Corporate Income Tax (CIT) is levied on the worldwide income of certain entities resident in the Netherlands (art. 2'1 CIT), and the Dutch income of certain non-resident entities (art. 3 CIT). Certain mutual investment funds are treated as taxable entities, whilst foundations (stichtingen) and certain other societies are only taxable to the extent they run a business(art. 2'1 CIT).
The tax rate of 34.5% applies to both residents and non-residents alike (art. 22 CIT).
The taxable basis of resident entities is their worldwide income. Non-residents are taxed on their Dutch business income and income from substantial interest in Dutch companies (art. 17 CIT). The taxable basis is generally calculated in Euros, but may also be reported in the taxpayer's functional currency(art. 7'5 CIT).
Tax is due over the taxable amount, which is the taxable profit less losses carried forward (art. 7 CIT). However, certain items of income are exempt, certain costs non-deductible and other items are either adjusted or imputed. These will be discussed hereafter.
The most important and best known exemption from taxation is the participation exemption (art. 13 and further CIT). This exempts income and capital gains from certain subsidiaries from being taxed again in the Netherlands. Under the participation exemption the costs related to exempt income from subsidiaries without taxable income in the Netherlands, are not not deductible. See our memo on the participation exemption for further information.
Another important exemption include the exemption for income from foreign businesses, which primarily is dealt with under the Unilateral Decree for the Prevention of Double taxation and tax treaties. Finally there is an exemption for the waiving of liabilities in order to safeguard the survival of the debtor; however, other recent legislation on the conversion of debt has in practice largely killed off this much needed relief. The State Secretary of Finance has promised a change in the recent legislation to remedy the situation. One hopes that such a change is implemented quickly, with retro active effect and does not include conditions which will still make it difficult to solve bona fide cases.
One final exemption, which can be significant for intermediate holding companies, is the exemption from corporate income tax of the foreign dividend withholding tax credit (art. 8a CIT and 11 Dividend Tax).
Besides the limitation on deductions in the participation exemption, mentioned here above, there are a number of limitations on the deductibility of costs of financing. These include:
See our detailed memo on the limitation of interest deductions for further details.
Adjustments to be made to the taxable basis include the transfer pricing adjustments (art. 8b CIT) mentioned here above and adjustments made for conduit finance and royalties (art. 8c CIT).
Imputations include the imputation of deemed profit realised upon the waiving of a liability mentioned here above, various recaptures of possible cost deductions relating to the participation exemption, such as the deemed realisation of profits upon the conversion of a permanent establishment into a subsidiary (art. 13c CIT), or the conversion of written down debt into equity (art. 13ba CIT) or the disposal of such debt (art. 13b CIT).
An imputation that stands all by itself both in its uniqueness, overkill and far fetched creativity is the so-called Surtax. This is a 20 percent tax that is supposed to be levied over any deemed excessive dividend distributions made before 31 December 2005. See our memo on this legislation.
There are a number of specific tax regimes. The first is a regime for consolidated tax groups (art. 15 and further CIT). In essence the subsidiaries within a tax group are treated as if they have been dissolved into the parent company. See our memo for more details. A second regime concerns that of the special risk reserve for group finance companies (art. 15b CIT). However, following an initial State Aid investigation by the EU, no rulings are currently being issued).
Another important regime is 0% tax regime for fiscal investment funds. Both NV's, BV's and taxable mutual investment funds may qualify for this regime (art. 28 CIT).
Special regimes not dealt with on this site include those for the shipping industry (taxation based on income estimated on the basis of a ship's capacity) and special provisions which may be formed by insurance companies.
Finally a number of facilities exist for the joining and dissolving of entities. These include legislation on share mergers, asset mergers, legal mergers and legal demergers (art. 14 - 14b CIT).
In principle, losses can be carried back for 3 years and carried forward indefinitely (art. 20 CIT). However, there are a number of instances in which certain tax facilities, such as the exemption for liabilities waived in order to save the debtor mentioned here above, are only available after all losses carried forward have been used. Under certain circumstances no loss compensation is available anymore if there has been a shift of 30 percent or more in the ultimate interest in the entity (art. 20a CIT). See our memo on loss compensation for more details.
Upon liquidation, an entity is generally deemed to have realised all its hidden reserves, released its provisions and has to pay tax over them. The same applies to the (partial) emigration of a taxpayer (art. 15c CIT).
A particularly dangerous piece of legislation to bear in mind is the law on the conversion of debt into equity (art. 12 CIT) mentioned here above. It dictates that the debtor is deemed to make a taxable profit on the difference between the par value and the fair market value of converted debt. This legislation makes any saving operations of a company in distress extremely difficult and costly. One is well advised to plan ahead (with the debtor if necessary) in situations like these, if at all foreseeable.
On a similar note, the Dutch Supreme Court has on 18 October 2002 finally crushed the point of view taken by the Dutch tax authorities that the unpaid debts of a company in bankruptcy (in this case Fokker Aircraft BV) does not lead to any taxable gains, which further weakens the already unfortunate position of the company creditors, when it stated that there is (obviously) no increase in the equity of an entrepreneur when it has ceased to pay its liabilities and have been declared bankrupt, since the debtor is not freed from its liabilities through the bankruptcy.