The participation exemption (or substantial holding exemption) is a key element in Dutch corporate tax. It prevents double taxation within company groups and allows tax-free profit distribution between group entities.
When does it apply?
The exemption kicks in when a parent company holds at least 5% of the nominal paid-in capital of a subsidiary, whether based in the Netherlands or abroad. Cooperative memberships can also qualify—regardless of capital percentage.
And here's the real benefit: all gains from the participation are tax-exempt. Think of dividends, capital gains, sales profits, and even acquisition costs. Revaluations related to earn-out and profit guarantees are also covered.
One exception? If the value of the participation drops due to losses, devaluation is not allowed in most cases. Only in liquidation, and only under strict conditions, may losses be deductible.
What changed in 2021?
Recent changes have narrowed the playing field. Since 2021, liquidation losses are only deductible if they meet these four criteria:
- Time limit: Losses must be taken within 3 years after ending operations.
- Origin: Only participations within the EU or EEA qualify.
- Control: The parent must have sufficient control, typically over 50%.
- Threshold: These limits apply only to losses above €5 million.
Investments? Different story.
If the participation is held as an investment, the exemption doesn’t apply. In that case, a tax credit may be available. Companies often request an Advance Tax Ruling to be sure.
A few extra rules
Changes in business structure can impact exemption status. In such cases, gains or losses must be split into taxable and non-taxable parts. Revaluations may also need to be booked, triggering a partitioning reserve.
And finally: under EU anti-abuse rules, the exemption doesn’t apply to deductible payments in hybrid structures.
