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Netherlands tax reform package passed

The upper chamber of the Dutch parliament approved, on 28 November 2006, a package of tax reform measures to introduce cuts in corporate income taxes and lower the domestic dividend withholding tax rate. The measures are intended to take effect on 1 January 2007,

The new law includes the following important amendments:

· the Dutch corporate income tax rate will be reduced from 29.6% to 25.5%;

· the Dutch domestic dividend withholding tax rate will be reduced from 25% to 15%. The applicable dividend withholding tax rate will generally be lower under the relevant tax treaties. For instance, provided certain conditions are met, a 0% dividend withholding tax rate is available for dividends from the Netherlands to the US;

· the introduction of a group interest box, under which the balance of intercompany interest will be taxed at an effective tax rate of 5%, provided certain requirements are met. When combined with the abolishment of capital tax, this will make Dutch companies attractive for group financing activities;

· the introduction of a new patent box regime, under which profits derived from qualifying intangible assets will be taxed at an effective tax rate of 10% provided certain requirements are met;

· the relaxation of participation exemption requirements such that the participation exemption will apply to shareholdings of at least 5% of the nominal issued and paid-up capital of a subsidiary, which has its capital, divided into shares. This exemption does not apply where the subsidiary holds more than 50% of non-free portfolio investments and it is not subject to a tax rate that is considered adequate. Adequate means that the effective tax rate equals at least 10% of the tax base as calculated by Dutch tax standards without considering the group interest box and patent box. In addition, specific rules have been introduced to facilitate real estate subsidiaries;

· the Bill further streamlines the rules on the limitation of interest expenses and eliminates existing limitations on the deduction of interest expenses for certain hybrid loans.

· under the Bill, losses can be carried back one year and carried forward nine years. Furthermore, grandfathering will cover existing tax losses for a specific period. Finally, depreciation on real estate property will be limited and stock option costs will no longer be deductible.

It should be noted that the Dutch authorities have asked the EU Commission to confirm that the reduced corporate income tax rates of the patent and interest boxes are in line with EU regulations. If EU approval is granted during 2007, the patent and interest boxes will be introduced with retroactive effect to 1 January 2007.

As of 1 January 2007, the Netherlands will have a low corporate income tax rate of 25.5%t, a reduced 15% dividend tax rate, low taxation of group interest and royalty income, and relaxed participation exemption requirements. The Netherlands already has the advantage of no capital tax, an extensive treaty network, and tax authorities that are willing to give rulings and provide advance certainty (except for potentially abusive situations).

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