NETHERLANDS: An Introduction to Tax

The Netherlands has a long-standing history as an attractive jurisdiction for foreign enterprises and investors due to its stable economic, social and political environment.

The Dutch tax system has always been an important element of the Dutch business and investment climate.

In the last decade, the OECD and the EU developed initiatives to counter tax avoidance and abuse. Following these initiatives, the Netherlands introduced measures to combat tax avoidance and abuse, both by endorsing and implementing EU directives and by introducing unilateral tax measures.

In the past two years, the Dutch government repeatedly emphasised the importance of a reliable and stable tax climate to remain attractive for (foreign) enterprises and investments. The need to maintain existing tax incentives to stimulate businesses has been acknowledged, as well as the need for a level playing field within the EU.

Regarding combatting tax avoidance, the Dutch government is careful to ensure that such measures do not have negative effects on real economic activities. For that reason, the government will in general refrain from unilateral measures where international or European initiatives have not, or not yet, resulted in measures. Moreover, it is important that companies established in the Netherlands are not disadvantaged in terms of their competitive position. Therefore, the government's basic principle in addressing international tax avoidance is to adhere to international agreements.

The government is continuing its fight against dividend stripping through unilateral measures. Effective 1 January 2024, several measures to strengthen the approach to dividend stripping took effect. In the explanatory notes to these measures, an investigation into additional measures against dividend stripping was announced. The outcome of this study is expected to be reported to the House of Representatives in the spring of 2025.

Another unilateral measure relates to the introduction of a conditional withholding tax on interest and royalties as of 2021, and on dividends as of 2024 (income in respect of a decedent (IRD) payments). The Netherlands levies a conditional withholding tax on IRD payments to affiliated entities in low-tax jurisdictions or in jurisdictions included on the EU blacklist. This tax is furthermore levied on IRD payments to certain hybrid entities, and in the case of abuse. In a recent letter to the Dutch Parliament, the Dutch State Secretary revealed that analyses show that several key measures against tax avoidance are indeed effective and that the conditional withholding tax on IRD payments has contributed to a significant decrease in financial flows to low-tax jurisdictions – ie, from EUR37 billion in 2019 to EUR7 billion in 2023.

As anti-abuse measures are generally based on international and European agreements and aim to exclude real economic activities, the Dutch tax system has preserved its attractiveness for multinational enterprises, inter alia because of its competitive tax rates, the possibility of obtaining tax certainty in advance, its large treaty network and holding regime (including a participation exemption and a broad domestic dividend withholding tax exemption), the reduced effective tax rate for benefits from qualifying research and development activities (innovation box), the favourable expatriates tax regime (30% ruling), the research and development wage tax credits and the investment allowances and tax incentives. Below, we highlight some key elements of the Dutch tax system.

Tax Rates

The Dutch corporate income tax features a main corporate income tax rate of 25.8% and a reduced corporate income tax rate of 19% for the initial EUR 200,000 of profits. The lower 19% rate applies per taxpayer, meaning that entities consolidated for CIT purposes in a so-called fiscal unity can only make use of the lower rate once.

Participation Exemption

The participation exemption aims to prevent economic double taxation of profits that are distributed by a subsidiary to its parent company. Hence, all income derived by a parent company from a qualifying participation is exempt from Dutch corporate income tax.

In general, a shareholding is considered a qualifying participation if the parent company, or a related party thereof, holds at least 5% of the nominal paid-up share capital of the subsidiary and these shares are not held as a (deemed) portfolio investment.

In principle, the participation exemption applies to all income. However, based on an anti-abuse rule, this is not the case for income that gives rise to a tax deduction elsewhere.

As an exception to the general rule that all income from a qualifying participation is exempt, a deductible loss can, under strict conditions, be claimed in case of the liquidation of a qualifying participation. This loss can be claimed in the year that the liquidation is completed.

Consolidation Regime

Dutch tax law provides for a consolidation regime for group companies pursuant to which corporate income tax is levied from these companies as if they are one taxpayer. Such a consolidated group is referred to as a fiscal unity.

One of the conditions to form a fiscal unity is that the parent company has both the full legal and full economic ownership of at least 95% of the nominal paid-up share capital of each of the subsidiaries, and that this ownership represents at least 95% of the statutory voting rights of the subsidiary and entitles the parent company to at least 95% of the profits and the capital of the subsidiary. If this condition and certain other conditions are met, the companies can file a joint request with the Dutch tax authorities to form a fiscal unity.

One of the main advantages of a fiscal unity is that the losses of one company can be offset against the profits of another company (other than pre-fiscal unity losses, which can only be offset against profits on a standalone basis). Another advantage is that assets can be transferred tax-free within the fiscal unity, save for situations in which an anti-abuse measure applies.

Innovation Box

The Dutch innovation box regime provides for the possibility to be effectively taxed at a reduced rate of 9% (instead of the regular rate of 19–25.8%) with respect to qualifying benefits derived from qualifying intangible assets. To apply the innovation box regime, several (formal) requirements have to be met. An important condition is that the taxpayer has developed one or more intangible assets by means of research and development (R&D) activities, at its own risk and on its own account, for which one or more R&D wage tax certificates have been obtained from the Netherlands Enterprise Agency.

Advance Tax Rulings

The Dutch tax authorities (DTA) offer companies having a sufficient economic nexus with the Netherlands the opportunity to obtain certainty in advance on the application of Dutch tax law by concluding an advance pricing agreement (APA) or an advance tax ruling (ATR). An APA contains an agreement on at arm’s length remuneration or the method chosen for the determination thereof. An ATR offers certainty in advance on the applicability and scope of a tax clause or on the tax consequences of an intended transaction. The DTA are also willing to provide advance certainty on the minimum taxation (Pillar Two) rules applicable as of 31 December 2023.

In conclusion, the Netherlands continues to be attractive for international companies. The Dutch government makes efforts to preserve its key elements. Furthermore, changes made to the Dutch tax system to combat tax avoidance generally do not affect real economic activities in the Netherlands.