A group that can hold its European operating companies through either a British or a Dutch parent is usually presented with two exemptions and told they achieve the same thing. Both take gains on the disposal of subsidiaries out of charge. Both are long established. Both are used by every serious group in their respective jurisdictions.
They do not achieve the same thing, and the differences are structural rather than marginal. The British substantial shareholdings exemption applies to gains and requires the company disposed of to be trading. The Dutch participation exemption applies to gains and to dividends and imposes no trading requirement at all. The choice between them is made when the holding company is incorporated, and by the time a disposal is in prospect it has become very expensive to change.
What Schedule 7AC actually exempts
Paragraph 1 of Schedule 7AC to the Taxation of Chargeable Gains Act 1992 provides that a gain accruing to a company on a disposal of shares is not a chargeable gain if the requirements of the Schedule are met. The wording is important. It does not say the company may elect for the gain not to be chargeable. The exemption operates by force of the statute wherever the conditions are satisfied.
Paragraph 8 defines the substantial shareholding. The investing company must hold shares conferring not less than 10 per cent of the ordinary share capital of the investee, beneficial entitlement to not less than 10 per cent of the profits available for distribution to equity holders, and beneficial entitlement on a winding up to not less than 10 per cent of the assets available for distribution to equity holders. All three limbs of that definition must be met, which means a share class carrying capital rights but restricted dividend rights can fail the test while looking like a 10 per cent stake on the register. Paragraph 8A supplies a separate definition, available only where qualifying institutional investors own at least a quarter of the investing company, which is dealt with below.
Paragraph 7 supplies the period requirement. The substantial shareholding must have been held throughout a twelve-month period beginning not more than six years before the day on which the disposal takes place. That six-year window was set by section 27 of the Finance (No. 2) Act 2017, and it is more generous than most advisers assume, because it means a stake reduced or partly sold some years earlier can still support the exemption on the remaining shares.
The trading requirement, and why it is the real difference
Paragraph 19 requires the company invested in to be a trading company, or the holding company of a trading group or trading subgroup, throughout the relevant period and immediately after the disposal where that applies. This is the condition that decides most British files, and it has no Dutch counterpart.
The same section 27 of the Finance (No. 2) Act 2017 removed the investing company requirement that used to sit at paragraph 18, so the seller no longer has to be trading. The buyer side of the test survived intact. A British holding company can therefore be a pure holding vehicle and still claim the exemption, provided that what it sells is a trading business.
The consequence is a category of asset the main exemption simply does not reach. A property investment subsidiary, a portfolio of financial assets held through a company, an intellectual property holding company that licenses rather than trades, a joint venture vehicle whose only activity is to hold shares in a non-trading target: none of these produce an exempt gain under paragraph 1, and for a company that never traded the institutional investor route described in the next section is the only way back in. Groups discover this at the point of exit, when the structure is fixed and the buyer wants shares.
Trading status is also a question of degree rather than of label, and it is tested across the whole of the relevant period rather than on the day of sale. A company that has accumulated cash beyond its working requirements, that has retained a former trading site as an investment, or that has wound down one division while another was sold, can find that its trading character is arguable for part of the twelve months the Schedule requires. Nothing about the disposal itself changes those facts, and nothing after the disposal can repair them.
The institutional investor route around the trading test
An ordinary group whose subsidiary has stopped trading has its own route in paragraph 3, whose conditions include that a disposal at some time within the two years before the sale would have been exempt under paragraph 1, and that where paragraph 19 fails at the time of sale the group controlled the company at some point in that period. Those conditions turn on trading history and control, not on who owns the seller. For a company that never traded, there is one way through the trading requirement, and it is not available to an ordinary corporate group. Paragraph 3A of the Schedule, inserted by section 28 of the Finance (No. 2) Act 2017, applies precisely where paragraph 7 is met, paragraph 19 is not met, and the investing company is not a disqualified listed company. If qualifying institutional investors own 80 per cent or more of the ordinary share capital of the investing company immediately before the disposal, no chargeable gain or loss accrues at all. If they own at least 25 per cent but less than 80 per cent, the gain or loss is reduced by the percentage they own, so the relief is proportionate rather than all or nothing.
The same section inserted paragraph 8A, which displaces the percentage test rather than the trading test. Where qualifying institutional investors own at least 25 per cent of the investing company, a holding is also a substantial shareholding if the ordinary shares cost at least 20 million pounds on acquisition and carry proportionate entitlements to profits and to assets on a winding up. Who counts as a qualifying institutional investor is settled by the categories listed in paragraph 30A, and a group outside those categories gains nothing from either provision.
What article 13 exempts, and on what conditions
Article 13 of the Wet op de vennootschapsbelasting 1969 works from a different starting point. Under paragraph 2, subparagraph a, a deelneming exists where the taxpayer is a shareholder in at least five per cent of the nominal paid-up capital of a company whose capital is divided into shares, in the statutory phrase ten minste 5% van het nominaal gestorte kapitaal. The threshold is half the British one, and the qualifying test is a single percentage rather than three parallel entitlements.
