Participation exemption

The Corporation Tax Act has always provided for a participation exemption, which is applicable to both domestic and foreign shareholdings. This exemption is one of the main pillars of the Dutch Corporation Tax Act, and it is motivated by the desire to prevent double taxation when the profits of a subsidiary are distributed to its parent company which is also liable to corporation tax. The main features of this scheme are as follows: all gains from shareholdings are exempted, the costs associated with a shareholding are not deductible, and losses arising from liquidation of the corporation are deductible only under certain conditions. The corporation distributing dividends does not have to pay dividend tax if the distribution of profits falls under the participation exemption enjoyed by the company receiving the dividend. The most important elements are as follows. 3.3.2. Shareholdings The participation exemption is applicable to both domestic and foreign shareholdings. A shareholding is deemed to exist if the taxpayer: 1. holds at least 5% of the nominal paid-up capital (a shareholding includes the related possession of 'jouissance' rights); or 2. holds less than 5%, but ownership of the shares is part of the normal business conducted by the taxpayer, or the acquisition of the shares served a general interest; or 3. is a member of a cooperative; or 4. holds at least 5% of the share certificates in a mutual fund based in the Netherlands. The participation exemption is not applicable if the taxpayer or subsidiary company is a fiscal investment institution. The concept of an investment institution is explained in section 3.6. The participation exemption is not applicable when the shares are held as stock. The participation exemption does not apply internationally when shares in the foreign corporation are held as a portfolio (passive) investment. Another requirement for the exemption to be granted is that the foreign company in which the shares are held is subject to a tax on profits levied by the central government in the country in which it is established (see also 3.3.7.). Furthermore, the participation exemption is not applicable for participations in foreign 'passive' finance companies. In principle a Dutch company cannot credit any foreign withholding tax on dividends received from foreign subsidiaries to which the participation exemption is applicable. However, the Dutch dividend tax which has to be transferred by the Dutch company in the event of the redistribution of foreign dividends received can be partly reduced, subject to certain conditions. The reduction amounts to a maximum of 3% of the foreign dividends received.