Controlled Foreign Company (CFC) Rules in Netherlands
- Roger Pay
- Jul 15
- 5 min read
Dutch CFC Rules Explained
Controlled Foreign Company (CFC) Rules in Netherlands
The Netherlands implemented Controlled Foreign Company (CFC) rules in its legislation on January 1, 2019, in accordance with the first European Union (EU) Anti-Tax Avoidance Directive (ATAD 1). These rules aim to combat tax avoidance by preventing Dutch taxpayers from shifting passive income to low-tax jurisdictions.
Here's a breakdown of the key aspects of the Dutch CFC rules:
1. Definition of a CFC:
A foreign entity or permanent establishment is generally considered a CFC if it meets all three of the following conditions:
Control: A Dutch corporate taxpayer (directly or indirectly, or together with affiliated companies) holds an interest exceeding 50% (in vote or value) in the foreign entity or branch.
Passive Income Threshold: More than 30% of the foreign entity's or branch's income consists of "tainted" (passive) income. This includes, but is not limited to, dividends, interest, royalties, benefits from the sale of shares, and leasing income.
Low-Taxed Jurisdiction: The foreign entity or branch is a tax resident in a jurisdiction that:
Does not subject the entity to corporate income tax.
Subjects the entity to tax at a statutory rate of less than 9%.
Is included on the EU list of non-cooperative jurisdictions for tax purposes or the Dutch national list of low-tax jurisdictions. The Dutch list is updated annually and includes countries with a statutory corporate income tax rate of less than 9%.
2. CFC Income Inclusion:
If a foreign subsidiary is deemed a CFC, its undistributed tainted income (passive income minus relevant expenses) is included in the taxable base of the Dutch taxpayer. This income is then taxed at the regular Dutch corporate income tax rate. The calculation of this income follows Dutch tax principles, considering aspects like the participation exemption (if applicable), interest deduction limitation rules, and transfer pricing corrections.
3. Exemption (Genuine Economic Activity/Substance):
The CFC rules do not apply if the CFC carries on genuine economic activity in the foreign jurisdiction. This can be demonstrated by satisfying certain minimum substance requirements, which typically include:
Meeting the Dutch minimum substance requirements in its country of residence.
Having at least €100,000 of (internal or external) labor costs.
Owning or renting an office space that is actively used for its business.
In addition to these minimum substance requirements, a taxpayer can also prove genuine economic activity through other organizational, economic, or strategic characteristics of the group.
4. Interaction with other Anti-Avoidance Measures:
Conditional Withholding Tax: The Netherlands has also introduced a conditional withholding tax on interest, royalty, and dividend payments to related entities in low-tax or EU blacklisted jurisdictions, or in abusive situations. This withholding tax rate is equal to the highest corporate income tax rate (currently 25.8% as of 2025). The list of low-tax jurisdictions relevant for CFC rules is also relevant for this withholding tax.
Participation Exemption: While the Dutch participation exemption generally applies to dividends and capital gains from qualifying shareholdings, it may be affected if the subsidiary is considered a portfolio investment or if it does not meet certain taxability or asset-holding conditions, potentially leading to taxation under CFC rules.
Pillar Two (Global Minimum Tax): The Netherlands has implemented the EU Minimum Tax Directive (Pillar Two), effective from financial years starting on or after January 1, 2024. This ensures a minimum effective tax rate of 15% for large multinational and domestic groups. The interaction between CFC rules and Pillar Two is complex, and recent guidance clarifies how CFC taxes might be considered in the effective tax rate calculation for Pillar Two purposes.
In essence, the Dutch CFC rules aim to prevent the erosion of the Dutch tax base by ensuring that certain passive income generated by controlled foreign entities in low-tax jurisdictions is taxed in the Netherlands. Businesses with international structures involving Dutch entities and subsidiaries in low-tax jurisdictions should carefully review the impact of these rules.
How Bestar can Help
Controlled Foreign Company (CFC) Rules in Netherlands
Navigating the complexities of the Dutch CFC rules, especially for multinational enterprises, can be challenging. This is where Bestar plays a crucial role. Here's how we can help:
1. Comprehensive Assessment and Impact Analysis:
Determine CFC Status: Bestar can meticulously analyze your foreign subsidiaries and permanent establishments to determine if they meet the Dutch CFC criteria (control, passive income threshold, low-tax jurisdiction). This involves reviewing legal structures, financial statements, and operational activities.
Quantify Potential Impact: If a CFC is identified, we can accurately calculate the amount of undistributed tainted income that would be subject to Dutch corporate income tax. This involves understanding Dutch tax principles, the participation exemption, interest deduction limitations, and transfer pricing adjustments.
Identify Exemptions: We will assess whether your CFC qualifies for the "genuine economic activity" exemption by evaluating its substance requirements (e.g., labor costs, office space, operational activities). This often involves a detailed review of the CFC's operations and documentation.
2. Strategic Tax Planning and Structuring:
Restructuring Advice: If your current structure is significantly impacted by CFC rules, Bestar can advise on potential restructuring options to mitigate the impact. This might involve relocating activities, changing legal forms, or re-evaluating financing arrangements.
Substance Planning: We can help you establish or enhance the substance of your foreign entities to meet the genuine economic activity exemption. This involves advising on staffing, office facilities, and management functions.
Optimizing Income Streams: We can guide you on how to optimize income streams to minimize the "tainted" income percentage, potentially by shifting activities or recharacterizing revenue.
3. Compliance and Reporting:
Accurate Tax Filings: Bestar ensures that all necessary information related to CFCs is accurately reported in your Dutch corporate income tax returns. This includes proper calculation of CFC income and any available foreign tax credits.
Documentation Requirements: We can help you prepare and maintain the required documentation to support your tax positions, especially for demonstrating genuine economic activity or the application of the participation exemption.
Staying Updated: Tax laws, including CFC rules and related regulations (like Pillar Two), are constantly evolving. Bestar stays up-to-date with these changes and advise on their implications for your business.
4. Dispute Resolution and Communication with Tax Authorities:
Responding to Queries: If the Dutch tax authorities raise questions or initiate an audit related to your CFCs, Bestar can assist in preparing responses, providing explanations, and representing your interests.
Advance Rulings: In complex cases, we can help you obtain an advance tax ruling (ATR) or advance pricing agreement (APA) from the Dutch tax authorities to gain certainty on the tax treatment of your CFCs.
Tax Control Framework (TCF): We can assist in developing and implementing a robust Tax Control Framework (TCF) to ensure ongoing compliance and good governance in relation to international tax matters, including CFC rules.
5. International Coordination:
Cross-Border Expertise: For multinational groups, Bestar can coordinate advice across various jurisdictions, ensuring that your global tax strategy is coherent and compliant with all relevant CFC regimes.
Pillar Two Integration: With the implementation of Pillar Two, Bestar can help integrate your CFC compliance strategy with the global minimum tax requirements, ensuring that all aspects of your international tax position are considered.
In summary, engaging Bestar provides crucial expertise, helps mitigate risks, ensures compliance, and allows businesses to navigate the complex landscape of Dutch CFC rules effectively. This leads to more efficient tax outcomes and reduces the likelihood of costly disputes with tax authorities.
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