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Doing business in the Netherlands 26The rate for corporation tax for innovative activitiesis 5% (2014). Losses on innovative activities canfrom now on be deducted at the normal corporateincome tax rate. The outsourcing of R&D work is alsopossible if the principal has sufficient activities andknowledge present. With effect from 2011 it is alsopossible to include innovation advantages obtainedbetween the application for a patent and the grantingof a patent in the innovation box. There is no maximumto the profit taxed at the special rate of 5%.As of 2013 the company has the option to declare aninnovation box benefit equal to 25% of the company’stotal profit instead of complex profit allocation tothe qualifying intangible asset(s). The benefit is howeverlimited to the amount of € 25,000. The option isvalid in the investment year and in the following 2years.A number of conditions must however be fulfilled tobe able to qualify for the aforementioned tax benefits:For example, to make use of the innovation boxthe intangible assets must contribute at least 30%to the profit that the company receives from theintangible asset. The innovation box does not applyto brands, logos, TV formats, copyrights on softwareand so on. The choice must be specified in the corporateincome tax declaration.Participation exemptionParticipation exemption or substantial holdingexemption is one of the main pillars of corporateincome tax. The scheme was introduced to preventdouble taxation. Profit distribution between groupcompanies is exempted from tax.A participation refers to a situation where a company(the parent company) is the owner of at least 5% ofthe nominal paid-in capital of a company that isbased either in the Netherlands or abroad (the subsidiary).A cooperative membership qualifies as wellregardless its share in the cooperatives capital.Under the participation exemption, all benefitsderived from the participation are tax exempt. Thebenefits include dividends, revaluations, profits andlosses in the sale of the participation and acquisitionand sales costs. The participation exemption alsoapplies to revaluations of assets and liabilities fromearn-out and profit guarantee arrangements. If thevalue of the participation falls due to lossesincurred, devaluation by the parent company is inprinciple not permitted. Losses arising on liquidationof a participation can under certain conditions bededucted.As a general rule participation exemption does notapply if the parent company or subsidiary is aninvestment institution. It is however possible toappeal for a ‘reduced tax investment participation’.To determine whether the participation exemptionapplies an intent test is used. This means looking atwhether or not the participation is held as an investment.A participation in a company whose balancesheet consists for example of liquid assets, debentures,securities and debts is regarded as an investment.In the latter case the participant is not entitledto participation exemption, but is however entitledto appeal for a participation settlement. It iscommon practice to apply for an Advance TaxRuling on the qualification of the participationunder the participation exemption provision.Because a number of conditions have to be satisfiedin order to apply for the participation exemption,factual and circumstantial changes can affect thetax (exempt) status of a participation. In this case,the capital gains or losses on this participation mustbe partitioned into a taxable and non-taxable part(partitioning doctrine). This doctrine will be codifiedby a bill released by the Dutch government in 2013.In addition, the bill provides for a participation to berevalued at fair market value once the participationtax regime changes. The revaluation result (positiveor negative) is, amongst other qualifying occurrences,added to a separate reserve (partitioningreserve). The reserve must be released upon disposalof the corresponding participation. A partialdisposal triggers a pro rata release. The rules underthis bill should apply retroactively as from 14 June2013. Before its enactment the bill may be subject toamendments due to EU law, the Parent-SubsidiaryDirective in particular.Property exemption for permanent establishmentWith effect from 1 January 2012 a property exemptionhas been introduced for foreign permanentestablishments of companies based in the Netherlands.As a result the profits and losses of a foreignpermanent establishment no longer affect theDutch tax basis. Final losses of foreign permanentestablishments that remain upon cessation (termination)can however still be deducted. The propertyexemption does not apply for profits from so-called