Gains

Gains from shareholdings are ignored when calculating the profits. In principle the term 'gains' includes both profits and losses. Profits, of course, include both official and disguised dividends received. Exempted gains also include profits made by the sale of a participation (including exchange rate differences). Since January 1997, it is possible to opt for application of the participation exemption to currency results arising from financial instruments which are used to hedge the translation risks on investments in foreign subsidiaries. Accordingly losses from sales are not deductible. If the participation declines in value as a result of losses suffered, then a write-off by the parent company is in principle non-deductible. An important exception is losses resulting from liquidation (see 3.3.6.). However, since January 1997 a company may claim a tax deduction for start-up losses of a subsidiary, in which it holds at least 25% of the share-capital. The rules allow the parent company to depreciate the book value of the subsidiary in the first 5 years after the acquisition if and to the extent that the value of the subsidiary has declined below cost price. When the subsidiary becomes profitable, a taxable appreciation has to be made up to the amount of the cost of the investment. To the extent the depreciation has not been reversed during the first 5 years, the balance will then have to be reversed in the next 5 years in equal steps. If the depreciated debts of a subsidiary to a parent company are converted into share capital then a special provision prevents tax claims being lost. In such cases an amount equal to the depreciation of the debt is, in principle, again regarded as part of the profits of the parent company. This is also applicable when the debt is sold to an affiliated company or if it is discharged.