Tax legislation

The tax system in any given country is invariably an extremely important criterion when it comes to companies finding a country of incorpo-ration. The view taken by the Dutch government is that the tax system may under no circumstances form an impediment for companies wishing to incorporate in the Netherlands. In that framework, it is possible to obtain advance certainty regarding the fiscal qualification of international corporate structures in the form of so-called Advance Tax Rulings. In addition, the Netherlands has also signed tax treaties with many other countries to prevent the occurrence of double taxation.

The following are a few of the benefits offered by the Dutch tax system:

• The Netherlands does not charge tax at source on interest and royalties.
• In most cases all the profits that the Dutch parent company receives from foreign subsidiaries are exempted from tax in the Netherlands (participation exemption).
• The Netherlands offers attractive tax-free compensation in the form of the 30% scheme for all foreign personnel who are temporarily employed in the Netherlands.

The Dutch tax system can be divided into taxes based on income, profit and assets, and cost price increasing taxes.

Corporate income tax

Corporate income fax is charged to legal entities of which the capital is partially or fully divided into shares. Examples of such legal entities are the Dutch NV and BV. Companies based in the Netherlands are taxed on the basis of the companies' local revenues. The question as to whether a company is in effect based in the Netherlands for tax purposes is assessed on the basis of the factual circumstances. The relevant criteria are issues such as where the actual management is based, the location of the head office and the place where the annual general meeting of shareholders is held. Entities set up under Dutch law are deemed to be established in the Netherlands. Certain entities not established in the Netherlands that receive income from the Netherlands are foreign taxpayers. A foreign taxpayer receives profit from a Dutch enterprise if the enterprise is operated in the Netherlands using a Dutch permanent establishment or permanent representative.

Tax base and rates

Corporate income fax is charged on the taxable profits earned by the company in any given year less the deductible losses. The following are the applicable corporate income tax rates for 2010:

f a company incurred a loss in any given year, that loss can be deducted from the taxable profit of the previous year or from the taxable profit over nine subsequent years. This loss set-off has been temporarily extended. Losses may be carried back three years. In exchange for this the loss carry forward of nine years is cut to six years. This temporary measure applies for the tax years 2009 and 2010.

The company profits must be determined on the basis of sound commercial practice and on the basis of a consistent operational pattern This entails, among other things, that as yet unrealized profits do not need to be taken into consideration. Losses, set against them, may be taken into account as soon as possible. The system of valuation, depreciation and reservation that has been chosen must be fiscally acceptable and, once approved, must be applied consistently. The tax authorities will not subsequently accept random movements of assets and liabilities.

In principle all business expenses are deductible when determining corporate profits. There are however a number of restrictions with respect to what qualifies as business expenses.

Valuation of work in progress and orders in progress

In work and/or orders in progress profit taking may no longer be postponed. The constant part of overheads must be capitalised and a cumulative profit must be taken. The same applies for orders in progress.

Limited depreciation on buildings

As of 2007, certain restrictions apply with respect to the depreciation of business buildings. Effectively, this means that the taxpayer is entitled to depreciate the building until the book value has reached the so-called base value. The base value is determined with reference to the WOZ value (see above). Based on the latter regulations, the value of a building is determined, to the greatest extent possible, on the basis of its value in the economic environment. The base value for owner-occupied buildings is 50% of the WOZ value. The base value for buildings used as investments is 100% of the WOZ value.

Arbitrary depreciation

In the Netherlands in principle no more than 20% per year of acquisition or production costs may be depreciated on operating assets, other than buildings and goodwill. The minimum depreciation period is therefore 5 years. Under certain conditions goodwill can be depreciated by a maximum of 10% per year.

As a temporary measure, because of the economic crisis, companies may depreciate their investments made in the 2009 or 2010 over 2 years (50% per year). Depreciation is possible as soon as an investment commitment is entered into or production costs are incurred in 2009. The amount of arbitrary depreciation may not be higher than what was paid by way of investment commitment or incurred by way of production costs.

