The Dutch Tax Administration confirmed that a CFC levy under Article 13ab of the Corporate Income Tax Act 1969 cannot substitute for the entity-level tax required by Article 13(11)'s asset and subject-to-tax tests, since the levy falls on the parent rather than the subsidiary — unlike Pillar Two's qualifying domestic top-up tax, which Article 13(20) expressly recognises.
The Dutch Tax Administration issued a clarification on 21 July 2026, explaining that the controlled foreign company (CFC) levy does not take low-tax-free investments into account.
The recent clarification by the Dutch Tax Administration provides important insights into how the CFC rules interact with the participation exemption under the Dutch Corporate Income Tax Act 1969 (CITA). The core of this clarification is that a CFC levy imposed on a parent company cannot be used to prove that a subsidiary’s investments are subject to a sufficient profit tax.
The mechanics and legislative reasoning behind this framework are as follows:
The participation exemption and investment participationsÂ
Under Article 13(1) of the CITA, benefits received from a qualifying participation are generally exempt from profit tax. However, to prevent the tax-free enjoyment of mobile capital that has been shifted to low-tax jurisdictions, Article 13(9) dictates that the participation exemption does not apply if the participation is held merely as an investment.
An exception is made if the investment qualifies as a “qualifying investment participation” under Article 13(11), which requires meeting either of two tests:
- The Subject-to-Tax Test (Article 13(11)(a)): The entity is subject to a profit tax that results in a reasonable levy according to Dutch standards.
- The Asset Test (Article 13(11)(b)): The entity’s assets generally consist of less than 50% “low-taxed free investments”.
To determine if free investments are “low-taxed” under the asset test, Article 13(13) evaluates whether the benefits from those specific investments are subject to a reasonable profit tax.
Why the CFC levy does not count toward the tax testsÂ
When an entity holds low-taxed free investments, the Dutch parent company may be subject to a CFC levy under Article 13ab of the CITA. This rule is designed to prevent profit shifting by taxing mobile assets located in low-tax jurisdictions directly at the level of the controlling parent company.
The Tax Administration clarified that the CFC levy is explicitly ignored when assessing whether free investments are low-taxed for the asset test. The primary reason is the level at which the taxation occurs:
- The statutory text and legislative history require that the reasonable profit tax be levied at the level of the entity in which the participation is held.
- The CFC levy is imposed on the Dutch taxpayer (the parent company), meaning the controlled entity itself is not subject to the tax.
The interplay rule (Article 13(19)) and preventing double taxation
Article 13(19) is the fix that keeps a narrow anti-double-taxation rule from turning into a loophole. The problem it solves: if a parent already pays tax on EUR 5 of CFC income from a subsidiary, that EUR 5 shouldn’t be taxed again when distributed. But if the same subsidiary also throws off a EUR 100 currency gain, and the CFC levy were allowed to count toward the asset test, the whole EUR 100 would slip out tax-free under the participation exemption — even though the subsidiary never actually qualifies as a genuine investment participation.
Article 13(19) blocks that by limiting the exemption strictly to income already taxed under the CFC rules. So the EUR 5 stays untaxed on distribution (correctly, since it was already taxed once), but the EUR 100 gain stays fully taxable, because the subsidiary still fails the underlying asset and subject-to-tax tests. Letting the CFC levy substitute for those tests would gut the provision’s purpose entirely.
Impact of Pillar Two minimum taxes (Article 13(20))
While the CFC levy does not count toward the subject-to-tax test, certain other top-up taxes do. Article 13(20) of the CITA (which governs the 15% minimum corporate income tax framework) explicitly states that a “profit tax” includes a qualifying domestic top-up tax.
During the parliamentary proceedings for the Minimum Tax Act 2024, lawmakers specified exactly which Pillar Two top-up taxes were relevant for different statutory tests. They deliberately included the qualifying domestic top-up tax for the participation exemption tests because it applies taxation at the entity level. The Tax Administration noted that if lawmakers had intended for parent-level CFC levies to count toward the asset test, they would have explicitly legislated it, just as they did for the Pillar Two domestic top-up taxes.
