Extensive Treaty Network and Unilateral Credits Support Foreign Investment: The Dutch Approach

Although the Netherlands has a worldwide system of taxation for residents, certain foreign profits are excluded from the tax base by treaty or internal law. The internal law exemption applies to active business income as well as certain passive income subject to a threshold tax rate of at least 10 %. The existing participation exemption removes from the Dutch income tax base certain dividends received from a 5 %-or-more owned foreign or domestic corporation. This participation exemption also encompasses certain gains realized on the sale of stock as well as on the liquidation of the corporation. There is a unilateral credit, available for Dutch recipients of dividends, royalties and interest payments from entities resident in developing counties. The Dutch participation exemption, the unilateral credit for specified investments, and the extensive treaty network provide considerable incentives for investment in developing countries.