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How Controlled Foreign Corporation Rules Look Around the World: Netherlands

5 min readBy: Sebastian Dueñas, Daniel Bunn

The Netherlands did not have a CFC regime until it was made mandatory by the European Commission Anti-TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Avoidance Directive (ATAD). The debut of CFC rules in the Dutch tax system was in January 2019.

The Dutch system includes a full participation exemption for foreign capital gains and dividends as well as favorable tax regimes for patent income, investment vehicles, and income derived from shipping activities. The system does not include withholding taxes on interest or royalty payments. Following the adoption of the CFC rules, however, some of the benefits due to these policies will probably end soon or at least be modified.

The Dutch Finance Minister recently announced a review of the entire tax system to get a better perspective of what needs to be reformed in the near future. The Dutch authorities have also announced the enactment of a conditional withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. tax on payments made to low-tax jurisdictions as part of the modifications starting in 2021.

Shareholding requirement for the control determination

The CFC determination applies not only to any incorporated form of businesses, but it also includes permanent establishments in the definition.

A permanent establishment is a broad concept used in international tax to indicate when there is a particular level of business activity in a country that does not operate as an incorporated business. A permanent establishment always gives rise to income or value-added taxes in the jurisdiction where it is operated.

As an example, consider a Dutch company that sells tulips to the U.S. that is trying to increase its U.S. sales. To do that the company may decide to send an employee to the U.S. and rent an office and some other facilities to send some samples of the plants to the U.S. This employee would work under the supervision of someone in the Netherlands. Even if the company has not decided to incorporate a separate subsidiary in the U.S., the employee managed by the office in the Netherlands can constitute a permanent establishment (PE) of the company in the U.S., and that PE can be considered a CFC of the Dutch parent.

Under the new set of rules, a foreign entity is considered a CFC if

  • a Dutch corporate taxpayer has a direct or indirect interest of more than 50 percent in that entity,
  • its income consists of more than 30 percent passive income, and
  • the entity is considered low-taxed (located in a jurisdiction with a corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate below 9 percent).

To show how this works think of a company incorporated in the Netherlands that owns a 60 percent direct interest in a company incorporated in Barbados. The income from the Barbados subsidiary mostly consists of income from licensing contracts between the Barbados company and other companies in the world. The total share of the income from licensing fees which would be considered passive income represents 80 percent of the Barbados subsidiary total income. As a country, Barbados does not have a corporate income tax, which means that the Barbados subsidiary would not pay income tax in that country. Given that the Barbados subsidiary complies with all the requirements stated in the Dutch legislation, it would be considered a CFC of the Netherlands parent company.

Applicability of the rules

In the Netherlands, a foreign company or a permanent establishment is considered a CFC when the entity is a tax resident in a jurisdiction without a corporate income tax or where the statutory corporate income tax rate is lower than 9 percent or if the country where the CFC operates has been included in the blacklist of non-cooperative jurisdictions.

The CFC rules are waived in cases where it can be proved that the CFC carries substantial economic activities by means of organizational, economic, or other relevant characteristics of the group as part of the structure and strategy. The safe harbor is satisfied when the wage costs of the CFC are at least 100,000 Euro and the CFC has an office space at its disposal for a period of at least 24 months.

Think of this as if the same Dutch company that was mentioned before incorporates a subsidiary in Luxembourg as a business and financial hub for the operations in Europe. For that purpose, the company rents office space in the country, hires employees, and deals with expenses that are more than 100,000 Euro a year. Because the requirements to apply for the safe harbor are met, the CFC rules will not be applicable for the subsidiary.

What is the type of income that is taxable: all income or just passive income?

The Netherlands’ CFC rules generally apply to passive income. Some categories of passive income include dividends, interests, royalties, benefits from the sale of shares, and leasing income. If the passive income of the CFC does not exceed 30 percent of the total income, then there is no CFC income inclusion to the shareholder according to Dutch rules. Certain categories of passive income that are not distributed by a CFC have to be allocated to the parent company and taxed in the Netherlands according to the rules. The rules allow entities to deduct the costs related to the generation of passive income.


The Dutch tax system is characterized by its simplicity and the attractiveness to investors. With the incorporation of CFC rules, the Dutch government protected its tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. from erosion and profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. . The Netherlands is facing a whole series of adjustments that would create a more complex system adapted to the international standards recommended by the OECD and adopted by the European Union Council. When revising the rules authorities must be mindful about not making the system more complex and to avoid increasing the compliance burden in the country.

Note: This is the third of nine posts which describe how CFC rules work in the United States, China, Spain, Germany, Colombia, France, Netherlands, Japan, and the United Kingdom. A longer discussion of the history of CFC rules and more details on these countries can be found here.

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