Participation exemption

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The Dutch participation exemption provides for an exemption from corporate income tax of any profit derived from a qualifying equity investment in another company, whether domestic or foreign. As a consequence, dividends and capital gains arising from such shareholdings are tax exempt, while capital losses and acquisition and disposal cost are not deductible.

In general, a Dutch entity can benefit from the participation exemption if it holds at least 5% of the nominal paid-up capital of another company and one of the three tests below (Motive test, Reasonable tax test respectively Asset test) will be met:

■ The participation is not held as a (deemed) portfolio investment (‘Motive test’). This motive test should be met if the participation is not merely held with the purpose to generate a return that can be expected from normal asset management, or
■ The participation is considered a ‘qualifying portfolio investment’, meaning that:
(I) the participation is subject to a profit tax resulting in taxation that is reasonable according to Dutch standards (‘Reasonable tax test’) or (II) the aggregated assets of the participation consist for more than 50% of non-portfolio assets or of portfolio investment assets of which the proceeds are taxed at a reasonable tax rate according to Dutch standards (‘Asset test’). For purpose of the asset test, real estate assets are deemed to be non-portfolio assets.

For private equity funds, venture capital funds, leveraged buy-out funds or real estate funds, a Dutch corporate entity can be a very attractive investment vehicle. Due to the participation exemption, all income and gains from the target investments can be collected tax-free in the hands of the Dutch entity.

Finally, it is important to realize that the Dutch participation exemption does not require a minimum holding period. Consequently, a capital gain realized upon a sale of a qualifying participation after, say, six months will still be exempt from Dutch corporate tax.

For further details with respect to the Dutch participation exemption rules we refer to the brochure Dutch Participation Exemption Rules on our website.

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