Tax-deductible donations

Within certain limits donations to religious, ideological, charitable, cultural or academic institutions or other bodies serving the public good are tax-deductible. The donations must be more than a total of NLG 500. The maximum deduction is 6% of the profits.

Offsetting of losses

A loss may be offset against the taxable income of the three preceding years (carry back) and against taxable income of all years to come (carry forward).
If a corporation discontinues its business either wholly, or in part, then any losses that have not been offset may be compensated with future profits, provided that at least 70% of its shares continue to be held by the same natural persons

Participation exemption

General

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.

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.

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.

Costs

Shareholdings may give rise to costs as well as gains. In principle such costs are not deductible. However an exception is made when these are indirectly conducive to making profits taxed in the Netherlands. With foreign shareholdings this may occur if the foreign subsidiary has a permanent establishment in the Netherlands. In practice the main non-deductible costs are the costs of financing the participation. The taxpayer must also show that the costs are conducive to making domestic taxable profits.