in technical research and development (“R&D”) was introduced in January 2007. This was largely designed to stimulate R&D activity by Dutch businesses. Under the innovation box regime, the income attributable to qualifying assets in excess of development costs is taxable at an effective tax rate of 5%.
On January 1, 2010 a couple of amendments were made to the innovation box regime, including:
- The exploitation losses utilized at the statutory rate of 25.5%.
- The threshold of four times the accumulated costs for development and/or improvement was abandoned.
Group interest box
A similar regime, referred to as the ‘group interest box’ has also been proposed for income from group financing activities, to which an effective tax rate of approximately 5% would apply. At the time of writing however, the investigation by the EU authorities into possible state aid is finalized. However the rules that are investigated by the EU authorities are amended at some points, which makes the situation on the time of writing unclear.
The fiscal investment institution (“FII”)
The fiscal investment institution is effectively corporate income tax exempt, and entails a facility for individual shareholders to invest jointly in securities (including equities and bonds derivatives), real estate et cetera without resulting into higher taxation as compared to the individual shareholder investing directly, i.e. without the interference of an FII. The most important conditions for the FII are the following:
- The FII should be an NV, BV or open fund for mutual account, or a comparable entity.
- The FII’s objective and actual operation involve investing in portfolio investments exclusively.
- Maintaining specific debt-to-equity ratios.
- Within eight months after financial year ultimo, the proceeds have to be distributed to the shareholders, whereas at least 75% of these shareholders have to be qualifying shareholders. As of book years starting on or after 1 August 2007, these requirements differ depending on the FII’s regulatory status, in which respect two types exist:
- Regulated FIIs, which are funds listed on a stock exchange, holding a license under the Dutch Financial Supervision Act or foreign UCITS with a European passport. The shareholder restrictions that apply to regulated FIIs are that no single (taxable / tax-transparent) shareholder (except another regulated FII) holds at least 45% of the shares of the FII and that no single individual may own an interest of 25% or more in the FII;
- Non-regulated FIIs, for which the shareholder restrictions are that the shares in the FII should be owned for 75% or more by private individuals, regulated FIIs and/or tax-exempt entities, and that no private individual owns an interest of 5% or more.
Investment income is, when distributed, in principle subject to 15% withholding tax (domestic rate since 1 January 2007), yet may be reduced by the Netherlands unilaterally or under a bilateral double tax treaty. The distributable income is determined by transferring capital gains to a tax-free reinvestment reserve (and therefore do not need to be included in the investment income that has to be distributed). Certain limitations and claw back provisions however apply.
Exempt Investment Institution (“EII”)
Another favorable tax regime for investments is the Dutch Exempt Investment Institution, applicable as from 1 August 2007. Under this regime, there is complete exemption from corporate income tax and dividend withholding tax (comparable with the Luxembourg SICAV). There are no minimum distribution requirements, nor are there any restrictions with regard to the types of shareholders and gearing ratios. Insofar, the EII differs from the FII regime. Unlike the FII however, the EII is not eligible for tax treaty benefits.
For a particular fund to be eligible for the EII status the EII needs to:
- Have a specific legal form, i.e. (domestically) an NV or an open fund for mutual account, or (foreign) a comparable entity incorporated or formed under:Aim for risk diversification and have at least two shareholders or unit holders.
- the laws of an EU Member State, the Netherlands Antilles or Aruba; or
- a country with which the Netherlands has a double tax treaty that includes a non-discrimination clause.
- The shares/units need to be repurchasable or redeemable out of EII’s assets.
- Consist exclusively of financial instruments (which includes equities, bonds, derivatives and bank balances), but also cash-settled derivative contracts for commodities, emission licenses, inflation rates or other economic statistics. Direct investments in real estate are not eligible for the EII status (note that an EII cannot invest in Dutch real estate through a tax transparent partnership).
The participation exemption is an exemption from corporate income tax in respect of profits and losses derived from qualifying shareholdings. Profits covered by the participation exemption include cash dividends, stock dividends, bonus shares, dividends in kind, hidden profits distributions and capital gains realized upon the disposal of a shareholding.
Costs relating to a qualifying shareholding, including interest and foreign exchange losses on debt funding, are deductible, whether the loan relates to shares in a Dutch or a foreign company. However, this also means that foreign exchange gains on debt funding are taxable, for example. The costs of acquiring or disposing of a qualifying shareholding are covered by the participation exemption and are therefore not tax deductible.
Capital losses on qualifying shareholdings are covered by the participation exemption as well. In principle these are generally not tax-deductible. However, there is one notable exception to this rule, which relates to liquidation losses. The allowable losses are reduced by income derived from the shareholding during a specified period. Complex rules apply where the liquidated company’s assets include direct or indirect shareholdings in other companies. Various anti-avoidance rules apply, for example where the business of the liquidated company is continued within the group. Initial depreciations on qualifying shareholdings are no longer tax deductible.
