Like most countries, the Netherlands primarily arrange for relief from the prevention of double taxation for resident taxpayers, although the fact that the tax position of permanent establishments is very similar to that of resident taxpayers does mean that they too benefit from certain measures, such as the participation exemption. Foreign shareholders also benefits (indirectly) from the dividend tax credit granted on flow through dividends. Besides the participation exemption, the primary measures for the prevention of double taxation of corporate taxpayers are, the Dutch Unilateral Decree for the Prevention of Double Taxation and the various Dutch tax treaties(for an extensive list, see www.minfin.nl), including the Tax Agreement for the Kingdom of the Netherlands (arranging the relations between the members of the Kingdom, including the Netherlands, the Netherlands Antilles and Aruba) and the EC Parent/Subsidiary Directive. Finally, certain taxes may be deducted as costs, if no other form of prevention is available.
The participation exemption is a form of prevention of double taxation at the corporate tax level both for the accumulation of national and cross border taxes. It basically exempts income from participations completely from the taxpayer's taxable profit. For more information, please see our general memorandum or detailed memorandum on this topic.
The unilateral decree is meant to cover those situations, which are not already covered by another measure for the prevention of double taxation, such as a tax treaty. One of the important differences between the decree and tax treaties is that the decree generally only grants relief on the condition that the income has actually been subject to taxation in another State. This decree is also important to the application of tax treaties, since most tax treaties refer to the unilateral decree for the mechanics of the prevention of double taxation, i.e. the rules of exemptions and tax credits, as applied by the Netherlands (e.g. see article 32, first paragraph, second sentence of the decree).
Exemption
The exemption of foreign business income is provided on a per country basis. The exemption is approximately the same percentage of the total tax due, as the profit from that state is of the total taxable income (article 33, second paragraph). Should the profit from a state exceed the total taxable profit in one year, the difference is carried forward indefinitely (article 34, first paragraph); losses from a state are first set off against future profits from that state before further exemptions are granted (article 35, first paragraph).
An important exception to the above exist for profits from passive activities in another State, unless it can qualify as active financing activities. Under this exception a credit, rather than exemption is granted. The credit equals the lower of either 50 percent of the Dutch corporate income tax rate, or the exemption that would have been granted to an active enterprise in that state, i.e. generally, at least half an exemption could be available (article 39, second paragraph). The subject to tax criterium also applies to this exception (article 39, first paragraph). Carry forward facilities and claw back rules for losses like those regarding active profits are applicable.
Tax credit
A tax credit is available for dividends, interest and royalties from developing countries, provided that they have been subject to an income tax (article 36, paragraph 1). The credit is equal to the lower of the tax levied by other States in that year and the amount that is approximately the same percentage of the total tax due, as the dividends, interest and royalties are of the total taxable income (article 36, second paragraph), but can not be more than the corporate income tax due (article 36, sixth paragraph). A taxpayer may opt to deduct the foreign tax as costs from its taxable income in stead of claiming a credit, should this be more advantageous (article 38). However, this can only be done for the total dividends, interest and royalties received in one year and can not be applied per item of income received.
Unlike the exemptions granted, the tax credits are calculated on an overall, rather than a per country basis, whereby losses from one state, will reduce the credit on income from another state. Like the exemption method, carry forward facilities are applicable.
The Netherlands has an extensive treaty network. Treaties generally follow the OECD models. Most tax treaties refer to the Dutch Unilateral Decree for the Prevention of Double Taxation for the mechanics of the prevention of double taxation, which means that profits from foreign enterprises are exempt from Dutch taxation (rather than the providing of a tax credit) and that a tax credit is granted for foreign dividends, interest and royalties.
The EC Parent Subsidiary Directive arranges for the prevention of double taxation on profit distributions within the EU. The measures under the directive have been incorporated into the Dutch corporate income tax law under the rules for the participation exemption, specifically article 13g, and the Dutch dividend withholding tax under article 4a and article 4b of the Dividend Withholding Tax Act 1965.
In case no other measure for the prevention of double taxation is available, the taxpayer may deduct foreign income taxes from its taxable income (see also the similar choice given under the Unilateral Decree, here above, which also applies even if a measure for the prevention of double taxation is available).