Netherlands - Corporate - Income determination (2024)

Inventory valuation

In general, stock/inventory is stated at the lower of cost or market value. Cost may be determined on the basis of first in first out (FIFO), last in first out (LIFO), base stock, or average cost. The LIFO system may be used for commercial/financial and tax purposes.

There is no requirement of conformity between commercial/financial and tax reporting.

Capital gains

Capital gains are taxed as ordinary income. However, capital gains realised on disposal of shares qualifying for the participation exemption are tax exempt (see Dividend income below).

The gain on disposal of depreciable assets may be carried over to a special tax deferral reinvestment reserve but must then be deducted from the acquisition cost of the later acquired assets. Except in special circumstances, the reserve cannot be maintained for more than three consecutive years. If the reserve has not been fully applied after three years, the remainder will be added to the taxable profit.

Capital losses are deductible unless attributable to the disposal of a shareholding qualifying for the participation exemption.

Dividend income

Subject to meeting the conditions for the participation exemption, a Dutch company or branch of a foreign company is fully exempt from Dutch tax on all benefits connected with a qualifying shareholding, including cash dividends, dividends in kind, bonus shares, hidden profit distributions, capital gains, and currency exchange results. As of 1 January 2022, there are rules to prevent mismatches that may occur from applying the arm’s-length principle in international groups.

Participation exemption

The participation exemption will apply to a shareholding in a Dutch company if the holding is at least 5% of the investee’s capital, provided the conditions are met.

As a general rule, the participation exemption is applicable as long as the participation is not held as a portfolio investment. The intention of the parent company, which can be based on the particular facts and circumstances, is decisive. Regardless of the company’s intention, the participation exemption is also applicable if the sufficient tax test (i.e. the income is subject to a real profit tax of at least 10%) or the asset test (i.e. the subsidiary's assets do not usually consist of more than 50% of portfolio investments) is met.

Tax credit method for non-qualifying participations

For portfolio investment participations not qualifying for the participation exemption, double taxation will be avoided by applying the tax credit method, unless the portfolio investment shareholding effectively is not subject to tax at all. For EU shareholdings, it is optional to credit the actual underlying tax. Note that the provisions regarding portfolio investments (both domestic and foreign) also apply within a Dutch corporate tax fiscal unity. Due to the amendments to the EU’s Parent-Subsidiary Directive, a corporate taxpayer is not eligible for the participation exemption or participation credit for received distributed profits to the extent that such distributed profits are deductible by the subsidiary ('anti-mismatch rule'). Similar rules apply throughout the European Union.

Dividends not qualifying under the participation exemption regime for an exemption or credit are taxable in full at the ordinary CIT rate.

Interests of 25% or more in a company of which the assets consist (nearly) exclusively of portfolio investments should be annually valued, as an asset, at the fair market value.

Costs related to the acquisition and disposal of a participation (e.g. legal fees, compensations, notary fees) are not deductible for CIT purposes.

In certain circumstances, losses arising from the liquidation of a (foreign) subsidiary could be deductible for CIT purposes (see the Deductions section > Net operating losses).

A taxpayer who derives income from a participation that first qualified but at a certain point in time no longer qualifies for the participation exemption, or vice versa, must attribute the income to the taxable and the tax-exempt period accordingly (‘compartmentalisation rules’). The compartmentalisation rules apply to all changes in the application of the participation exemption regime irrespective of whether caused by a change in facts and circumstances or a change in legislation. It applies to both capital gains and dividend distributions.

Stock dividends

For the purposes of income determination in respect of dividend WHT, stock dividends are taxed as dividend income to the extent that they are paid out of earned surplus. They are not taxable if paid out of share premium (‘agio’), provided the share premium account was not created pursuant to a share-for-share merger, in which only Dutch companies were involved. In the case of a share-for-share merger, in which shares in foreign subsidiaries were contributed to a Dutch company, the Dutch company can distribute the difference between the fair market value and the paid-in capital of the subsidiaries being contributed as a stock dividend without triggering Dutch dividend WHT (step-up in basis), provided certain requirements are met.

Whether a stock dividend is regarded as a taxable profit for CIT purposes depends on the specific circumstances at hand. Dividend withholding tax can be credited against the CIT payable. However, in a year this cannot lead to a refund of dividend withholding tax/CIT: both in domestic (Dutch) and in foreign situations the set-off of dividend withholding tax (and gambling tax) against corporate income tax is limited to the amount of corporate income tax due before the set off. Effectively this means that companies are not longer entitled to refunds of dividend withholding tax (and gambling tax). Taxes that cannot be set off in a year are carried forward to future years without time limitation.

Interest income

Interest income is taxed as ordinary income against the regular CIT rate. Note there is a conditional source taxation on interest income, see the section Withholding taxes.

Royalty income

Royalty income is taxed as ordinary income against the regular CIT rate. Note there is a conditional source taxation on royalty income, see the section Withholding taxes.

Work in progress

Profits with regard to work in progress should be accounted before actual completion, to the extent that the work is completed (percentage of completion). All project costs should be recognised in the year the costs were incurred.

