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Participation exemption

Overview

The Dutch participation exemption is a cornerstone of the Dutch corporate tax system. It provides a full exemption from Dutch corporate income tax on income and capital gains derived from qualifying shareholdings. This exemption aims to prevent double taxation in group structures and is widely used by holding and investment companies based in the Netherlands.

What Income Is Exempt?

The participation exemption applies to a broad range of income types derived from qualifying subsidiaries, including:

  • Dividends (cash, stock, in kind)

  • Bonus shares and hidden profit distributions

  • Capital gains on the disposal of shares

  • Certain currency exchange results

  • Income and capital gains from a profit participating loan, provided the loan qualifies as equity under Dutch tax law

A profit participating loan (PPL) is treated as an equity-like instrument if it meets specific conditions (e.g. subordinated, profit-dependent return, no fixed repayment). In that case, both interest income and capital gains from the PPL fall under the participation exemption.

What Is Not Deductible?

Costs directly related to a qualifying shareholding are generally not tax-deductible. This includes acquisition and disposal costs, as well as initial depreciations. However, funding costs, such as interest and currency losses on loans used to acquire a participation, remain deductible—while gains on such funding (e.g. FX gains) are taxable.

The participation exemption also applies to capital losses, which means that in principle, such losses are not deductible either. An exception applies to liquidation losses, under strict conditions. These must be reduced by any income received from the shareholding during a defined period, and anti-abuse rules apply—especially where the liquidated entity holds indirect participations or its business is continued within the group.

Recent Dutch Supreme Court rulings clarified that certain foreign exchange gains on delayed dividend receipts may fall outside the exemption. Also, exit bonuses or other transaction costs paid after a share sale may not qualify unless directly linked to the disposal.

Conditions for Applying the Participation Exemption

The exemption is available to all Dutch corporate taxpayers, including non-resident companies with a Dutch permanent establishment. The main requirements are:

  • Legal form: The participation must be in a company with capital divided into shares, or a qualifying cooperative, open CV, or mutual fund. Participations in tax-exempt Dutch investment institutions do not qualify.

  • Minimum interest: The Dutch taxpayer must hold at least 5% of the nominal paid-up capital (or an equivalent economic interest). No minimum applies for cooperatives.

Passive Investment Subsidiaries

The exemption generally does not apply to passive, low-taxed subsidiaries, unless one of the following tests is met:

  1. Qualifying involvement: The Dutch company (or group management) is actively involved in the subsidiary’s strategy and operations.

  2. Sufficient taxation: The subsidiary is subject to a genuine profit tax of at least 10%.

  3. Asset test: No more than 70% of the subsidiary’s assets are free portfolio investments. (Threshold increased from 50% in 2020.)

Where a subsidiary has mixed activities (e.g. investing and trading), the primary business purpose determines the outcome.

Real Estate Participations

Real estate is considered a business asset under the asset test. As a result, the participation exemption generally applies to subsidiaries with at least 70% of their assets in real estate. However, real estate held via tax-exempt investment funds is excluded.

What If the Exemption Does Not Apply?

If the participation exemption is not available—typically in the case of passive, low-taxed holdings—the following alternatives may apply:

  • A fixed tax credit of 5% on gross income from the participation; or

  • A credit for actual underlying tax, if the EU Parent-Subsidiary Directive applies.

Mark-to-Market for Low-Taxed Portfolio Participations

Participations that are not sufficiently taxed and consist for at least 90% of free portfolio assets must be valued at fair market value annually (mark-to-market). The resulting deemed income is grossed up by 100/95. If the participation is fully exempt, there is no gross-up, but also no credit for underlying taxes.

Recent Developments

The Dutch participation exemption has undergone several legal and practical updates in recent years:

  • Anti-hybrid rules (2015) exclude the exemption for hybrid mismatches.

  • ATAD II (2020) tightened rules for passive, low-taxed subsidiaries and expanded the asset test threshold.

  • Transfer pricing mismatch rules (2022–2025) confirmed that full gains remain exempt, even in mismatch situations.

  • Recent Supreme Court rulings (2023–2025) clarified treatment of FX gains, exit-related costs, and derivatives tied to participations.

  • Revised policy guidance (2025) limits rollover relief and liquidation loss rules in certain intra-group scenarios.