Excepted operating assets are:

• Buildings, earth, road and hydraulic engineering works, animals, intangible fixed assets (such as software), mopeds, motorbikes and passenger cars. However arbitrary depreciation may be made on taxis and very economical passenger cars.
• Operating assets intended primarily to be made available to third parties.

Participation Exemption

Participation exemption or substantial holding exemption is one of the main pillars of corporate income tax. The scheme was introduced to prevent double taxation. Profit distribution between group companies is exempted from tax.

A participation refers to a situation where a company (the parent company) is the owner of at least 5% of the nominal paid-up capital of a company that is based either in the Netherlands or abroad (the subsidiary).

Under the participation exemption, all benefits derived from the participation are tax exempt. The benefits include dividends, profits and losses in the sale of the participation and acquisition and sales costs. If the value of the participation falls due to losses incurred, devaluation by the parent company is in principle not permitted. Losses arising on liquidation of a participation can under certain conditions be deducted.

In principle, participation exemption does not apply if the parent company or subsidiary is an investment institution. It is however possible to appeal for a 'reduced tax investment participation'. To determine whether the participation exemption applies an intent test is used. This means looking at whether or not the participation is held as an investment. A participation in a company whose balance sheet consists for example of liquid assets, debentures, securities and debts is regarded as an investment. In the latter case the participant is not entitled to participation exemption, but is however entitled to appeal for a participation settlement.

Fiscal unity

If the parent company owns at least 95% of the shares of a subsidiary, the companies can submit a joint application for fiscal unity to the tax authorities, whereby the companies will be viewed as a single entity for corporate income tax purposes. The subsidiary is thereby effectively absorbed by the parent company. One of the most important advantages of a fiscal unity is the fact that the losses of one company can be set off against the profits of another company in the same group. The companies are thereby also entitled to mutually supply goods and / or services without fiscal consequences, and they are also entitled to transfer assets from one company to another.

Fiscal unity is only permissible where all of the companies concerned are effectively established in the Netherlands. In addition company and the subsidiaries must also use the same financial year and be subject to the same tax regime.

Innovatiebox (Innovation box)

In 2007 the patent box was introduced. Companies that have developed intangible assets (an invention or technical application) can deduct the development costs from the company's annual profits in the year in which the asset was developed. As soon as a patent has been granted for the intangible asses, the company can opt to place the benefits in the so-called patent box. With effect from 1 January 2008 the patent box has been extended with intangible assets for which patent has not been granted but which have arisen from a research and development project. The tax payer must have received a R& D declaration for this from Agentschap NL (see page)

With effect from 2010 the patent box has been given a new name: the innovation box. The rate for corporation tax for innovative activilies has been reduced from 10% to 5%. Losses on innovative activities can from now on be deducted al the normal rate of 25.5%.
The outsourcing of R&D work is also possible if the principal has sufficient activities and knowledge present.

A number of conditions must however be fulfilled to be able to qualify for the aforementioned tax benefits: For example, to make use of the innovation box the intangible assets must contribute at least 30 percent to the profit that the company receives from the intangible asset. The patent box does not apply to brands, logos, TV formats, copyrights on software and so on. The choice must be specified in the corporate income tax declaration.

Group interest box

In 2007 the Dutch government introduced the 'group interest box in corporate income tax. The purpose of the box is to tax the balance of interest paid and received between group companies at a special low tax rate of 5%. The company must fulfll a number of conditions to qualify for this allowance. The scheme was approved by the European Commission in 2009, The Netherlands has decided not to introduce the group interest box for the present however.

Thin capitalisation rule

On 1 January 2004, the government introduced a limitation on the interest deduction on corporate income tax; a system that is known as `thin capitalisation'. Based on this rule, the company is not permitted to deduct interest in so far as it is making use of excess levels of leveraged financing. The rule applies exclusively to companies that form part of a group.
The rule uses two tests to determine whether the company is making excessive use of leveraged financing, namely, a fixed ratio and a group test:

• Based on the fixed ratio criterion, the company is using excess leveraged financing where the fiscal leveraged finance exceeds the company's fiscal equity capital by more than three times reduced by a franchise of € 500,000.
• Based on the group test, the company is using excess leveraged financing where the ratio between reveraged financing and the company's equity capital, according to the commercial (consolidated) balance sheet, exceeds that of the group of which the company forms part of as a whole.

