Companies and organisations that are subject to corporate income tax are referred to as ‘entities’ to distinguish them from ‘natural persons’ who are subject to income tax. Examples of companies that are subject to corporate income tax are corporations of which the capital is divided into shares and cooperatives. The main types of companies referred to in the Corporate Income Tax Act are the public limited (nv) and the private limited (bv) company.

Companies established in the Netherlands are resident taxpayers. Certain companies that are not established in the Netherlands but which do derive Dutch income are non-resident taxpayers.
Whether a company is deemed for tax purposes to be established in the Netherlands is assessed on the basis of the factual circumstances. Relevant factors specifically include the place of actual management, the head office location, and the place where the general meeting of shareholders is held. Under the Corporate Income Tax Act all companies incorporated under Dutch law are regarded as being established in the Netherlands.

Tax rates

Corporate income tax is levied on the taxable profits made by a company in a given year less deductible losses. Corporate income tax is levied at a rate of 25.5% (24.5% as from 2007) on the first € 22,689 of the taxable profits and at 29.6% (29.1% as from 2007) on the excess. There are plans for further reduction.

Profits on the principle of sound business practice
Determination of profits on the principle of sound business practice
Profits must be determined on the principles of sound business practice and in a consistent manner. According to sound business practice, for example, allowances may be made for unrealised losses, while profits not yet realised may be disregarded.

The consistency requirement means that there must be a certain degree of continuity in the method used to determine the results. The method may only be changed if this is in line with sound business practice.

Depreciation of fixed assets

Fixed assets used for running a company are depreciated on an annual basis. In principle, taxpayers are free to choose any depreciation method, but the method chosen must be in line with sound business practice. In general, the straight-line method is used. This method entails a fixed percentage being charged each year for the entire period of depreciation.

Stock valuation
The way in which stock is valued affects how profits are determined. The following stock valuation methods are permitted:

• valuation based on cost
• valuation based on cost or lower market value
• the base stock method.

Valuation at cost price complies with the principle of sound business practice, unless the market value is significantly lower than the cost price. In that case the lower value may be entered. In this system an unrealised profit is ignored, while unrealised losses may be taken into account immediately. The value of the stock can be determined either by the ‘first in, first out’ (fifo) or ‘last in, first out’ (lifo) method. When calculating the profit, the fifo method considers that the stock purchased first, is sold first. The lifo method assumes that the stock purchased last, is sold first.
Under certain conditions, on the basis of case law, the base stock method is permitted. The base stock is the stock a company needs to continue its production and sales processes.

When are costs deductible?
In principle, when determining profits all the business expenses may be deducted. However, the deductibility of certain business expenses is subject to restrictions. The interest paid on loans may sometimes only be partly deducted from profits. This may be the case when a company has too many debts in relation to its equity capital.

Reserves

A company may build up certain reserves (thus enter lower profits) by making a deduction from its profits. Examples of permitted reserves are the cost equalisation reserve and the reinvestment reserve.

The cost equalisation reserve enables recurrent costs to be spread evenly over a period of time. The deduction is then made in a year in which expenditure is not yet incurred while the costs of running the company are in fact incurred in that year. Examples include large-scale maintenance or environmental damage.

A reinvestment reserve may be created if fixed assets have been lost, damaged, or sold to the extent that the payment received exceeds the book value of the assets. The amount received is thus not considered to be profit or taxed as such in the year in which the amount was received. To be eligible for this reserve the company must have the intention of re-investing. Generally speaking, the reserve must be terminated in the third year following the year in which it was formed.

Set off of losses

A company may set off its losses against its taxable profits for the three preceding years (carry back) and against its taxable profits for all years to come (carry forward).
The losses incurred by an investment institution or a company ceasing operations entirely may only be set off against future profits if at least 70% of its shares continue to be held by the same natural persons. If a company reduces its business activities by more than 70% and less than 70% of its shares remain in the hands of the original shareholders, losses that have not been set of may only be set off against future profits. However, these profits must be generated by the company’s original activities.

Losses of a holding company or group financing company may only be set off against later profits of years in which the company activities still consist of at least 90% group financing or of holding participations.