Reserves

Certain reserves may be formed by making a deduction from the profits. In order to qualify for this deduction the business must keep regular annual accounts. Three reserves are legally permitted, which are the cost equalisation reserve, the replacement reserve and since January 1997 the reserve for financial risks for multinational companies. The cost equalisation reserve enables recurrent costs to be spread uniformly over a period of time. A replacement reserve may be created if fixed assets are lost, damaged, or sold, when the payment received exceeds the book value. To be eligible for this reserve there must be plans to replace or repair the assets. The reserve should generally be terminated in the fourth year following the year in which it was formed. Under certain conditions a reserve may be formed for the special risks involved in operating as an international group. The risks aimed at concern financing and holding activities. One of the main conditions to qualify is that the financing activities must comprise financing of group companies in at least four countries or on two continents. In principle, the entity that forms the reserve may charge to this reserve 80% of its income derived from financing activities before tax. The tax inspector will grant the regime for ten years upon a request filed by the tax payer, in wich the tax payer states the relevant factual circumstances. The Dutch tax inspector can impose additional conditions.