The Dutch Participation Exemption (PE) is a relief from the corporate tax associated with the profits and losses obtained from qualifying shareholdings. These types of incomes cover dividends and capital gains, which is why this tax benefit is so appealing. Below, our Dutch specialists in opening a company explain how the Participation Exemption scheme, also known as the PE scheme, applies. They also explain how to test and see if your Dutch company can qualify for the PE scheme.
| Quick Facts | |
|---|---|
| Definition | The participation exemption (PE) scheme is a tax relief from the corporate tax. |
Applicability | The scheme applies to qualifying shareholdings and is associated with the profits and losses of a company. |
Qualifying income | – dividend payments, – profit distribution, – capital gains, and foreign exchange |
| Qualifying assets under the Dutch PE scheme | – shares, – various types of assets, – real estate, etc. |
| Types of companies eligible for the Dutch participation exemption scheme | The scheme applies mainly to holding companies. |
| Availability of the scheme for non-resident companies (YES/NO) | No, only Netherlands-based companies can benefit from this tax exemption. |
| Who can benefit from the tax exemption? | The tax exemption applies to the shareholders who must be Dutch residents from a tax perspective. |
| Are there companies that cannot benefit from this scheme? | Yes, the participation exemption does not apply to fiscal investment entities. |
| Minimum requirements for holding companies to be eligible for the Dutch PE | Qualifying holdings must own at least 5% of the share capital or voting rights in a subsidiary, it must participate in the management of the subsidiary, and the participation is not a portfolio investment. |
| Possibility to verify a company’s eligibility for the scheme (YES/NO) | Yes, there are several tests available. |
| The company test under the Dutch PE | The subsidiary of the holding must be a Dutch resident company. |
| The asset test | The direct and indirect assets of the holding in the subsidiary, which are subject to a tax rate below 10%, do not exceed 50% of its entire assets. |
| The tax test | The Dutch subsidiary does not pay a low corporate tax, in accordance with the national taxation standards. |
| Alternatives for companies not qualifying for the Dutch PE (YES/NO) | Yes, other companies can benefit from various tax deductions. |
| Dutch PE tax-related support (YES/NO) | Yes, our Dutch company formation agents can assist in matters related to the PE scheme. |
Table of Contents
The Dutch Participation Exemption scheme and its appliance
The Netherlands’ taxation system when it comes to companies offers many advantages in the form of deductions and exemptions. These can be obtained, however, if certain types of structures are employed. Among these, the Dutch limited liability company offers most of the tax benefits.
A few recent changes in the tax laws of the Netherlands have made the country even more appealing for local and foreign investors who benefit from equality when it comes to starting a business here. One of these benefits refers to the Participation Exemption scheme.
The tax laws of the Netherlands provide for the corporate tax on local companies to be imposed on the following incomes:
- business income;
- trading income;
- dividend payments;
- interest payments;
- royalties payments.
Under the Dutch PE scheme, the income generated by a qualifying income will benefit from an exemption from the corporate tax. The income that can qualify must derive from dividend payments, profit distribution, capital gains and foreign exchange. It is important to know that only Dutch-resident companies can take advantage of the Participation Exemption scheme.
Most of the time, holding companies qualify for the Participation Exemption scheme in the Netherlands.
Our company registration consultants in the Netherlands remind investors that at the beginning of 2019, the corporate tax was modified in the sense that the lowest rate was decreased from 20% to 19% on the first 200,000 euros generated by a company. In the next years, the rates will decrease even more.
Who can benefit from the participation exemption regime?
It is important to know that only Dutch-resident companies can take advantage of the Participation Exemption scheme. Even if the law stipulates that a local enterprise is subject to the corporate tax on its worldwide income, when it comes to this tax relief, the benefits apply to the shareholders. They must also be Dutch residents from a tax perspective. In this case, participation refers to equity a company has in another entity, such is the case of holdings.
An interesting fact about the Dutch corporate tax is that it also has an exception that refers to the “incorporation fiction’’. The term is used for enterprises that are registered under the Netherlands’ Company Law whilst their management is located outside the country. In this case, it is worth noting that the Participation Exemption does not apply.
If you are interested in starting a business in the Netherlands to benefit from this regime, we advise considering this aspect, if you are a foreign investor. However, you can rely on the experience of our local agents who can guide you.
We also have an infographic on this subject below:
Qualifying participations
As mentioned above, not all income can be subject to the Dutch PE. As such, you should know that a Dutch company can claim such a benefit if:
- it holds at least 5% of the share capital or voting rights in the subsidiary;
- it is not a fiscal investment entity;
- the participation is not a portfolio investment;
- it is part of the management of the company in which it owns shares.
To determine if a company qualifies for the PE in the Netherlands, there are several tests that can be made. Our Dutch company formation agents can advise in this sense.
How to verify if a Dutch company can benefit from the PE scheme
In order to qualify for the Dutch Participation Exemption scheme, a company must pass a so-called test which implies complying with a few conditions. The test and its conditions are:
- the company test – which implies that the subsidiary of the holding company is a Dutch resident company;
- the shareholding test – which implies the holding company owns at least 5% of the paid-up capital in the subsidiary;
- the intention test – which implies that the holding company not own the subsidiary as a portfolio investment;
- the deemed portfolio investment test – which implies the subsidiary not to be a portfolio investment;
- the portfolio investment test – which implies for the subsidiary to comply with one of the two conditions related to taxation.
The conditions under which the Dutch company can still qualify for the PE scheme even if it is considered a portfolio investment are:
- the participation is subject to a corporate tax applied in accordance with the tax rules applicable in the Netherlands; or
- the threshold of the assets subject to a lower tax than the one accepted by the Dutch tax standards is below 50%.
It is recommended to have a company verified for the Dutch Participation Exemption scheme by professionals, which is why our advisors are at your disposal with detailed information in this sense. You can also rely on us if you are interested in company formation in the Netherlands.
What are the assets that can be considered under the Dutch PE scheme?
As mentioned above, in order to qualify for the Participation Exemption scheme in the Netherlands, the assets test must be passed and the assets that can qualify are:
- immovable property is one of the best assets a company can have for qualifying for the PE scheme;
- free passive assets that must generate a profit and are taxed at a rate of less than 10%;
- assets used for various purposes, such as licensing, leasing, or financing, under certain conditions;
- shares in the company, if the holding owns at least 5% of the capital in the subsidiary.
Our specialists can offer more information on the assets that can be held under the Dutch Participation Exemption scheme.
What is the main goal of the Dutch PE scheme?
It is important to know that the PE scheme is an EU regulation meant to favor companies registered in the Union with activities in other EU states. The PE scheme, however, has other international implications, among which is the fact that it is meant to help with the avoidance of double taxation of the corporate income tax in certain cases.
If you want to open a company in the Netherlands and need assistance, our local consultants are at your disposal at any time.
Here is our video on this subject:
Alternatives for companies not falling under the PE
Considering not all companies can qualify for the participation exemption, there are also tax reliefs available for such entities. One of them is the general tax credit of 5%. Then, there is also the EU Parent-Subsidiary Regime.
According to the Foreign Investment Agency, other alternatives for companies are also:
- the innovation box which provides for a 9% tax rate for profits obtained from intangible assets, such as intellectual property rights;
- the tax relief for environmental-friendly investments which allows companies to obtain a 45% deduction on investments in green activities;
- the tax relief for investments in sustainable energy equipment which enables companies to deduct 40% of the costs with the respective appliances.
Please contact us for more information on the Dutch Participation Exemption scheme and assistance in setting up a business in this country.