The maximum limitation on the interest deduction is the amount of the interest due to the allied (local and overseas) companies.

Additional limitation on interest deduction

With effect from 1 January 2008 the anti-abuse provision relating to interest deduction has been tightened up further. The Dutch tax authorities may from now on demonstrate that in the case of a group transaction no business considerations are involved, even tf the recipient pays 10% or more tax abroad. In that case the interest paid within the group is not deductible. The interest for ordinary business transactions does however remain deductible. Evidence to the contrary is however possible with the so-called evidence to the contrary ruling. If the requirements for this ruling are met, the deduction of interest is restored.

Arm's Length Principle

The Dutch corporate income tax legislation includes an article that determines that national and foreign allied companies are entitled to charge one another commercial prices for mutual transactions. This is however subject to an obligation to keep due documentation of all relevant transactions. This enables the Dutch tax authorities to determine whether the transaction between the applicable allied companies are conducted based on market prices and conditions. It is possible to obtain prior assurance of the fiscal acceptability of the internal transaction with the use of the so-called Advance Pricing Agreement'.

Tax declarations

The corporate income tax declaration must be submitted to the fax authorities within six months of the end of the company's financial year.

Income tax

Income tax is a tax levied on the income of natural entities with domicile in the Netherlands (domestic taxpayers). They are taxed on their full income wherever it is earned in the world. Any natural person who is not domiciled in the Netherlands, but earns an income in the Netherlands, is liable to pay income tax on the income (foreign taxpayers). Foreign taxpayers can also opt to pay domestic taxes. In the latter instance, the taxpayer is subject to all the rules applicable to domestic taxpayers.
In principle, income tax is charged on an individual basis: Married persons, registered partners and unmarried cohabitants can however mutually distribute certain joint income tax components.

Tax base
Income tax is charged on all taxable income. The different components of taxable income are broken down into three 'closed' boxes; each at a specific tax rate.
Each source of income can only be entered in one box. A loss in one of the boxes cannot be deducted from a positive income in another box. A loss generated in Box 2 can be deducted from a positive income in the same box in the previous year (carry back) or in one of the nine subsequent years (carry forward). A loss in Box 1 can be deducted from a positive income in the same box in the 3 preceding years or in one of the subsequent 9 years. Box 3 does not recognize a negative income.

Box 1: Taxable income from work and home

The income from work and home is the sum of:

• The profit from business activities;
• The taxable wages;
• The taxable result of other work activities (e.g. freelance income or income from assets made available to entrepreneurs or companies);
• The taxable periodic benefits and provisions (e.g. alimony and government subsidies);
• The taxable income derived from the own home (fixed amount reduced by a deduction equivalent to a specified interest paid on the mortgage bond);
• Negative expenditures for income provisions (e.g. repayment of specific annuity premiums);
• Negative personal tax deductions.

The following allowances apply to the above-mentioned income components:

• Expenses for income provisions (e.g. premiums paid for an annuity insurance policy or a disability insurance);
• Personal deductions. This concerns costs related to the personal situation of the taxpayer and his family that influence his ability to support himself and his dependents (e.g. medical expenses, school fees and specific living expenses for children).

The tax rate in Box 1 is progressive and can accumulate to a maximum of 52%.

Business allowances and exemptions for Small and Medium-size Enterprises (SME) (MKB in Dutch)
A natural person who derives income from business activities qualifies for tax allowances for entrepreneurs under certain circumstances. The tax allowances for entrepreneurs include self-employed allowance, research and development allowance, overtime allowance and discontinuation allowance. In addition, a starting entrepreneur is also entitled to a start-up allowance.

