Investment vehicles under the Dutch participation exemption

Main rule

The Dutch participation exemption provides a full Dutch corporate income tax exemption on the benefits of a subsidiary, such as dividends and capital gains, in cases where the Dutch company holds at least 5% of the paid-up capital of a subsidiary.

Investment vehicle

When a Dutch company owns a subsidiary as an investment, instead as a part of its active company, the Dutch participation exemption in principle does not apply. Dutch tax law does not give an unambiguous definition of an investment vehicle. However, legislation and case law provide a framework to determine whether a subsidiary should be considered an investment vehicle or not.

This exception in the Dutch participation is an anti-abuse provision – by this exception, the Dutch government aims to prevent mobile capital from being rendered low-taxed, and thereafter from receiving tax exempt in the Netherlands. Taking that as the main consideration for this exception, the Dutch government added an escape for so-called “qualifying investment vehicles”. Therefore, the participation exemption can be applied on investment vehicles, under certain conditions.

To qualify, the subsidiary needs to meet one of the following requirements:

1. The subsidiary pays at least 10% corporate income tax (statutory and effective tax rate); or
2. The assets of the vehicle qualify (this is an extensive provision; therefore we will not elaborate on that in this article).

Conclusion

The Dutch participation exemption appears straightforward at first glance, but it is quite laborious in execution. Therefore, it is recommended that you engage a Dutch tax advisor if this issue comes up.

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Photo: Tobias Arhelger - stock.adobe.com