The core of the new global minimum tax is testing whether the jurisdictional effective tax rate is at least 15%. This is calculated by dividing the covered taxes by the tax base of the global minimum tax. This means that permanent differences between how the covered taxes are calculated (i.e. taxes calculated on the basis of the local corporate income tax) and how the tax base of the global minimum tax base are calculated, reduce or increase the effective tax rate. The participation exemption is one of the major sources of permanent differences and a comparison thereof helps to understand how the global minimum tax may affect a corporate structure.

The comparison between the participation exemption in the Dutch corporate income tax (“Dutch CIT”) and the equivalent in the global minimum tax reveals significant differences. While most corporate income tax systems include a participation exemption, the global minimum tax takes a different approach and excludes dividends and capital gains and losses in a profit and loss account based on a financial accounting standard. There are various ways to account for such share interests depending on a number of variables, which impacts the operation of the participation exemption in the global minimum tax. The OECD created a generic participation exemption based on common elements found across different corporate income tax systems, but guidance is limited and case law does not yet exist.

A short overview of both participation exemptions:

1. The participation exemption in the Dutch CIT exempts profit distributions and capital gains derived from a share interest representing at least 5% of the nominal paid-up capital. Through the years, an extensive array of court cases has been handed down on this subject.
2. The participation exemption under the global minimum tax excludes dividends and certain capital gains or losses from the equation to determine the effective tax rate. Dividends are excluded when they originate from a share interest except when it represents less than 10% of the capital, profit, or voting rights of an entity which has been economically owned for less than one year. Capital gains or losses are excluded except when they relate to a share interest when it represents less than 10% of the capital, profit or voting rights.

The main differences between the two participation exemptions are:

1. Threshold: The global minimum tax has a 10% threshold, which is the average of the rights to profit, capital, and voting. It allows for flexibility, and the 10% ownership does not need to be held by the same group entity; it can be spread across the group. In contrast, the Dutch participation exemption refers to the nominal paid-up capital and, in exceptional circumstances, to voting rights. At least one group company must meet the 5% threshold.
2. Equity or debt financing: The global minimum tax considers the distinction between equity and debt instruments based on the applicable accounting standard, such as IFRS. The Dutch law looks at civil law features, categorizing instruments as shares or debts and adding tax-only exclusions to the qualifications.
3. Ordinary and preference shares: under the Dutch participation exemption, the civil law qualification determines whether a parent owns a share interest (either ordinary or preference) or a debt instrument. Under IFRS, the presence of an obligation to repay the principal and/or remuneration determines the qualification. This means that certain preference shares are considered debt instruments under the global minimum tax. Remuneration on those is not excluded under the global minimum tax, but is exempt under the Dutch participation exemption, resulting in a permanent difference resulting in the decrease of the effective tax rate.
4. Anti-abuse clauses: The Dutch participation exemption includes anti-abuse clauses that can deny the application for share interests held as portfolio investments, is low-taxed and/or owns low-taxed portfolio assets. These clauses are not relevant for the global minimum tax, as the IIR would likely address such situations. Dutch CIT levied as a result of the anti-abuse clause would, however, not count towards the covered tax for the Dutch holding company, nor would it be allocated to the subsidiary under the global minimum tax’ controlled foreign corporation rules due to the definition of covered taxes.
5. Option contracts: The Dutch CIT exempts payments made under option contracts if the contract leads to a participation in the company after exercise. The global minimum tax only mentions profit distributions and premium payments under an option contract may or therefore may not be covered by this definition. The Netherlands has extensive case law on this topic, but it is unlikely that such specific guidance will be provided for the global minimum tax.

The above differences show that once the global minimum tax becomes effective, questions as fundamental as the application of a participation exemption must be revisited.

An in-depth analysis of this comparison can be found in this paper prepared by our colleague Roland Meuwissen.