On April 29 2005 the Dutch Ministry of Finance has issued a white paper on the contemplated reform of the Dutch corporate tax system. Subject to the usual legislative process, the envisaged effective date is January 1 2007. In an international context the following highlights are of particular interest.

Reduction of the standard corporate tax rate

In addition to the recently announced reductions, it is now proposed to further reduce the tax rate to 27.4% in 2007 and 26.9% after that.

Participation exemption

It is proposed to abolish the portfolio investment test for foreign subsidiaries. The only condition for the application of the participation exemption will be a minimum ownership of 5% of the shares subsidiary. To a "passive" foreign subsidiary, however, the participation exemption will only apply if the profits of the subsidiary are subject to an adequate tax. If not, a tax credit will be applied.

Intercompany interest

It is proposed to introduce an intercompany interest box whereby the balance of interest paid and received on intercompany loans is taxed at a favourable rate (10% for example). Application would be optional, so that any negative balance can still be deducted at the standard tax rate.

Cross-border loss compensation

In response to the EU developments, it is proposed to extend the fiscal unity regime to non-Dutch group companies. As a result of the fiscal unity rules non-Dutch subsidiaries included in a fiscal unity will be treated as foreign branches with the effect that foreign branch losses will reduce the Dutch tax base, while foreign branch profits will generally be exempt. Foreign branch losses that have been set off in previous years will reduce the exemption of future branch profits and will be fully recaptured when the relevant activities are no longer carried out through a branch. All foreign branch profits and losses will have to be netted before applying the exemption or deduction.

Willem Specken (Willem.Specken@cliffordchance.com), Amsterdam