Subsidiaries distribute their profits as dividends to the parent company. The participation exemption provides that this profit is exempt from taxation (Corporate Tax) at the parent company. This prevents that the same profit is being taxed twice within the group. The exemption only applies to parent companies that own 5% or more of the shares in a subsidiary.
The company that receives a dividend does not have to count this profit as taxable profit. This also applies to the capital results (such as the sales result) that have been achieved with a participating interest. Within the group, corporate income tax is therefore only levied once.
The scheme applies to participation’s in domestic and foreign companies. Because profits are not taxed again, subsidiaries established abroad can compete with local companies on the basis of an equivalent tax position.
The participation exemption only applies to shareholders who have an interest of 5% or more in a company. If the shareholder has had this interest for more than a year, the exemption will continue for 3 years from the moment that the interest falls below 5%.
If the Holding BV in the Netherlands has a participation in a Belgium BVBA, and this BVBA has already paid a tax of 30%, the distribution of profit from this BVBA to the Holding BV in the Netherlands is untaxed. Naturally, the payment from the Holding BV to a natural person is taxed again (Box 2) for a total of 25%.