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Amendments to the Dutch Holding regime

Netherlands

Several significant amendments to the Netherlands holding regime entered into force on January 1, 2007[1]. The principal amendments affecting corporations are summarized below:

Reduction of the corporate tax (CT) rate to a maximum of 25.5% (for profits exceeding EUR 60,000, profits below EUR 25.000 will be taxed at 20% CT and profits between EUR 25.000 and EUR 60.000 are taxed at the CT rate of 23.5%)

Significant amendments to the participation exemption regime, including the introduction of a credit system for "passive investment subsidiaries"

Introduction of a group interest box, resulting in an effective rate of 5% on profits from inter-company finance activities

Introduction of a patent box regime, resulting in a tax rate of 10% for income from self-developed intellectual property, patented after January 1, 2007

Reduction of the dividend tax rate from 25% to 15%

Restriction on depreciation of assets (goodwill 10 years, other assets 5 years)

Limitation of the depreciation on real estate (portfolio assets not lower than the value under the Real Estate Survey Act, real estate for own use not lower than 50% of said value)

Restriction on loss relief (carry back to 1 year, carry forward to 9 years)

Revision of the anti-base erosion measures (interest deduction and thin cap rules).

This memorandum focuses on those amendments most affecting the Netherlands holding regime: the participation exemption, the credit system for passive investment subsidiaries, the group interest box and the dividend tax.

Participation exemption

Qualifying participations

A subsidiary qualifies for the participation exemption if the parent company holds at least 5% of the (nominal, paid-up) share capital. This 5%-criterion has been amended so that it is now a strict rule without exceptions. Transitory measures introduced with respect to participations of less than 5% must be applied prior to January 1, 2010. With respect to a shareholding in a corporation resident in an EU country that has a double taxation treaty with the Netherlands, the participation exemption also applies if the shareholder holds 5% or more of the voting rights in the subsidiary. Shareholdings that do not qualify because they fail to meet the 5% criterion, might become eligible for the participation exemption if another corporation within the same group of companies does have a qualifying participation (i.e. 5% or more). In addition, if a corporation has a qualifying participation, income derived from profit-sharing bonds and loans deemed to function as equity under Dutch tax law, is also exempt under the participation exemption.

Hybrid loans

Contrary to the position prior to January 1 2007, the exemption on income derived from a hybrid loan is no longer restricted to hybrid loans on which the interest paid by the foreign subsidiary is not deductible. This creates opportunities for tax planning: if carefully drafted, the income on a hybrid loan from a Netherlands parent company to a foreign subsidiary may be exempt from corporate tax, even if the interest is deducted at the level of the subsidiary. Also, a hybrid loan could be used as a protective instrument against interest not deductible at the level of the subsidiary.

Expenses

Expenses incurred with the sale of a subsidiary can no longer be deducted under the participation exemption. Deduction of expenses incurred with the purchase was already abolished in 2004.

Portfolio investment test and 'subject-to-tax'-test

For foreign subsidiaries, in general, the portfolio investment test and the requirement that the subsidiary must be subject to a profit tax, has been abandoned. This has been replaced by a credit system for all subsidiaries (foreign and domestic) that can be considered to be "passive investment subsidiaries" (also called "low-taxed portfolio subsidiaries"). The concept of a passive investment subsidiary and the credit system will be explained further below.

Credit system for passive investment subsidiaries

The participation exemption regime does not apply to participations in so-called passive investment subsidiaries. A credit system has been introduced for such participations. In order to determine whether a participation is considered to be a passive investment, there are two cumulative criteria:

The portfolio investment test: the subsidiary is considered to be passive if its assets comprise of uncommitted portfolio investments of more than 50%. Such assets are, for example, stocks, bonds, real estate and bank deposits, that are not considered to play a role in the enterprise of the company. The 50%-test has to be applied on an aggregate basis, meaning that assets of participations of the subsidiary must be attributed to the subsidiary.

The subject-to-tax test: the subsidiary is subject to a profit tax at an effective rate of less than 10%, calculated in accordance with Netherlands' tax principles. The latter implies that the profit of the subsidiary has to be calculated in accordance with Netherlands tax law, applying the local tax rate. Therefore, tax benefits such as tax holidays, fictitious costs (e.g. the Belgian notional interest regime), certain provisions, exemptions etcetera can lead to an effective tax rate of lower than 10%, while the formal rate is higher. If both criteria apply (and the parent company owns more than 5% of the shares), the participation credit system applies, as opposed to the participation exemption.

Indirect real estate participations

Although in some cases it could be argued that a subsidiary that invests in real estate qualifies as a portfolio investment, a subsidiary is not considered to be a passive investment if it qualifies as a real estate participation. This applies if the assets of the subsidiary comprise of real estate for 90% or more. As in the case of the portfolio investment test, this test has to be applied on a pro rata basis.

Group Interest Box

For inter-company financing activities, a special, optional regime has been introduced. In short, the (positive) balance of income from loans granted to group companies and the interest paid to group companies, is taxed at a rate of 5%. Capital gains and losses on inter-company loans do not fall within the scope of the group interest relief. Further, third party debt is not taken into account for the purpose of the group interest relief. However, when a third party loan has been used to finance a capital contribution in a group company that uses the funds for inter company financing activities, the interest paid to the third party should be taken into account in determining the basis for the group interest relief. There is a limit to the amount of income that qualifies for the group interest relief. The threshold is calculated as the average annual equity of the company, multiplied by the percentage of interest on payments due to the Netherlands tax authorities ("heffingsrente; currently 4.7%).The group interest relief is subject to approval by the European Commission. Once the Commission has confirmed that this tax relief is not classified as state aid, the relief regime will have retroactive effect as from January 1, 2007.

Dividend tax

The dividend tax rate has been reduced from 25% to 15%. This reduction will only affect shareholders of Dutch companies that do not benefit from the EC Parent/Subsidiary Directive or double taxation treaties which mitigate the dividend tax burden. Furthermore, the threshold for the exemption to withhold dividend tax has been lowered to a shareholding of 5% for EU-resident parent companies. In addition, those foreign entities seated within the EU that are not subject to a corporation tax, can claim a refund of the dividend tax. Prior to 2007, this type of refund was only granted to Dutch entities.

[1] The Group Interest Box regime is subject to approval by the European Commission. Hence, it is not yet known when this incentive will enter into force. The Patent Box regime has already been approved by the Commission.

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