Inventory valuation
In general, stock/inventory is stated at the lower of cost or market value. Cost may be determined on the basis of first in first out (FIFO), last in first out (LIFO), base stock, or average cost. The LIFO system may be used for commercial/financial and tax purposes.
There is no requirement of conformity between commercial/financial and tax reporting.
Capital gains
Capital gains are taxed as ordinary income. However, capital gains realised on disposal of shares qualifying for the participation exemption are tax exempt (see Dividend income below).
The gain on disposal of depreciable assets may be carried over to a special tax deferral reinvestment reserve but must then be deducted from the acquisition cost of the later acquired assets. Except in special circ*mstances, the reserve cannot be maintained for more than three consecutive years. If the reserve has not been fully applied after three years, the remainder will be added to the taxable profit.
Capital losses are deductible unless attributable to the disposal of a shareholding qualifying for the participation exemption.
Dividend income
Subject to meeting the conditions for the participation exemption, a Dutch company or branch of a foreign company is fully exempt from Dutch tax on all benefits connected with a qualifying shareholding, including cash dividends, dividends in kind, bonus shares, hidden profit distributions, capital gains, and currency exchange results. As of 1 January 2022, there are rules to prevent mismatches that may occur from applying the arm’s-length principle in international groups.
Participation exemption
The participation exemption will apply to a shareholding in a Dutch company if the holding is at least 5% of the investee’s capital, provided the conditions are met.
As a general rule, the participation exemption is applicable as long as the participation is not held as a portfolio investment. The intention of the parent company, which can be based on the particular facts and circ*mstances, is decisive. Regardless of the company’s intention, the participation exemption is also applicable if the sufficient tax test (i.e. the income is subject to a real profit tax of at least 10%) or the asset test (i.e. the subsidiary's assets do not usually consist of more than 50% of portfolio investments) is met.
Tax credit method for non-qualifying participations
For portfolio investment participations not qualifying for the participation exemption, double taxation will be avoided by applying the tax credit method, unless the portfolio investment shareholding effectively is not subject to tax at all. For EU shareholdings, it is optional to credit the actual underlying tax. Note that the provisions regarding portfolio investments (both domestic and foreign) also apply within a Dutch corporate tax fiscal unity. Due to the amendments to the EU’s Parent-Subsidiary Directive, a corporate taxpayer is not eligible for the participation exemption or participation credit for received distributed profits to the extent that such distributed profits are deductible by the subsidiary ('anti-mismatch rule'). Similar rules apply throughout the European Union.
Dividends not qualifying under the participation exemption regime for an exemption or credit are taxable in full at the ordinary CIT rate.
Interests of 25% or more in a company of which the assets consist (nearly) exclusively of portfolio investments should be annually valued, as an asset, at the fair market value.
Costs related to the acquisition and disposal of a participation (e.g. legal fees, compensations, notary fees) are not deductible for CIT purposes.
In certain circ*mstances, losses arising from the liquidation of a (foreign) subsidiary could be deductible for CIT purposes (see Net operating losses in the Deductions section).
A taxpayer who derives income from a participation that first qualified but at a certain point in time no longer qualifies for the participation exemption, or vice versa, must attribute the income to the taxable and the tax-exempt period accordingly (‘compartmentalisation rules’). The compartmentalisation rules apply to all changes in the application of the participation exemption regime irrespective of whether caused by a change in facts and circ*mstances or a change in legislation. It applies to both capital gains and dividend distributions.
Stock dividends
For the purposes of income determination in respect of dividend WHT, stock dividends are taxed as dividend income to the extent that they are paid out of earned surplus. They are not taxable if paid out of share premium (‘agio’), provided the share premium account was not created pursuant to a share-for-share merger, in which only Dutch companies were involved. In the case of a share-for-share merger, in which shares in foreign subsidiaries were contributed to a Dutch company, the Dutch company can distribute the difference between the fair market value and the paid-in capital of the subsidiaries being contributed as a stock dividend without triggering Dutch dividend WHT (step-up in basis), provided certain requirements are met.
Whether a stock dividend is regarded as a taxable profit for CIT purposes depends on the specific circ*mstances at hand. Dividend WHT can be credited against the CIT payable. However, in a year this cannot lead to a refund of dividend WHT/CIT: both in domestic (Dutch) and in foreign situations the set-off of dividend WHT (and gambling tax) against CIT is limited to the amount of CIT due before the set off. Effectively this means that companies are no longer entitled to refunds of dividend WHT (and gambling tax). Taxes that cannot be set off in a year are carried forward to future years without time limitation.
Interest income
Interest income is taxed as ordinary income against the regular CIT rate. Note there is a conditional source taxation on interest income (see the Withholding taxes section).
Royalty income
Royalty income is taxed as ordinary income against the regular CIT rate. Note there is a conditional source taxation on interest income (see the Withholding taxes section).
Work in progress
Profits with regard to work in progress should be accounted before actual completion, to the extent that the work is completed (percentage of completion). All project costs should be recognised in the year the costs were incurred.
Foreign income
In general, a Dutch resident company is subject to CIT on its worldwide income. However, certain income is exempt (e.g. due to the application of the participation exemption described above) or excluded from the tax base.
Certain foreign-sourced income (foreign branch income, real estate income, and other income) is ‘excluded’ from the Dutch taxable base. The so-called ‘object exemption’ or ‘base exemption’, a method to provide relief for international juridical double taxation in situations of Dutch companies with a PE abroad, is designed as a tax base adjustment instead of a real exemption. Consequently, losses of foreign PEs can no longer be offset against profits of the Dutch head office (except for final losses), but currency exchange results are still included in the tax base. Also, if the foreign activities cease and certain requirements are met, losses upon ‘liquidation’ can be deducted. For certain low-taxed passive PEs, the object exemption is replaced by a credit system.
Double taxation of foreign dividends, interest, and royalties is relieved by a (full or partial) tax credit for foreign paid tax at the source (most often a WHT) provided by Dutch tax treaties or unilaterally if the payer of the income streams is a resident of a developing country designated by Ministerial Order. If no treaty or unilateral relief applies, a deduction of the foreign tax paid as a cost is allowed in computing the net taxable income.
However, relief by exemption is given for dividends from foreign investments qualifying for the participation exemption, as discussed under Dividend income above. In that case, there is no Dutch tax available to credit for taxes withheld at the source in the subsidiary’s country of residence.
In most circ*mstances, the foreign dividend is exempt from Dutch CIT under the participation exemption, as previously discussed. As a consequence, foreign WHT cannot be credited, and the WHT constitutes a real cost for the companies concerned. A credit of the foreign WHT is granted against Dutch dividend WHT due on the distribution to foreign parents of the Dutch company. The credit amounts to a maximum of 3% of the gross dividend paid, to the extent that it can be paid out of foreign-source dividends received that have been subject to a WHT rate of at least 5% and the foreign company is liable to CIT. This tax credit does not result in taxable income for CIT purposes.
The offsetting of dividend tax and gambling tax against CIT is limited to the annual amount of CIT due. WHTs that cannot be set off will be carried forward for offsetting in the next year.
