The Territorial Taxation Experience in the Netherlands

November 21, 2012

In an effort to see what lessons the United States can learn from other countries that practice a territorial tax system, the Tax Foundation released a case study on the Netherlands to evaluate its experience with a territorial tax system.

Since 1893, the Dutch have always exempted foreign profits -- and for good reason.

  • First, the country respects the ability of other nations to tax the business profits within their own borders.
  • Second, the Netherlands' domestic market of 16 million people is too small for innovative companies, meaning companies must be able to compete with other multinationals to gain a foothold in foreign markets.

The Dutch system is characterized by many exemptions, which benefit their companies that go abroad.

  • Several types of investment, including portfolio investment and financing activities are exempt.
  • Passive income can be exempt if it was taxed at an effective rate of at least 10 percent in whichever jurisdiction it was made in.
  • For foreign dividends that are not exempt, firms may receive a foreign tax credit and a deferral regime.

In order to keep jobs and innovation in the Netherlands, the country imposes a tax rate of 5 percent on qualifying income from intangible assets. This disincentivizes the shift of intangible property and income to tax havens. The Dutch system also offers many possibilities for deducting expenses from gross income. As a result, many companies locate to the Netherlands, which is considered to have the most attractive corporate tax system in Europe.

The Dutch employment figures are generally high, and have consistently performed better than the United States since 1998. The Netherlands also outperforms the United States in tax revenue collection. As a matter of fact, it has collected more than the Organization for Economic Cooperation and Development average until very recently.  This is especially surprising considering that the corporate tax rate has been lowered from 35 percent in 2001 to 25 percent.

Source: "The Territorial Taxation Experience in the Netherlands," Tax Foundation, November 16, 2012.

 

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