The participation exemption is one of the most significant provisions in the Dutch corporate income tax system, and a primary reason why the Netherlands remains one of Europe's leading jurisdictions for international holding structures. For businesses operating through a Dutch holding company, or considering doing so, understanding this exemption is essential. 

This article provides a clear overview of how the participation exemption works, who qualifies, what has changed in 2026, and what to watch out for. 

What Is the Participation Exemption? 

When a Dutch holding company owns shares in a subsidiary, that subsidiary's profits are first taxed at the corporate level in the country where it operates. Without a specific relief mechanism, the Netherlands would then tax those same profits a second time when they are distributed upward, as dividends, to the Dutch parent. This is known as economic double taxation. 

The participation exemption eliminates this outcome. Under Dutch corporate income tax law, all income derived from a qualifying shareholding — including dividends, capital gains on the sale of shares, and certain other returns — is fully exempt from Dutch corporate income tax at the level of the holding company. The exemption applies to both domestic and foreign subsidiaries, making it particularly valuable for multinational group structures. 

Who Does It Apply To? 

The participation exemption is available to all companies subject to Dutch corporate income tax, including foreign companies with a Dutch permanent establishment (such as a branch office). There is no restriction based on the country where the subsidiary is located; the exemption covers subsidiaries worldwide. 

The exemption does not apply to Dutch fiscal investment institutions (fiscale beleggingsinstellingen), which are regulated investment funds subject to a separate tax regime. 

What Income Is Exempt? 

Once a shareholding qualifies, the exemption covers a broad range of income derived from it: 

• Dividends, whether distributed in cash, shares, or in kind; 
   
• Capital gains realised on the disposal of the shares; 
   
• Foreign exchange results related to the participation; 
   
• Increases in the book value of the shareholding. 

The exemption operates symmetrically: because income from the participation is tax-free, costs directly attributable to it — such as acquisition costs or management fees charged to the holding company — are generally not tax-deductible. Financing costs (e.g. interest on a loan used to acquire the subsidiary) remain deductible, though corresponding gains on such funding are taxable. 

Core Requirements 

A Minimum 5% Shareholding 

To qualify for the participation exemption, the Dutch company must hold at least 5% of the nominal paid-up share capital of the subsidiary; that is, 5% of the face value of the shares issued, not their market value. In certain circumstances, a 5% stake measured by voting rights may also be sufficient. For participation in cooperatives, no minimum percentage applies. 

Maintaining this threshold consistently is important: a temporary dip below 5%, even if brief, can jeopardise the exemption for the entire fiscal year. There is no minimum holding period required for dividend income. For capital gains, however, the exemption must have applied continuously throughout the holding period. If the subsidiary fell outside the exemption's scope at any point, the gain on disposal may be fully taxable. 

Qualifying Tests: Active Business vs. Passive Investment 

Reaching the 5% threshold is a necessary condition, but not a sufficient one. The participation exemption is intended to support genuine business investments, not to shelter passive or low-taxed portfolio holdings. Three tests determine whether a shareholding qualifies. 

The Motive Test 

The motive test is the default, and most commonly satisfied, criterion. It asks whether the shares are held as part of an active business strategy. Because the Dutch company manages the subsidiary, the subsidiary should serve a commercial function within the group, or the investment should be integral to the parent's business operations. 

The test fails only if the participation is held purely as a passive financial investment, with no active involvement or strategic purpose. Most standard holding structures will satisfy this test without difficulty. 

If the motive test is met, no further assessment is required. 

The Subject-to-Tax Test 

Where the motive test is not satisfied, the subject-to-tax test offers an alternative route to qualification. If the subsidiary is subject to a genuine profit tax of at least 10% in its country of residence, the participation exemption applies regardless of the subsidiary's asset composition. 

This test ensures that the exemption is not used to avoid tax on income that has been routed through jurisdictions with little or no corporate taxation. 

The Asset Test 

If the subsidiary is subject to a tax rate below 10% in its home jurisdiction, the asset test becomes decisive. The participation can still qualify if the subsidiary's assets consist primarily of active business assets rather than passive investments. Specifically, if no more than 70% of its consolidated assets (measured at fair market value) are comprised of low-taxed, passive portfolio investments. 

The 70% threshold was increased from 50% following legislative changes in 2020, making it somewhat more accessible for subsidiaries with mixed activities. 

When the Exemption Does Not Apply 

If a shareholding fails the qualifying tests, a full exemption is not available. However, alternative relief may apply: 

• A fixed tax credit of 5% on gross income from the participation; or 
   
• A credit for the actual underlying tax paid by the subsidiary, available for EU-based participations under the EU Parent-Subsidiary Directive. 

Participations that are insufficiently taxed and consist of at least 90% passive portfolio assets must be valued at fair market value each year (mark-to-market), with resulting deemed income subject to a gross-up of 100/95. 

Losses and the Liquidation Exception 

Generally, losses on qualifying participations are not tax-deductible, consistent with the exemption's symmetrical treatment of income and costs. 

There is one notable exception: liquidation losses. When a subsidiary is fully wound down and liquidated, the loss suffered by the Dutch parent may be deductible, subject to strict conditions: 

• The loss must be final, with all operations ceased and assets fully distributed; 
   
• For non-Dutch subsidiaries, only those based in the EU or EEA qualify; 
   
• The parent must have held more than 50% of the subsidiary; 
   
• The loss must be claimed within 3 years of the subsidiary ceasing operations; 
   
• The threshold applies only to losses exceeding €5 million. 

Relevant Developments for 2026 

The participation exemption has been subject to ongoing legislative refinement and judicial clarification. The following updates are relevant for 2026: 

• Anti-hybrid rules prevent the exemption from applying where a payment is deductible in the subsidiary's jurisdiction but exempt in the Netherlands, a structure that would otherwise result in double non-taxation; 
   
• ATAD II (implemented 2020) tightened the rules for passive, low-taxed subsidiaries and raised the asset test threshold from 50% to 70%; 
   
• Dutch Supreme Court rulings (2023–2025) have clarified several technical points, including the treatment of foreign exchange gains on delayed dividend receipts, the deductibility of exit-related costs paid after a share sale, and the scope of the exemption in relation to certain financial derivatives; 
   
• Revised policy guidance (2025) has narrowed rollover relief and tightened liquidation loss rules in certain intra-group scenarios; 
   
• For businesses where qualification is uncertain, Dutch tax law provides the option of requesting an Advance Tax Ruling (ATR) — a formal written confirmation from the Dutch tax authorities on how the exemption applies to a specific structure. This is a widely used instrument and can provide valuable certainty before committing to a holding arrangement. 

The Dutch participation exemption remains a powerful and well-established feature of the Netherlands' corporate tax framework. When properly structured, it enables tax-neutral profit distributions, tax-free share disposals, and efficient capital management across international group structures. 

Qualification is not automatic, however. It requires ongoing attention to shareholding thresholds, the nature of the subsidiary's activities, its local tax position, and evolving case law. For businesses establishing or reviewing Dutch holding structures, a timely assessment by a qualified tax advisor is the most reliable way to ensure continued eligibility. 

Are you looking for tax advisory or ongoing support with your business’ alignment regarding the Participation Exemption? Contact us!