Requirements for exemption
All corporate taxpayers, including non-resident companies holding shares through a Dutch branch, can in principle benefit from the participation exemption, except qualifying Dutch investment companies (FII/EII, see above). The exemption can apply to shareholdings in both resident and non-resident companies, subject to fulfilling the following conditions:
- Legal form: The entity in which the shares are held must have a capital divided into shares or otherwise qualify, as an ‘open’ limited partnership, cooperative association or qualifying mutual fund. An interest in a Dutch investment company is not covered by the participation exemption.
- Minimum holding: The taxpayer company must hold at least 5% of the nominal paid-up share capital (or an equivalent interest in the case of funds or limited partnerships). No minimum is required for interests in cooperative associations.
Qualifying passive investment subsidiary
On 1st January 2010 new rules entered into force that exclude passive investment subsidiaries for the participation exemption unless the subsidiary qualifies as a “qualifying” passive investment subsidiary. Active involvement and the intent of the Dutch parent company or central group management are decisive criteria to qualify as a qualifying passive investment subsidiary. If there is active involvement in the central management of the group, regarding the company strategies of the subsidiary and its (sub-) subsidiaries, then the participation exemption will apply. In case of a participation that is both (passively) investing and (actively) conducting a business, it needs to be verified what the core activities are.
If based upon this new main rule the participation exemption would not apply the conditions may still be met if the new “sufficient tax” test (subject to a real profit tax of at least 10%) or if the revised asset test is met. The revised asset test entails, in short, that the assets of the subsidiary do not consist for more than 70% (used to be 50%) of assets that have no function in the subsidiary’s entrepreneurial activities (i.e. are free portfolio assets).
Real estate investments
Under the revised asset test, real estate is not considered as a free portfolio asset. As a result, the Dutch participation exemption is applicable to benefits from participations that own at least 70% or more real estate. It is therefore allowed to have only 30% non-real estate assets in order to meet the test. Note however that real estate that is owned by tax-exempt investment funds does not qualify.
If the participation exemption does not apply, income (including capital gains) derived from such none sufficiently taxed (portfolio) participation is eligible for a general credit of 5%. As an alternative, the actual (yet non-sufficient) underlying tax may be credited in case of income derived from a participation that qualifies under the EU Parent-Subsidiary Directive.
Mark-to-market rules for low-taxed portfolio participations
Investments in portfolio participations that are not sufficiently taxed and of which at least 90% of the assets consist of free portfolio investments, need to be marked to market on an annual basis. This deemed and other income is grossed up with a factor of 100/95. Note that if a portfolio participation is totally exempt, there is no gross up, whereas there will be no credit for underlying taxes.
Group tax consolidation (fiscal unity)
In principle a parent company and its 95% (or more) subsidiaries (including indirectly held subsidiaries) can create a fiscal unity. Under a fiscal unity, the parent company and its subsidiaries can file what is in effect a consolidated tax return after the necessary approval of the tax authorities has been granted. Although the tax is levied on the parent company, each member remains technically a separate taxpayer.
In general, a fiscal unity is restricted to companies that are resident in the Netherlands on the basis of their place of effective management (and that are not resident outside the Netherlands under an applicable tax treaty or similar arrangement). Resident companies that are incorporated outside the Netherlands need to satisfy additional criteria (e.g. have a corporate form equivalent to Dutch companies). Subject to meeting certain conditions (e.g. as regards place of effective management, corporate characteristics et cetera), Dutch permanent establishments of non-resident companies may be included in a fiscal unity. A permanent establishment can also function as the parent company in a fiscal unity, provided that the shares in the subsidiaries are attributable to the permanent establishment.
A loss realised on a business asset can in general be utilised with taxable profits. An important exception relates to losses realised on shareholdings to which the participation exemption applies (see paragraph “Participation exemption”). Unless otherwise restricted, tax losses incurred by a company in a particular tax year may be carried back against profits of the preceding year and carried forward for the following nine years. For the year 2010 the Dutch Ministry of Finance introduced a temporary option which makes it possible to opt for tax los carry-back for two additional years (total of three years). The tax loss carry-forward will then be maximized to six years. The amount of tax losses that can opt for the broader loss utilization is limited to a maximum of € 10,000,000 per year.
Particular restrictions regarding carry forward and carry back apply to losses realised by holding and finance companies. Losses may also be utilised within a corporate group under the fiscal unity regime described above under ‘Group tax consolidation (fiscal unity)’. In this context, restrictions can apply, in particular as regards losses incurred prior to or subsequent to fiscal unity membership. The general carry-forward or carry-back of losses may be restricted if ownership of the company has changed by 30% or more between the loss-making year and the profitable year. This rule does not apply in a number of situations, including where the company is not involved in passive investment and has not ceased or significantly reduced its activities, or where the ownership change merely represents an expansion of an existing holding of one-third or more of the shares.