The SME Allowance (MKB-vrijstelling) will also come into effect in 2007. This entails that entrepreneurs will be entitled to an additional exemption of 12% (2010) of the profits following deduction of the start-up allowance.

Box 2: Taxable income from substantial interest

Substantial interest applies where the taxpayer, with or without his partner, is a direct or indirect holder of a minimum of 5% of the paid-up capital in a company of which the capital is distributed in shares.

The income from substantial interest is the sum of the regular benefits and / or sales benefits reduced by deductible costs. Regular benefits include dividend payments and payments on profit-sharing certificates. Sales benefits include the gains or losses on the sale of shares. Examples of deductible costs include the following: consultancy fees and the interest on loans taken out to finance the purchase of the shares.

The tax rate in Box 2 is 25%.

Box 3: Taxable income from savings and investments

Box 3 charges tax on the taxpayer's assets. This assumes a fixed return on investment of 4% of the yield base. The yield base is the average value of the assets less the average value of the debts. The average value is obtained by adding up the assets at 1 January and at 31 December and dividing the sum by two.

The following assets are included under Box 3: Savings, a second house or holiday house, properties that are leased to third parties, shares that do not fall under the substantial interest regime and capital payments paid out on life insurance. Debts in Box 3 include the following: Consumer loans and mortgage bonds taken out to finance a second house. Per person, the first € 2,900 (2010) of the average debt is not deductible from the assets.

Untaxed assets
All taxpayers are entitled to untaxed assets in Box 3 of € 20,661 (2010). The amount is intended to reduce the yield base. The untaxed assets can be increased by a child allowance of € 2,762 (2010) per minor. Taxpayers of 65 and older are entitled to an extra increase up to a maximum of € 27,350 (2010) under certain conditions. A fixed return of 4% is then calculated on the amount remaining after deduction of the exemption. 30% fax is then paid on this return.
The tax rate in Box 3 is 30%.

Tax allowances
Once the due tax has been calculated for each box, certain tax allowances are deducted from those amounts. All domestic taxpayers are entitled to a general tax allowance of € 1,987 (2010). Depending on the personal situation of the taxpayer and the actual amount of the annual income, the taxpayer may also be entitled to additional tax deductions.

Advance tax payments
Tax is withheld in advance over the course of the fax year for income deriving from work activities and from dividends. Both wage withholding and dividend fax are advance fax payments on income. The withheld amount may be deducted from the income tax due.

Tax declaration
The income tax declaration for any given fax year must be submitted to the fax authority in principle before 1 April of the next year. If a firm of accountants produces the return an extension scheme applies. This means that the return may also be submitted later in the year.

Dividend tax

Companies often pay out profits to the shareholders in the form of dividends. The following are further examples of dividend situations:

• Partial repayment of the moneys paid up on shares by shareholders;
• Liquidation payments above the average paid-up equity capital;
• Bonus shares from profits;
• Constructive dividend. This concerns situations in which the shareholder sells something to the company at a lower value than the prevailing value in the market. in other words, this works to the company's advantage;
• Compensation received for a cash loan, where the loan was taken out under such conditions that it effectively functions as corporate equity capital.

The company (liable for withholding the tax) that pays out the dividend is bound to withhold the dividend tax and to pay it to the fax authorities.

Exemption
No tax is withheld, among others, in the following situations:

• Where, in inland relationships, benefits are enjoyed from the shares, profit-sharing certificates and cash loans of participations to which the participation exemption applies;
• If a Dutch company pays out dividends to a company established in a member state of the European Union and the company holds at least a 5% share of the Dutch company.

Tax rate
The tax rate for dividends is 15%. The tax is withheld by the company that pays out the dividends and pays it to the fax autho The dividend tax withheld serves as an advance tax payment on income and corporate income tax. The Netherlands has signed tax treaties with various other countries, as a result of which a lower fax rate will apply in many instances.

Prevention of double taxation

Residents of the Netherlands and companies that are registered in the Netherlands must pay tax on all revenue generated worldwide. This could result in any given income component being taxed both in the Netherlands and abroad.

