You work hard to build up a successful business. You invest your personal savings and might even have to borrow starting capital from friends and family. In the initial stage of your business, you re-invest all profit in your business and work for the minimum wage. Your business slowly grows and your income too. For the time being, you do not put aside any money for your pension. You hope that the future sale of your business will be solving the gap in your pension savings. In meantime you pay wage tax over your salary and corporate income tax over the profits of your business. Once you get to the stage of selling your business, you do not want to pay high taxes on the capital gains of the sales.
Are the sales of a business taxed?
In many countries the profit of the sale of a business is taxed. Though this is not the case everywhere. In some countries there is no or limited personal and corporate taxation in general. Other countries have personal income and corporate taxes, though exempt the taxation of profits made with the sale of businesses. The Netherlands also has such exemption. It exists for companies that sell a subsidiary. This facility is called the participation exemption.
How does the Dutch participation work?
The reasoning behind the Dutch participation exemption is that corporate profits will only be taxed once. Operational companies in the Netherlands pay corporate income tax over their profits on a yearly basis (at a rate of 15% in the first bracket). To avoid double taxation, the income that a Dutch holding company receives from its (operational) subsidiaries will be excluded from taxation. This income can come from dividend distributions or capital gains. Capital gains are the profit resulting from the sale of shares. The profits exist of the difference between the sale price and the original price of the shares.
What are the conditions for the applicability of participation exemption in the Netherlands?
The subsidiary on which the Dutch participation applies can both be Dutch and non-Dutch resident. The main conditions for the applicability of the participation exemption are:
- the participation must take place in a legal entity with a capital divided into shares;
- the participation must represent at least 5% of the nominal paid-up capital or of the voting rights;
- the participation shall not be low-taxed.
It is advisable to set up the Dutch holding company at the start of the operational activities of the subsidiary. A Dutch notarial office (notariskantoor) or company formation agency can assist you with this. The shares of your operational companies can also be added to the holding company at a later stage. This shall be done by means of a purchase at net asset value of the shares operational company or a contribution of the shares into the holding company’s capital, a tax neutral rollover. The holding company must be put in place well before the sale of the shares of the operational company to avoid triggering any anti-abusive provisions. Dutch trust companies offer nominee director services to holding companies.
A holding company also enables you to have high risk activities, placed in the operational company, separated from low risk activities and valuable assets, placed in the holding company. In case of financial problems of the operational company, the valuable assets will be safeguarded.
Before you set up a Dutch holding company, please have yourself provided with advice from a Dutch and local tax advisor.