Corporation tax is levied at a rate of 30% of taxable profits.
The profits should be determined according to sound business practice and consistent accounting methods. The concept of sound business practice has mainly been developed in case law. For example unrealized losses may be taken into consideration, while unrealized profit may be ignored. The requirement of consistent accounting methods means that the method of determining profits may be changed only if this is compatible with sound business practice. Companies exploiting sea-going vessels may opt for a tonnage-based profit determination, providing that certain requirements are met. An important requirement is that the decision is binding for a period of ten years.
The depreciation of fixed assets for tax purposes is a statutory requirement. In principle taxpayers are free to choose a depreciation method. The method chosen must be in accordance with sound business practice. The linear method of depreciation is generally used. A less common method of calculating depreciation is the declining balance method. In case law, the latter method is accepted only for fixed assets with a steadily declining use with age. A combination of both methods, i.e. depreciation according to a declining percentage, may also be used.
Goodwill may only be depreciated if the goodwill has been purchased from a third party; goodwill generated by the company itself cannot be depreciated. An accelerated depreciation is permitted for certain fixed assets, of which the most important are:
· energy-saving fixed assets and other environmentally-friendly fixed assets;
· sea-going vessels;
· intangible assets, providing these belong to a business that has been purchased which was not established in the Netherlands.
This is subject to restrictions.
The following stock valuation methods are permitted: valuation based on cost, valuation based on cost or market value (whichever is lower), or the base stock method. Valuation at cost is in accordance with sound business practice, unless the market value is significantly lower than the cost. In this system unrealized profit is ignored, while unrealized losses can be taken into account directly. The value of the stock can be determined by either the FIFO or LIFO method. Subject to certain conditions, case law also permits the use of the base stock system.
The basic principle of the determination of the profits is that all expenses associated with business operations are tax-deductible. If an expense can be regarded as commercially sound then its value is not of importance. However, the deductibility of certain business expenses is subject to restrictions. This concerns mixed expenses, which are business expenses with a private element. Non-deductible expenses include costs connected with pleasure craft used for entertainment purposes and fines.
The limitations on deductibility of expenses are more strict for companies with one or more natural persons holding a substantial interest in the company, who also work(s) for the company. Basically, a natural person has a substantial interest if he holds 5% or more (direct or indirect) of the share-capital of the company. In that case 10% of the company's costs in connection with food, drinks, tobacco, representation including receptions and entertainment, seminars, excursions etc., are not deductible. The company can opt for a fixed amount of NLG 3,200 per substantial interest holder, who also works for the company, to be treated as non-deductible.
The Corporation Tax Act gives an inexhaustive list of deductible and non-deductible expenses. The following expenses are always deductible:
· profit shares paid to directors and other staff as remuneration for employment;
· profit shares paid to creditors other than founders, shareholders or other persons entitled to shares in the corporation;
· profit shares paid in connection with licences, patents, etc., to persons other than founders, shareholders or persons otherwise entitled to shares in the corporation;
· profit shares paid by an insurance company to its policyholders;
· the costs of incorporation and of alterations in the capital.
In the Netherlands no thin capitalization rules exist. Since January 1997 limitations on the deductibility of intercompany interest expenses have been introduced in the Corporate Income Tax Act. The (interest) expenses on intercompany loans are not deductible in basically two types of situations:
(interest) expenses arising from indebtness in the shareholder/susidiary relation, e.g. in connection with dividends, reduction of capital and capital contributions. However, (interest) expenses remain deductible, if the tax payer can demonstrate that both the transaction and the loan were entered into for sound business reasons;
(interest) expenses related to artificial conversion of equity into debt within the group. However, expenses related to these schemes remain deductible, if the tax payer can demonstrate that either both the transaction and the loan were entered into for sound business reasons or that the interest paid is effectively subject to a reasonable level of profits tax in the hands of the recipient.
The following expenses are never deductible:
· profit distributions other than those specifically designated as deductible in the Corporation Tax Act (see above);
· corporation tax, dividend tax and tax on games of chance.
Certain reserves may be formed by making a deduction from the profits. In order to qualify for this deduction the business must keep regular annual accounts. Three reserves are legally permitted, which are the cost equalisation reserve, the replacement reserve and since January 1997 the reserve for financial risks for multinational companies.