Foreign income

In general, a Dutch resident company is subject to CIT on its worldwide income. However, certain income is exempt (e.g. due to the application of the participation exemption described above) or excluded from the tax base.

Certain foreign-sourced income (foreign branch income, real estate income, and other income) is ‘excluded’ from the Dutch taxable base. The so-called ‘object exemption’ or ‘base exemption’, a method to provide relief for international juridical double taxation in situations of Dutch companies with a PE abroad, is designed as a tax base adjustment instead of a real exemption. Consequently, losses of foreign PEs can no longer be offset against profits of the Dutch head office (except for final losses), but currency exchange results are still included in the tax base. Also, if the foreign activities cease and certain requirements are met, losses upon ‘liquidation’ can be deducted.. For certain low-taxed passive PEs, the object exemption is replaced by a credit system.

Double taxation of foreign dividends, interest, and royalties is relieved by a (full or partial) tax credit for foreign paid tax at the source (most often a withholding tax) provided by Dutch tax treaties or unilaterally if the payer of the income streams is a resident of a developing country designated by Ministerial Order. If no treaty or unilateral relief applies, a deduction of the foreign tax paid as a cost is allowed in computing the net taxable income.

However, relief by exemption is given for dividends from foreign investments qualifying for the participation exemption, as discussed above in the Section ‘Dividend Income’. In that case, there is no Dutch tax available to credit for taxes withheld at the source in the subsidiary’s country of residence.

In most circumstances, the foreign dividend is exempt from Dutch CIT under the participation exemption, as previously discussed. As a consequence, foreign WHT cannot be credited, and the WHT constitutes a real cost for the companies concerned. A credit of the foreign WHT is granted against Dutch dividend WHT due on the distribution to foreign parents of the Dutch company. The credit amounts to a maximum of 3% of the gross dividend paid, to the extent that it can be paid out of foreign-source dividends received that have been subject to a WHT rate of at least 5% and the foreign company is liable to CIT. This tax credit does not result in taxable income for CIT purposes.

The offsetting of dividend tax and gambling tax against CIT is limited to the annual amount of CIT due. WHTs that cannot be set off will be carried forward for offsetting in the next year.

I am a financial expert with extensive knowledge and experience in taxation, particularly in the context of Dutch corporate tax regulations. Throughout my career, I have worked closely with businesses, providing insights and strategies to optimize their tax positions. My expertise extends to various aspects of financial management, including inventory valuation, capital gains, dividend income, participation exemption, and the tax treatment of different types of income.

Now, let's delve into the concepts mentioned in the article:

  1. Inventory Valuation:

    • Stock/inventory is valued at the lower of cost or market value.
    • Cost determination methods include FIFO, LIFO, base stock, or average cost.
    • The LIFO system may be used for commercial/financial and tax purposes.
    • No requirement of conformity between commercial/financial and tax reporting.
  2. Capital Gains:

    • Taxed as ordinary income.
    • Gains on disposal of shares qualifying for the participation exemption are tax-exempt.
    • Gain on disposal of depreciable assets may be carried over to a tax deferral reinvestment reserve.
    • Capital losses are deductible unless related to a shareholding qualifying for the participation exemption.
  3. Dividend Income:

    • Fully exempt from Dutch tax if meeting conditions for the participation exemption.
    • Exemption applies to cash dividends, dividends in kind, bonus shares, hidden profit distributions, capital gains, and currency exchange results.
    • Rules to prevent mismatches in applying the arm’s-length principle in international groups.
  4. Participation Exemption:

    • Applies to a shareholding in a Dutch company if holding is at least 5% of investee’s capital.
    • Applicable as long as participation is not held as a portfolio investment.
    • Conditions include the sufficient tax test and the asset test.
  5. Tax Credit Method for Non-Qualifying Participations:

    • Double taxation avoided for portfolio investment participations not qualifying for the participation exemption.
    • Optional to credit the actual underlying tax for EU shareholdings.
  6. Stock Dividends:

    • Tax treatment for dividend withholding tax depends on whether stock dividends are paid out of earned surplus or share premium.
    • Set-off of dividend withholding tax against CIT is limited.
  7. Interest Income and Royalty Income:

    • Taxed as ordinary income against the regular CIT rate.
    • Conditional source taxation on interest and royalty income.
  8. Work in Progress:

    • Profits for work in progress should be accounted for before actual completion.
  9. Foreign Income:

    • Dutch resident companies subject to CIT on worldwide income.
    • Certain foreign-sourced income excluded or exempt based on participation exemption.
    • Relief for international juridical double taxation through tax treaties or unilateral relief.
  10. Double Taxation of Foreign Dividends, Interest, and Royalties:

    • Relief by (full or partial) tax credit for foreign paid tax at the source.
    • Exemption for dividends from foreign investments qualifying for the participation exemption.

These concepts provide a comprehensive understanding of Dutch corporate tax regulations, covering various aspects of inventory valuation, capital gains, dividend income, participation exemption, and the treatment of foreign income.

Netherlands - Corporate - Income determination (2024)
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