There is no trading requirement. What replaces it is a purpose test. Paragraph 9 withdraws the exemption where the participation is held as an investment rather than for business reasons, making it a beleggingsdeelneming, unless it is a qualifying one. Paragraph 11 then sets two tests which are alternatives and not cumulative conditions, and the Belastingdienst confirms that meeting either the onderworpenheidstoets or the bezittingentoets restores the exemption regardless of the purpose for which the holding is held. Under the onderworpenheidstoets the participation must be subject to a profits tax resulting in what the statute calls a naar Nederlandse begrippen reële heffing. No percentage appears in the statute. The Belastingdienst states that a rate of 10 per cent normally counts as such, and that the base is compared with the Dutch determination of annual profit, so the rate alone does not settle the question. Under the bezittingentoets the assets of the participation must generally consist, directly or indirectly, of less than half laagbelaste vrije beleggingen, meaning low-taxed free investments.
The practical reach is therefore wider and differently shaped. A Dutch holding company disposing of a property investment subsidiary is exempt if that subsidiary meets the onderworpenheidstoets on its own facts, where the British equivalent would fail the trading test whatever the subsidiary pays. A Dutch holding company disposing of a lightly taxed passive vehicle that meets neither test is not exempt, where a British trading test would never have been reached.
Dividends: one regime or two
Paragraph 1 of article 13 puts dividends received and gains on disposal inside a single expression, voordelen uit hoofde van een deelneming, so one set of conditions answers both questions.
The United Kingdom splits them. Schedule 7AC deals with gains. Dividends are dealt with by Part 9A of the Corporation Tax Act 2009, which provides at section 931A that the charge to corporation tax on income applies to a distribution only if it is not exempt, with separate exemption chapters for distributions received by small companies and for distributions received by companies that are not small. The exemptions are wide in practice and most inbound dividends are exempt, but they are tested on their own conditions and on their own definitions.
The effect on file management is not trivial. A Dutch group tests one condition once. A British group tests the distribution exemption every year on the dividend flow and the substantial shareholdings exemption once on the exit, against different requirements, with different consequences if either fails.
The exemption that cannot be turned off
The most consequential difference is that neither exemption is elective, and this bites hardest in the United Kingdom because of the trading requirement. Section 16(2) of the Taxation of Chargeable Gains Act 1992 provides that the provisions distinguishing chargeable gains from those that are not apply equally to distinguish allowable losses from those that are not. The Dutch regime is symmetrical in the same way, and the Belastingdienst states plainly that where the participation exemption applies the profits are not taxed and the losses are not deductible.
A disposal that would have produced an exempt gain therefore produces an unallowable loss. A group that sells a trading subsidiary at a loss, having held a qualifying stake for the required period, has no capital loss to carry forward and nothing to set against a later gain. Nothing in the Schedule allows the group to decline the exemption for that disposal.
This is the choice referred to in the title, and it is not made at the point of sale. It is made when the group decides where its holding company sits and what it will hold. A structure that produces exempt gains on its successes produces unusable losses on its failures, and the arithmetic of that trade depends on how many of each the portfolio is expected to generate.
Where the two regimes give different answers on the same facts
Consider a group holding four European subsidiaries: two trading operating companies, one property investment company and one entity holding a licensed brand. Under a British holding company in ordinary corporate ownership, the two trading disposals fall within Schedule 7AC provided the paragraph 8, paragraph 7 and paragraph 19 tests are met, and the other two do not. Under a Dutch holding company, all four are tested against the same article 13 conditions, and each will qualify or fail on whether it is a portfolio holding and, if so, on the subject to tax and asset tests.
Now change one fact. The group holds 8 per cent of a fifth company. The British exemption is unavailable because paragraph 8 is not met on any limb, and paragraph 8A is out of reach unless qualifying institutional investors own at least a quarter of the holding company and the stake cost at least 20 million pounds. The Dutch exemption is available because the five per cent threshold is cleared. That difference alone has decided the location of holding companies in club deals and consortium investments, where nobody ends up with a double-digit stake.
Change one more. The group holds 12 per cent of an operating company but through a share class carrying capped dividend rights, which is common where a founder retains economic upside. The British test can fail on the profits limb of paragraph 8 while the shareholding percentage looks comfortable, and the failure is invisible on the cap table.
In one mandate we were asked to review a British holding company on the eve of a sale of three subsidiaries, two of which were expected to realize losses. The trading subsidiaries qualified without difficulty, and the point that had not been raised anywhere in the file was that the qualifying disposals sold at a loss would generate nothing usable. The group had been advised on the exemption as a benefit and never on its symmetry. Restructuring at that stage was not available, because any interposition would itself have been a disposal at the values the buyer had already agreed.
Deciding before there is anything to decide
The honest description of this comparison is that the Dutch regime is broader and the British regime is more predictable within its narrower field. A British group selling trading businesses has a clean and well-litigated exemption with a generous six-year lookback. A group whose assets are mixed, whose stakes are small, or whose exits are as likely to be losses as gains is in a different position, and the drafting will not accommodate it after the fact.
The structuring point is therefore sequencing. The trading status of each subsidiary, the percentage held, the rights attaching to the class held and the expected shape of the exit are all known at the time the holding company is formed and are all difficult to change afterwards. Interposing a Dutch entity later is itself a disposal, and moving a British holding company abroad triggers its own deemed disposals. The exemption that will apply on exit is chosen years before the exit, usually without anyone noticing that a choice was being made.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.