To prevent this kind of double taxation, the Netherlands has signed tax treaties with many other countries. The treaties are largely modelled on the OESO Model Treaty for the prevention of double taxation.

If an income tax component is nevertheless double-taxed as income or corporate income tax, the taxed amount is reduced based on the exemption method. The method entails a reduction of the Dutch tax related to the foreign income. The exemption on the income tax is calculated per box.
Double taxation of dividend payments and interest payments and royalties is prevented with the use of the settlement method. The use of this method means that the Dutch tax is reduced by the amount of tax charged abroad.

In certain situations it is also possible to deduct the foreign tax directly from the profits or as costs related to income.

The 30% rule

Foreign employees who come to work in the Netherlands temporarily qualify for the 30% Rule under certain circumstances.
The rule entails that the employer is entitled to pay the employee a tax-free remuneration to cover the extra costs of their stay in the Netherlands (extraterritorial costs). The disposition is only valid for a maximum period of 10 years, and the situation can be reviewed after 5 years. The compensation amounts to 30% of the salary, including the compensation, or 30/70 of the salary excluding the compensation. The condition is that, based on this salary, the employee is not entitled to prevention of double taxation. 1f the employer reimburses more than the maximum amount, then this is additional salary before salary deductions.

Conditions for qualification for the 30% rule

1. The employee has a permanent job;
2. The employee has a specific expertise that is hardly or not at all available in the Dutch employment market. This is, in any event, the case if the employee is employed in the mid or upper levels of the management of an international company and is sent to the Netherlands on a rotational basis. The employee must have been employed by the company for a period of approximately 2.5 years.

Extraterritorial costs
The extraterritorial costs consist of the following, among other things:

• extra cost of living because of the higher cost of living in the Netherlands than in the country of origin (cost of living allowance);
• the cost of an introductory visit to the Netherlands, with or without the family;
• the cost of the application for a resident's permit;
• double housing costs, because the employee will continue his or her residence in the country of origin.

The following aspects are not covered by the extraterritorial costs and can therefore not be compensated or granted untaxed:

• the overseas posting allowance, bonuses and comparable compensations (foreign service premium, expat allowance, overseas allowance);
• loss of assets;
• the purchase and sale of a house (reimbursement of house purchase expenses, agent's fee);
• the compensation for higher tax rates in the Netherlands (tax equalization).

If the employee has children, the employer is entitled to offer the employee tax-free compensation for school fees at an international school in addition to the 30% rule. Other professional costs can be compensated untaxed based on the normal rules applicable to the Wages and Salaries Tax Act (Wet op de loonbelasting).

If the extraterritorial costs add up to more than 30%, then the actual costs that have reasonably been incurred can also be compensated tax-free. It must however be possible to demonstrate that the costs incurred are justifiable.

To be able to make use of the 30% rule, the employer and the employee must jointly submit an application to the Foreign Office of the tax authorities in Limburg (Belastingdienst/Limburg/kantoor Buitenland). If the application is approved, the tax authorities will issue a decision.

The decision is valid for a maximum period of 10 years. Should the request be made within four months after the start of employments as an extraterritorial employee by the employer, the decision shall be retroactive to the start of employment as an extraterritorial employee. If the request is made later, the decision shall apply starting the first day of the month following the month in which the request is made. The ten-year period is reduced by previous periods of stay or employment in the Netherlands.

In addition, the employee can also submit an application for registration as a partial foreign taxpayer for tax purposes in the Netherlands. This entails that he will be entered as a foreign taxpayer in Box 2 and 3.

