Dutch Participation Exemption (PE) Scheme

The Dutch Participation Exemption (PE) is a relief from the corporate tax associated with the profits and losses obtained from qualifying shareholdings. Below, our Dutch specialists in opening a company explain how the Participation Exemption scheme, also known as the PE scheme, applies and how they can help you.

Do you offer PE-related services in the Netherlands?

Yes, our local specialists can perform the necessary tests to verify if your company qualifies for the Participation Exemption.

Does the Dutch PE scheme apply to Dutch resident companies only?

Yes. To qualify for the Participation Exemption, the company must be registered in the Netherlands. Most of the time, holding companies qualify for the Participation Exemption scheme in the Netherlands.

Does the foreign shareholding of a Dutch company affect the application of the PE scheme?

No, the company can be fully foreign owned and still benefit from the Dutch Participation Exemption.

What does a participation cover?

A participation refers to the equity interest a company has in another business. As such, 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;
• if it is a portfolio investment, it meets the subject-to-tax or asset test (management involvement is not a legal requirement).

Also, portfolio participations must be subject to a realistic profit tax (at least 10%) or pass the asset test.

We also have an infographic on this subject below:

How does the Dutch Participation Exemption apply?

Under the Dutch PE scheme, the income generated by a qualifying income will benefit from an exemption from corporate tax. The income that can qualify must derive from dividend payments, profit distribution, capital gains, and foreign exchange.

The income benefiting from the Dutch PE scheme applies at a shareholder level.

How do the authorities verify if a company is a Dutch resident?

The most important aspect is for the company to pay the corporate tax in the Netherlands. Apart from this:

• the management decisions must also be made in the Netherlands;
• the company maintains its records and submits its financial statements in the Netherlands.

NOTE: A Dutch company is not required to have a resident director; however, appointing one can increase its chances to benefit from the PE scheme.

What are the tests to perform to verify my company’s eligibility for the Dutch PE?

The tests and their conditions are:

1. the company test – which implies that the holding company is subject to Dutch corporate tax (the subsidiary may be Dutch or foreign);
2. the shareholding test – which implies the holding company owns at least 5% of the paid-up capital in the subsidiary;
3. the intention test – which implies that the holding company does not own the subsidiary as a portfolio investment;
4. the deemed portfolio investment test – which implies the subsidiary is not a portfolio investment;
5. the portfolio investment test – which implies that the subsidiary complies 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%.

What assets can be considered under the Dutch PE scheme?

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.

Here is our video on this subject:

Does the Participation Exemption interfere with double taxation treaties?

No, the Participation Exemption can be used to avoid double taxation in the Netherlands and its treaty countries.

What happens to participation that cannot be exempt from taxation in the Netherlands?

In such cases, a credit can be granted for the tax paid. The rate of the tax cannot exceed 5%, however.

Please contact us for more information on the Dutch Participation Exemption scheme and assistance in setting up a business in this country.