The cost equalisation reserve enables recurrent costs to be spread uniformly over a period of time.
A replacement reserve may be created if fixed assets are lost, damaged, or sold, when the payment received exceeds the book value. To be eligible for this reserve there must be plans to replace or repair the assets. The reserve should generally be terminated in the fourth year following the year in which it was formed.
Under certain conditions a reserve may be formed for the special risks involved in operating as an international group. The risks aimed at concern financing and holding activities. One of the main conditions to qualify is that the financing activities must comprise financing of group companies in at least four countries or on two continents. In principle, the entity that forms the reserve may charge to this reserve 80% of its income derived from financing activities before tax. The tax inspector will grant the regime for ten years upon a request filed by the tax payer, in wich the tax payer states the relevant factual circumstances. The Dutch tax inspector can impose additional conditions.
This scheme allows a certain percentage of the sum invested in fixed assets in a particular year to be deducted when calculating the taxable profits. Investments are divided into nine tranches, where the percentage of the allowance decreases with increase in investment. In 1999 the lowest tranche is applicable to investments between NLG 3,900 and NLG 65,000, and the highest tranche is applicable to investments between NLG 503,000 and NLG 566,000. The corresponding percentages are 27% and 3% respectively. Certain fixed assets are excluded from the investment allowance. If fixed assets for which an investment allowance was obtained in the past are sold within five years of being purchased then the investment allowance is withdrawn either wholly or in part.
Furthermore, there is an investment allowance in respect of investments in energy saving business assets, placed on an Energylist. For investments over NLG 3,900 up to NLG 65,000 the allowance is 52%. The percentage of the allowance declines as the amount of the investment increases. The maximum allowance is 40% of NLG 208 mln.
This scheme allows an additional percentage of the costs of education of employees to be deducted when calculating the taxable profits. The percentage of the allowance varies between 20% and 80%.
Within certain limits donations to religious, ideological, charitable, cultural or academic institutions or other bodies serving the public good are tax-deductible. The donations must be more than a total of NLG 500. The maximum deduction is 6% of the profits.
A loss may be offset against the taxable income of the three preceding years (carry back) and against taxable income of all years to come (carry forward).
If a corporation discontinues its business either wholly, or in part, then any losses that have not been offset may be compensated with future profits, provided that at least 70% of its shares continue to be held by the same natural persons
The Corporation Tax Act has always provided for a participation exemption, which is applicable to both domestic and foreign shareholdings. This exemption is one of the main pillars of the Dutch Corporation Tax Act, and it is motivated by the desire to prevent double taxation when the profits of a subsidiary are distributed to its parent company which is also liable to corporation tax. The main features of this scheme are as follows: all gains from shareholdings are exempted, the costs associated with a shareholding are not deductible, and losses arising from liquidation of the corporation are deductible only under certain conditions. The corporation distributing dividends does not have to pay dividend tax if the distribution of profits falls under the participation exemption enjoyed by the company receiving the dividend.
The most important elements are as follows.
The participation exemption is applicable to both domestic and foreign shareholdings. A shareholding is deemed to exist if the taxpayer:
1. holds at least 5% of the nominal paid-up capital (a shareholding includes the related possession of 'jouissance' rights); or
2. holds less than 5%, but ownership of the shares is part of the normal business conducted by the taxpayer, or the acquisition of the shares served a general interest; or
3. is a member of a cooperative; or
4. holds at least 5% of the share certificates in a mutual fund based in the Netherlands.
The participation exemption is not applicable if the taxpayer or subsidiary company is a fiscal investment institution. The concept of an investment institution is explained in section 3.6. The participation exemption is not applicable when the shares are held as stock.
The participation exemption does not apply internationally when shares in the foreign corporation are held as a portfolio (passive) investment. Another requirement for the exemption to be granted is that the foreign company in which the shares are held is subject to a tax on profits levied by the central government in the country in which it is established (see also 3.3.7.). Furthermore, the participation exemption is not applicable for participations in foreign 'passive' finance companies.
