Dutch participation exemption


The Dutch participation exemption is an exemption from Dutch corporate income tax in respect of profits and losses derived from qualifying shareholdings. Profits covered by the participation exemption include cash dividends, stock dividends, bonus shares, dividends in kind, hidden profits distributions and capital gains realized upon the disposal of a shareholding.

Costs relating to a qualifying shareholding, including interest and foreign exchange losses on debt funding, are deductible, whether the loan relates to shares in a Dutch or a foreign company. However, this also means that foreign exchange gains on debt funding are taxable, for example. The costs of acquiring or disposing of a qualifying shareholding are covered by the participation exemption and are therefore not tax deductible.

Capital losses on qualifying shareholdings are covered by the participation exemption as well. In principle these are generally not tax-deductible. However, there is one notable exception to this rule, which relates to liquidation losses. The allowable losses are reduced by income derived from the shareholding during a specified period. Complex rules apply where the liquidated company’s assets include direct or indirect shareholdings in other companies. Various anti-avoidance rules apply, for example where the business of the liquidated company is continued within the group. Initial depreciations on qualifying shareholdings are no longer tax deductible.

Requirements for exemption

All corporate taxpayers, including non-resident companies holding shares through a Dutch branch, can in principle benefit from the participation exemption, except qualifying Dutch investment companies (FII/EII, see above). The exemption can apply to shareholdings in both resident and non-resident companies, subject to fulfilling the following conditions:

  • Legal form: The entity in which the shares are held must have a capital divided into shares or otherwise qualify, as an ‘open’ limited partnership, cooperative association or qualifying mutual fund. An interest in a Dutch investment company is not covered by the participation exemption.
  • Minimum holding: The taxpayer company must hold at least 5% of the nominal paid-up share capital (or an equivalent interest in the case of funds or limited partnerships). No minimum is required for interests in cooperative associations.

Qualifying passive investment subsidiary

On 1st January 2010 new rules entered into force that exclude passive investment subsidiaries for the participation exemption unless the subsidiary qualifies as a “qualifying” passive investment subsidiary. Active involvement and the intent of the Dutch parent company or central group management are decisive criteria to qualify as a qualifying passive investment subsidiary. If there is active involvement in the central management of the group, regarding the company strategies of the subsidiary and its (sub-) subsidiaries, then the participation exemption will apply. In case of a participation that is both (passively) investing and (actively) conducting a business, it needs to be verified what the core activities are.

If based upon this new main rule the participation exemption would not apply the conditions may still be met if the new “sufficient tax” test (subject to a real profit tax of at least 10%) or if the revised asset test is met. The revised asset test entails, in short, that the assets of the subsidiary do not consist for more than 70% (used to be 50%) of assets that have no function in the subsidiary’s entrepreneurial activities (i.e. are free portfolio assets).

Real estate investments

Under the revised asset test, real estate is not considered as a free portfolio asset. As a result, the Dutch participation exemption is applicable to benefits from participations that own at least 70% or more real estate. It is therefore allowed to have only 30% non-real estate assets in order to meet the test. Note however that real estate that is owned by tax-exempt investment funds does not qualify.

Tax credit

If the participation exemption does not apply, income (including capital gains) derived from such none sufficiently taxed (portfolio) participation is eligible for a general credit of 5%. As an alternative, the actual (yet non-sufficient) underlying tax may be credited in case of income derived from a participation that qualifies under the EU Parent-Subsidiary Directive.

Mark-to-market rules for low-taxed portfolio participations

Investments in portfolio participations that are not sufficiently taxed and of which at least 90% of the assets consist of free portfolio investments, need to be marked to market on an annual basis. This deemed and other income is grossed up with a factor of 100/95. Note that if a portfolio participation is totally exempt, there is no gross up, whereas there will be no credit for underlying taxes.