Value Added Tax (VAT)

The Dutch turnover or value added tax system is based on the European Directive concerning tax on added value. Tax is due the Added Value (VAT or 'BTW' in Dutch). This entails that tax is charged at each and every stage of the production chain and in the distribution of goods and services. Businesses charge one another VAT for goods and / or services provided. The company that charges the VAT is required to pay the VAT amount to the tax authorities. If a company is charged VAT by another company, it is entitled to deduct the VAT amount from VAT due on the company's part. By doing so, the system ensures that the end user is effectively responsible for paying the VAT. Foreign companies that perform taxed services in the Netherlands are in principle also liable to pay VAT. Those companies, too, will be required to pay the VAT due in the Netherlands and will therefore also be able to claim the VAT invoiced to it by Dutch companies.

Exemptions
Not all good and services in the Netherlands are subject to VAT. The following services are VAT exempt: medical services, services provided by educational institutions, most banking services, insurance transactions, services performed by sports organizations and property rentals. Companies that provide exempted services are not entitled to charge VAT for their services. In addition, they are also not entitled to claim the VAT charged to them for goods and services. Companies that perform both VAT liable and VAT exempt services will assign VAT to those specific services on which VAT is due.

The VAT system in the internal European market
Europe has recognized the existence of an internal European market since 1 January 1993. From that date on, the European Union has recognized the free traffic of goods, persons, services and capital in the EU. Performances within the European Community are referred to as the intracommunity supply and acquisition of goods and intracommunity services. VAT is charged based on the destination country principle. This means that goods that cross the border to another EU country are taxed in the destination country. With effect from
1 January 2010 there is a new main mle for business to business services (B2B). These are from now on usually taxed in the country where the customer is established or has a permanent establishment.

Tax rates
The general VAT tax rate is 19%. The Netherlands also has a low VAT rate of 6%. Goods and services falling under the low tax rate are specified in Table 1 of the Turnover Tax Act (Wet op de omzetbelasting 1968). This applies, among other things, to foodstuffs and medicines. The zero rate is mainly intended for goods exported to outside the EU and for goods exported to other EU members states.
All companies are bound to submit VAT declarations. lf the company also supplies goods or services to elsewhere in the European Union, it is also bound to fill in the Opgaaf Intracommunautaire Prestaties (Intracommunity Supplies) tax form.

Excise and other Duties

Excise duty
The Netherlands charges excise duties on alcohol-containing beverages, tobacco, fuel and other mineral oils. Manufacturers, traders and importers pay excise duties to the tax authorities, The Excise Duty Act (Wet op de accijns) in the Netherlands is fully harmonized with the applicable EU directives.

Environmental taxes
The Netherlands charges the following environmental taxes:

• Groundwater tax
• Tax on mains water
• Waste tax (Afvalstoffenbelasting)
• Fuel tax
• Energy tax
• Packaging tax

Groundwater tax

The taxes are paid by companies that extract groundwater. The amount of tax due is based on the amount of cu groundwater that is extracted by the company. The rate is € 0.1951 per m3.

Tax on mains water
The Netherlands charges tax on mains water. All companies and households pay tax on a maximum per connection per annum. The rate is € 0.157 per m3.

Waste tax (Afvalstoffenbelasting)
Waste fax is charged on all dumped waste. The rate is € 107.49 per 1,000 kg of dumped waste. The rate for non-burnable waste and waste that should not be incinerated is subject to a rate of E 16.79 per 1,000 kg.

Fuel tax
Fuel tax is paid by the producers and importers of coal. The rate is € 13.42 per 1,000 kg coal.

Energy tax
The purpose of energy tax is to reduce CO2 emissions and to reduce energy consumption. The energy fax is charged to the user of the energy (natural gas, electricity and certain mineral oils). The rates are related to the amounts used, whereby the rates are progressively reduced as consumption increases.

Packaging tax
With effect from 1 January 2008 the Netherlands has introduced a new tax: the packaging tax. The principal pays the tax. The tax is also payable by people who for the first time market a packaged product or an (empty) packaging together with a product. For each taxpayer there is a tax threshold of 50,000 kg. The packaging tax is only paid on the amount of packaging’s that exceed the threshold. Businesses who make available or market less than 50,000 kg of packaging’s are not affected by the packaging tax and also do not have to notify the Dutch Tax Authorities.