In principle a Dutch company cannot credit any foreign withholding tax on dividends received from foreign subsidiaries to which the participation exemption is applicable. However, the Dutch dividend tax which has to be transferred by the Dutch company in the event of the redistribution of foreign dividends received can be partly reduced, subject to certain conditions. The reduction amounts to a maximum of 3% of the foreign dividends received.
Gains from shareholdings are ignored when calculating the profits. In principle the term 'gains' includes both profits and losses. Profits, of course, include both official and disguised dividends received. Exempted gains also include profits made by the sale of a participation (including exchange rate differences). Since January 1997, it is possible to opt for application of the participation exemption to currency results arising from financial instruments which are used to hedge the translation risks on investments in foreign subsidiaries. Accordingly losses from sales are not deductible. If the participation declines in value as a result of losses suffered, then a write-off by the parent company is in principle non-deductible. An important exception is losses resulting from liquidation (see 3.3.6.).
However, since January 1997 a company may claim a tax deduction for start-up losses of a subsidiary, in which it holds at least 25% of the share-capital. The rules allow the parent company to depreciate the book value of the subsidiary in the first 5 years after the acquisition if and to the extent that the value of the subsidiary has declined below cost price. When the subsidiary becomes profitable, a taxable appreciation has to be made up to the amount of the cost of the investment. To the extent the depreciation has not been reversed during the first 5 years, the balance will then have to be reversed in the next 5 years in equal steps.
If the depreciated debts of a subsidiary to a parent company are converted into share capital then a special provision prevents tax claims being lost. In such cases an amount equal to the depreciation of the debt is, in principle, again regarded as part of the profits of the parent company. This is also applicable when the debt is sold to an affiliated company or if it is discharged.
Shareholdings may give rise to costs as well as gains. In principle such costs are not deductible. However an exception is made when these are indirectly conducive to making profits taxed in the Netherlands. With foreign shareholdings this may occur if the foreign subsidiary has a permanent establishment in the Netherlands. In practice the main non-deductible costs are the costs of financing the participation. The taxpayer must also show that the costs are conducive to making domestic taxable profits.
As losses incurred by foreign subsidiaries cannot be offset against profits made by the Dutch parent company, foreign activities from which profits are not directly expected are often undertaken through a permanent establishment. Foreign losses can then be directly deducted from the profits of the Dutch company. To prevent losses being deducted from the profits in the Netherlands whilst later profits in this country are not taxed, it is stipulated that when a permanent establishment is converted into a subsidiary then the profit made by the subsidiary up to the amount of the losses deducted from the Dutch profit is not exempted from taxation. This obligation to compensate profits made by a subsidiary with earlier losses incurred by the permanent establishment is applicable to the eight years preceding the conversion, and is subject to the condition that the losses have not been offset against other foreign profits.
In principle losses from participations cannot be taken into account by the parent company. An exception is those losses resulting from liquidation. The liquidated subsidiary cannot be compensated for these losses in the future. For this reason these losses may be taken into account by the parent company, under certain conditions, in the year in which the liquidation of the subsidiary is completed. The loss resulting from liquidation is the difference between the liquidation payments and the sum paid to acquire the participation (the 'sacrificed amount'). Special rules apply if a tax deduction has been claimed for this participation (see 3.3.3.).
There are additional requirements for taking account of the losses resulting from the liquidation of foreign participations. One requirement is that the holding must be at least 25%, and that it must have been held during the five years preceding the discontinuation of the subsidiary's business, the year of discontinuation itself, and during subsequent years in which liquidation payments are received. In addition no loss resulting from liquidation can be taken into account if the participation was obtained from a foreign associated company when the operations concerned are discontinued within three years.
In 1992 Dutch legislation was amended in line with the EU directive on parent companies and subsidiaries. The relevant Act has a retroactive effect from 1 January 1992. The participation exemption has been extended in several respects. For example an investment in a company established in another EU member state can be regarded as a participation covered by the participation exemption. For this purpose a shareholding of at least 25% is required. The possession of at least 25% of the voting rights in a company can also be regarded as a participation under certain conditions, even if the shareholding is less than 5%. Under this Act dividend tax is not levied on dividend paid to a company established in another member state when the company has an interest of at least 25% in the company paying the dividend.