The tax system in any given country is invariably an extremely important criterion when it comes to companies finding a country of incorporation. The view taken by the Dutch government is that the tax system may under no circumstances form an impediment for companies wishing to incorporate in the Netherlands. In that framework, it is possible to obtain advance certainty regarding the fiscal qualification of international corporate structures in the form of so-called Advance Tax Rulings. In addition, the Netherlands has also signed tax treaties with many other countries to prevent the occurrence of double taxation.
The following are a few of the benefits offered by the Dutch tax system:
- The Netherlands does not charge tax at source on interest and royalties.
- In most cases all the profits that the Dutch parent company receives from foreign subsidiaries are exempted from tax in the Netherlands (participation exemption).
- The Netherlands offers attractive tax-free compensation in the form of the 30% scheme for all foreign personnel who are temporarily employed in the Netherlands.
The Dutch tax system can be divided into taxes based on income, profit and assets, and cost price increasing taxes.
Below you find a summary regarding corporate income tax.
Corporate income tax
Corporate income tax is charged to legal entities of which the capital is partially or fully divided into shares. Examples of such legal entities are the Dutch NV and BV. Companies based in the Netherlands are taxed on the basis of the companies’ local revenues. The question as to whether a company is in effect based in the Netherlands for tax purposes is assessed on the basis of the factual circumstances. The relevant criteria are issues such as where the actual management is based, the location of the head office and the place where the annual general meeting of shareholders is held. Entities set up under Dutch law are deemed to be established in the Netherlands. Certain entities not established in the Netherlands that receive income from the Netherlands are foreign taxpayers. A foreign taxpayer receives profit from a Dutch enterprise if the enterprise is operated in the Netherlands using a Dutch permanent establishment or permanent representative.
Tax base and rates
Corporate income tax is charged on the taxable profits earned by the company in any given year less the deductible losses. The following are the applicable corporate income tax rates for 2010:
|Profit from / up to||Rate|
|Up to € 200,000||20.0%|
|More than € 200,000||25.5%|
If a company incurred a loss in any given year, that loss can be deducted from the taxable profit of the previous year or from the taxable profit over nine subsequent years. This loss set-off has been temporarily extended. Losses may be carried back three years. In exchange for this the loss carry forward of nine years is cut to six years. This temporary measure applies for the tax years 2009 and 2010.
The company profits must be determined on the basis of sound commercial practice and on the basis of a consistent operational pattern. This entails, among other things, that as yet unrealized profits do not need to be taken into consideration. Losses, set against them, may be taken into account as soon as possible. The system of valuation, depreciation and reservation that has been chosen must be fiscally acceptable and, once approved, must be applied consistently. The tax authorities will not subsequently accept random movements of assets and liabilities.
In principle all business expenses are deductible when determining corporate profits. There are however a number of restrictions with respect to what qualifies as business expenses.
Valuation of work in progress and orders in progress
In work and/or orders in progress profit taking may no longer be postponed. The constant part of overheads must be capitalised and a cumulative profit must be taken. The same applies for orders in progress.
Limited depreciation on buildings
As of 2007, certain restrictions apply with respect to the depreciation of business buildings. Effectively, this means that the taxpayer is entitled to depreciate the building until the book value has reached the so-called base value. The base value is determined with reference to the WOZ value (see above). Based on the latter regulations, the value of a building is determined, to the greatest extent possible, on the basis of its value in the economic environment. The base value for owner-occupied buildings is 50% of the WOZ value. The base value for buildings used as investments is 100% of the WOZ value.
In the Netherlands in principle no more than 20% per year of acquisition or production costs may be depreciated on operating assets, other than buildings and goodwill. The minimum depreciation period is therefore 5 years. Under certain conditions goodwill can be depreciated by a maximum of 10% per year.
As a temporary measure, because of the economic crisis, companies may depreciate their investments made in the 2009 or 2010 over 2 years (50% per year). Depreciation is possible as soon as an investment commitment is entered into or production costs are incurred in 2009. The amount of arbitrary depreciation may not be higher than what was paid by way of investment commitment or incurred by way of production costs.
Excepted operating assets are:
- Buildings, earth, road and hydraulic engineering works, animals, intangible fixed assets (such as software), mopeds, motorbikes and passenger cars. However arbitrary depreciation may be made on taxis and very economical passenger cars.
- Operating assets intended primarily to be made available to third parties.
Participation exemption or substantial holding exemption is one of the main pillars of corporate income tax. The scheme was introduced to prevent double taxation. Profit distribution between group companies is exempted from tax.
A participation refers to a situation where a company (the parent company) is the owner of at least 5% of the nominal paid-up capital of a company that is based either in the Netherlands or abroad (the subsidiary).
