The Dutch government has announced plans to change participation exemptions rules in a bid to improve the country's investment climate.
In its 2010 budget plans, announced on September 15, the Ministry of Finance said it will reintroduce the motive test. Before 2007 the motive of the taxpayer for holding shares in a foreign subsidiary was used to determine whether or not the participation exemption applied.
In 2007, the government changed the rules introducing an asset test and a subject to tax test.
These tests turned out to be complex. "Dealings with the tax authorities revealed it was impossible to meet with the test requirements," said Martin de Bruin, a partner at Stibbe in the Netherlands.
Since the introduction of these tests, the applicability of the participation exemption has been uncertain in some cases and has come with a high administrative burden, in particular for holding companies. The change was made to block the use of the Netherlands as a holding company jurisdiction for low taxed investment participations.
Under the new rules the participation exemption will not apply to domestic and foreign subsidiaries which are held as passive investments.
The new rules follow the release of a consultation document in June this year proposing the relaxation of the country's rules in this area. The latest plans did not mention the tax treatment of group interest and interest payments in relation to acquisitions and participations, which were also part of the government consultation.
"Given this timing it is unlikely that the proposals to limit tax deduction for interest will become effective on January 1 2010," said René van Eldonk, a partner at Simmons & Simmons in the Netherlands.
The budget plans also include changes to the country's withholding tax regime and minor changes to the corporate income tax rate. The rate is reduced to 20% for the first €200,000 ($293,000) of taxable profit. However, the rate remains at 25.5% for the remainder.
Loss carry forward rules have also been relaxed and will now go back three years. "The bad news is that if you opt for the three year carry back the loss carry forward is reduced from nine years to six years. This is a temporary measure and is a reaction to the financial crisis," said Michael Molenaars, a partner at Stibbe in the Netherlands.
The new measures are expected to come into force on January 1 2010.
