A recent Dutch lower court decision and a ministerial decree have both addressed the classification of participations in the Netherlands. In the court case a non-Dutch company had a permanent establishment in the Netherlands. This company also had shares in another Dutch company. The decision focused on whether the foreign company's shares in the Dutch company could, for Dutch corporate income tax purposes, be attributed to the permanent establishment rather than the foreign company. The advantage of such an attribution would be that the Dutch participation exemption would apply to the stake in the Dutch resident company.

The ministerial decree contains various conditions that must be met in order for the permanent establishment (rather than the foreign company) to be treated as the shareholder. One of those conditions is that the shareholder's permanent establishment should conduct a business and that this business should show a real link between the permanent establishment and the participation. The assets and liabilities should also be attributed to the permanent establishment. The shareholder may determine whether these conditions are met in advance, unless the main reason for this structure is to avoid Dutch dividend tax on the available reserves.

Contrary to the stringent conditions set out in the decree, the lower court held that if the entire business of the non-Dutch company is conducted through the Dutch permanent establishment, the participation can be attributed to the permanent establishment, even if the permanent establishment does not conduct a great deal of business. In this case, the entire business of the foreign company with a permanent establishment in the Netherlands was conducted by a manager and a secretary from an office in the Netherlands. The assets were primarily the participation in the Dutch holding company and the office in the Netherlands.

This decision is important for the tax planning of international companies that intend to distribute dividends from participations to a non-EU parent company. The shares in foreign participations will then be held by a Dutch holding company. The attribution of the shares in the Dutch holding company to the permanent establishment will result in the applicability of the participation exemption to distributions to the permanent establishment. Any subsequent distribution from the permanent establishment to its overseas headquarters in principle will not result in a taxable event.

For further information on this topic please contact David P S de Boer at Baker & McKenzie, Amsterdam by telephone (+31 20 5517555) or by fax (+31 20 626 79 49) or by email ( [email protected]).