Under the participation exemption, all benefits derived from the participation are tax exempt. The benefits include dividends, profits and losses in the sale of the participation and acquisition and sales costs. If the value of the participation falls due to losses incurred, devaluation by the parent company is in principle not permitted. Losses arising on liquidation of a participation can under certain conditions be deducted.
In principle, participation exemption does not apply if the parent company or subsidiary is an investment institution. It is however possible to appeal for a ‘reduced tax investment participation’. To determine whether the participation exemption applies an intent test is used. This means looking at whether or not the participation is held as an investment. A participation in a company whose balance sheet consists for example of liquid assets, debentures, securities and debts is regarded as an investment. In the latter case the participant is not entitled to participation exemption, but is however entitled to appeal for a participation settlement.
If the parent company owns at least 95% of the shares of a subsidiary, the companies can submit a joint application for fiscal unity to the tax authorities, whereby the companies will be viewed as a single entity for corporate income tax purposes. The subsidiary is thereby effectively absorbed by the parent company. One of the most important advantages of a fiscal unity is the fact that the losses of one company can be set off against the profits of another company in the same group. The companies are thereby also entitled to mutually supply goods and / or services without fiscal consequences, and they are also entitled to transfer assets from one company to another.
Fiscal unity is only permissible where all of the companies concerned are effectively established in the Netherlands. In addition, the parent company and the subsidiaries must also use the same financial year and be subject to the same tax regime.
Innovatiebox (Innovation box)
In 2007 the patent box was introduced. Companies that have developed intangible assets (an invention or technical application) can deduct the development costs from the company’s annual profits in the year in which the asset was developed. As soon as a patent has been granted for the intangible asset, the company can opt to place the benefits in the so-called patent box. Plant variety rights also fall under this. With effect from 1 January 2008 the patent box has been extended with intangible assets for which a patent has not been granted but which have arisen from a research and development project. The tax payer must have received an R&D declaration for this from Senternovem.
With effect from 2010 the patent box has been given a new name: the innovation box. The rate for corporation tax for innovative activities has been reduced from 10% to 5%. Losses on innovative activities can from now on be deducted at the normal rate of 25.5%. The outsourcing of R&D work is also possible if the principal has sufficient activities and knowledge present.
A number of conditions must however be fulfilled to be able to qualify for the aforementioned tax benefits: For example, to make use of the innovation box the intangible assets must contribute at least 30 percent to the profit that the company receives from the intangible asset. The patent box does not apply to brands, logos, TV formats, copyrights on software and so on. The choice must be specified in the corporate income tax declaration.
Group interest box
In 2007 the Dutch government introduced the ‘group interest box’ in corporate income tax. The purpose of the box is to tax the balance of interest paid and received between group companies at a special low tax rate of 5%. The company must fulfil a number of conditions to qualify for this allowance. The scheme was approved by the European Commission in 2009. The Netherlands has decided not to introduce the group interest box for the present however.
Thin capitalisation rule
On 1 January 2004, the government introduced a limitation on the interest deduction on corporate income tax; a system that is known as ‘thin capitalisation’. Based on this rule, the company is not permitted to deduct interest in so far as it is making use of excess levels of leveraged financing. The rule applies exclusively to companies that form part of a group. The rule uses two tests to determine whether the company is making excessive use of leveraged financing, namely, a fixed ratio and a group test:
- Based on the fixed ratio criterion, the company is using excess leveraged financing where the fiscal leveraged finance exceeds the company’s fiscal equity capital by more than three times reduced by a franchise of 500,000 €.
- Based on the group test, the company is using excess leveraged financing where the ratio between leveraged financing and the company’s equity capital, according to the commercial (consolidated) balance sheet, exceeds that of the group of which the company forms part of as a whole.
The maximum limitation on the interest deduction is the amount of the interest due to the allied (local and overseas) companies.
Additional limitation on interest deduction
With effect from 1 January 2008 the anti-abuse provision relating to interest deduction has been tightened up further. The Dutch tax authorities may from now on demonstrate that in the case of a group transaction no business considerations are involved, even if the recipient pays 10% or more tax abroad. In that case the interest paid within the group is not deductible. The interest for ordinary business transactions does however remain deductible. Evidence to the contrary is however possible with the so-called evidence to the contrary ruling. If the requirements for this ruling are met, the deduction of interest is restored.
Arm’s Length Principle
The Dutch corporate income tax legislation includes an article that determines that national and foreign allied companies are entitled to charge one another commercial prices for mutual transactions. This is however subject to an obligation to keep due documentation of all relevant transactions. This enables the Dutch tax authorities to determine whether the transaction between the applicable allied companies are conducted based on market prices and conditions. It is possible to obtain prior assurance of the fiscal acceptability of the internal transaction with the use of the so-called ‘Advance Pricing Agreement’.
The corporate income tax declaration must be submitted to the tax authorities within six months of the end of the company’s financial year.
Author: Harry den Hond, Schagen Lensen & van Krieken Accountants, www.slk.nl